Chris Howard, partner, Linklaters
Shoring up the wall of debt
19 March 2012
Final CFTC rules on protection of collateral for uncleared swaps and treatment of portfolio margining account in bankruptcy
11 November 2013
1 July 2013
8 February 2013
13 March 2013
18 November 2013
European loans maturing soon will require some novel solutions when it comes to refinancing
Approaching $550bn (£350bn) of European leveraged buyout loans (LBO loans) is due to mature between 2012 and 2016, according to data produced by Dealogic for Linklaters. The annual volume requiring refinancing ranges from $69bn in 2012 to $103bn in 2016, hitting peaks of nearly $140bn in each of 2014 and 2015.
Today, refinancing this $550bn wall of debt is subject to greater pressure than ever - the wall is moving. European LBO loan refinancings done in 2009-11 typically had tenors of between three and five years, effectively deferring them to 2012-16. These must be addressed in addition to those originally falling due in 2012-16. The outcome of the eurozone crisis remains unclear and the attendant lack of confidence continues.
Banks are likely to be less able to participate in such refinancings, instead being required to comply with regulatory requirements to delever their balance sheets and raise more capital.
Collateralised loan obligation (CLO) funds, another key investor group from the boom years, are also less likely to be able to participate as their constitutions limit the extent to which they may invest or reinvest.
Finally, the backdrop is tough. IMF growth forecasts for the eurozone and individual European countries were cut in January and the default rate for the S&P European Leveraged Loan Index was, at the 2011 year-end, more than double the 2010 year-end level. Such defaults also move the wall of debt, bringing forward the date on which a company’s debt structure needs to be addressed.
Faced with these challenges, what are the options for addressing this refinancing requirement? First, banks and CLOs still have a role to play. Banks are under pressure to lend, and must weigh this against the regulatory requirements to which they are subject.
CLOs will be able to invest until the end of their investment periods, thereby enabling them to make new investments in LBO loans to some extent. They may also be able to restructure their investments to permit continued investment.
Second, other sources of finance may be available to the right borrowers on the right terms. These may include the high-yield bond market, so-called alternative capital providers and private equity.
Finally, for those LBO loans that are not able to be refinanced, there may be a move towards some lenders exiting by selling their debt into the secondary market at a realistic price, while remaining lenders enter into negotiations for a more fundamental restructuring of the debt and overall capital structure than might previously have been acceptable. Restructurings would likely require deeper adjustments to a company’s debt burden and capital structure, so aiming to provide a lasting debt solution.
As a last resort, insolvency is available. Unless being used as a tool for implementing an agreed restructuring this is still likely to be viewed as value-destructive, but as lenders’ priorities shift it may see increased use.
There are complexities and nuances to every aspect of both the wall of debt and the potential solutions for refinancing it. The key lies in appreciating these and seeing how the various options can be best used in individual situations.