Monday, June 29, 2009

Behind the Second Wave of Mortgage Resets, a Tsunami of Corporate Refinancing

Did you see this graph in the Wall Street Journal yesterday? It is enough to make you want to read the accompanying article by Serena Ng and Kate Hatwood. I also reproduced it below with all proper credit for those who would have a hard time getting access.

In my blog yesterday (see Chronicles of a Second Wave of Foreclosures based on Ross McKitrick's "Green Shoots Reality Check"), I commented on another incoming large wave of home foreclosures that could bring a new series of bank failures and renewed financial distress and, as a result, prolong the current economic recession well beyond 2010.

Well, it appears that once we are over this second wave, a tsunami of corporate debt refinancing is going to hit us. It maybe hard to see in the distance, hidding behind two large waves of foreclosures: The first one falling on our head right now and the second one due to hit us with full strenght in about 18 months.

Starting in 2001, but really getting momentum in 2012 and peaking in 2014, hundreds of billions of dollars of debt are due to be renewed. Already the mountain of debt on the horizon is pushing some desperate firms to attempt debt rescheduling exercise to avoid the crowd in 20013 and 2014. For the lucky ones who have already succeeded or who will succeed in the coming months, this means heavy concession to lenders usually under the form of higher interest payments. It may be good management risk practices but it also means reduced profit outlook for the next few years as interest payments immediately jump. Not very bullish for the Stock market. Read on.

Rates Low, Firms Race to Refinance Their Debts
Wall Street Journal, Friday 26, 2009

By Serena Ng and Kate Haywood

A growing number of companies, looking ahead to a massive pileup of debt maturing in the next few years, are rushing to refinance their loans, fearful that the window in the credit markets could close at any time.

Companies from SunGard Data Systems Inc. to Cablevision Systems Corp. are buying extra time to repay their debts -- even though many of their loans don't mature until some time from 2012 to 2014.

These companies are seeking to sidestep what is likely to be the biggest-ever wave of loan refinancing among risky companies as $440 billion in debt comes due in a span of three years. That is about 85% of the $518 billion in current leveraged loans outstanding, according to Standard & Poor's Leveraged Commentary & Data.

Some firms have asked banks and other holders of their loans to give them two or three additional years to repay, offering higher interest rates to those lenders that agree. Others are issuing junk bonds or stock, using the cash raised to repay some of their loans well ahead of schedule.

The pre-emptive moves demonstrate rising concern about the massive bubble of lending that developed from 2005 to 2007. Bankers and borrowers alike worry that the overhang could create serious problems in the years ahead if financial markets don't heal enough to allow hundreds of non-investment-grade companies to refinance their debt. The rush to refinance underscores the fragility of the recent recovery in the credit markets, which has pulled up prices of risky corporate bonds and leveraged loans over 30% this year.

'Hard to Predict'

"It's hard to predict how many windows will be open between now and when you actually need to refinance or pay off debt," says Michael Ruane, chief financial officer of SunGard. Earlier this month, the financial-services technology company reached an agreement with its lenders, including banks such as J.P. Morgan chase & Co. and Barclays Capital, to extend the maturity of $2.5 billion in loans by two years and bump up its interest payments by about two percentage points a year.

Back in 2005, the takeover of SunGard by private-equity firms marked the start of a wave of giant leveraged buyouts that were financed with multibillion-dollar leveraged loans. SunGard had roughly $5 billion in term loans scheduled to mature by 2014, but now half of that will come due in 2016.

"We decided to deal with it sooner rather than wait until 2014," Mr. Ruane adds. "Who knows what the markets will be like then?"

Beating the Rush

Other firms are trying to get in front of the refinancing wave, fearing that a late-stage rush by many companies to raise money at the same time could add further stress to the markets.
"We figured it would be good for everyone if we bought some sort of an insurance policy by reaching an agreement with our lenders to extend our loan," said Seifi Ghasemi, chief executive of Rockwood Holdings Inc.

The Princeton, N.J., chemicals company recently extended the maturity of $1.2 billion in loans by two years to 2014. Rockwood agreed to pay its lenders 4.25 percentage points above a minimum London interbank offered rate of 2%. The rate on its loan was previously 1.75 percentage points above Libor.

"Now we can concentrate on running our business over the next five years without worrying too much about refinancing," Mr. Ghasemi said, adding that the whole exercise took about three weeks.

In recent weeks, hospital operator HCA Inc., Georgia-Pacific Corp. and Weight Watchers International Inc. have approached their lenders about possible loan extensions. So far this year, companies have obtained or sought extensions on at least $11 billion in loans, according to S&P LCD.

The loan-extension wave, dubbed "amend to extend" by market participants, is proving to be an economically cheaper alternative for companies than issuing new debt.

"It's like self-help -- instead of finding new lenders, companies are asking their existing lenders to help," said Denis Coleman, co-head of leveraged finance at Goldman Sachs Group Inc.

Extending an entire loan isn't easy -- borrowers typically need approval from all lenders to push out the maturity or to change other major terms of their loan agreements. So companies are taking a less onerous path of extending the maturity on a portion of the loan, a move that requires just 50.1% lender approval. The rest is typically kept at the old terms.

A Tough Task

"Companies don't want to run up against their maturities and their lenders don't want them to default. Exchanging yield for maturity helps both parties meet halfway," said Andy O'Brien co-head of leveraged finance at J.P. Morgan.

While the amendments are helping companies buy time, there are risks. If the economy doesn't recover sufficiently, the strategy may simply delay the day of reckoning for many risky borrowers.

Mr. Ruane of SunGard says his firm decided to fork out more in interest now to remove some uncertainty about the future. "Time will tell whether this was a good decision," he adds.

Write to Serena Ng Ng at and Kate Haywood at

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