Get Ready For 8% Default Rates And Other Lending Fun

That’s what S&P’s Steven Miller is predicting for 2009. He said the rates could probably increase to 5% by the year’s end and climb up to 6% or 8% next year. “I think the economy is going to bottom out in the first half of next year,” he said.*

Well, why hasn’t it bottomed out yet? Because all the jumbo destined-to-fail deals are too young. “We haven’t seen problems in those areas…yet,” he said.

Hell, it took 15 years for us to strike another deal as large as RJR Reynolds. (I say “us” as if I had something to do with it…). The deal I’m referring to is HCA, by the way. According to Miller, it’ll probably take that long to get there again.

What else do lenders want these days?

Pre-marketing, apparently. And veracious (not ferocious) covenants.

According to Greg Margolies, Head of Merrill Lynch’s Global Leveraged Finance, the ability to pre-market the debt on a deal makes all the difference in deciding whether he wants to commit. “If we are able to go out and speak to the market and see what they think, it verifies where the market is, and allows us to get more aggressive on terms.” And that’s a good thing.

And as for those covenants: Only 20% of the deals year to date used covenant lite, compared to 37% of the deals done last year. And those covenants have veracity, Margolies said. “They have definition. Previously they were structured in a way that obfuscated the value of the covenant,” he said. Now they have bianary terms with Ebitda definitions.

So are we seeing a definitive end for big buyouts and loose leverage? “Some partners of mine feel like the (mega-market LBO) business is over,” said Steve Smith, a UBS investment banker. “I don’t think that’s the case,” he added. “We can go back to 4 or 5x debt to cash flow.”

*These comments were made a couple of weeks ago at a conference.