At the beginning of this year, bankruptcy pros looked at the massive hangover of LBO debt, coupled with the deteriorating economy, and predicted a giant wave of bankruptcies would wash over the private equity world in 2009. While bankruptcies are up over last year (on pace to double, in fact), the figure is still not close to “tsunami” proportions. Part of that can be attributed to increasing flexibility on the part of the lenders.
One driver of that flexibility is a move called “amend and extend,” a debt workaround that Buyouts’ Ari Nathanson outlined in the magazine’s latest issue (sub. required). In such transactions, the buyout firm negotiates with a firm’s existing lenders to extend the maturity on a portfolio company’s loan in exchange for increased pricing on the leverage.
These so-called “amend-and-extend” deals are growing in popularity among borrowers looking to stave off loan maturities in a market lacking traditional refinancing and exit opportunities. Through July, S&P tracked a total of 56 issuers that have sought amend-and-extend deals this year, 24 of which were sponsor-backed companies.
Of the 26 buyout-backed companies that have undergone such transactions thus far in 2009, four were backed by KKR. Yesterday, KKR’s Henry Kravis said that the firm has prioritized 11 portfolio companies that will require debt restructuring or refinancing. The firm has put two amendments in place for health care portfolio company HCA in 2009, he said.
Companies owned by Blackstone Group, Bain Capital, TPG, Carlyle, THL Partners, Silver Lake, and Hellman & Friendman all made appearances on the S&P list.
Blackstone Group commented on the amend and extend trend in the firm’s recent earnings call. CEO Steve Schwarzman said the firm has retired or extended more than $10 billion worth of debt this year. James said that, in general, banks have been happy to “kick the can down the road,” because it is cutting back on the number of distressed situations that turn to bankruptcy.
Regarding the terms, Nathanson wrote that spread increases for these deals averaged 160 basis points in July. Meanwhile fee increases averaged an increase of 38 points, according to S&P. Bu these deals aren’t for the very distressed:
Because of the additional price burden on the part of the issuer, and the prolonged exposure to a legacy asset on the part of the lender, amend-and-extend deals are not right for every company looking to stave off a near-term maturity. William Shields, a partner at law firm Ropes & Gray, said companies out of compliance with their covenants or those that lack some semblance of stability need not apply.
The lowest rating on a sponsor-backed company completing such a transaction in 2009 was ‘B-‘, according to S&P.
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(Why are we writing about debt so much, you ask? Because thanks to its scarcity, there are no deals to cover!)