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Get ready for a flood of debt restructurings

WITH continued volatility in world markets expected to continue for at least the next two years, many companies are going to find it necessary to restructure their borrowings as debts reach maturity. While this presents a challenge to borrowers, it is an opportunity for restructuring advisers, with many forecasting a rush of work in the months ahead so long as macro-economic conditions appear unlikely to bailout companies.

Many of the corporate finance deals that were cut during the leveraged buyout boom will shortly come to maturity and expectations are that the costs of refinancing will be much higher this time around, piling pressure on businesses already struggling to meet their repayments. According to research from Standard & Poor’s, there has been a big rise in the number of requests for amendments to loan covenants in the corporate leveraged loans market during the first quarter of 2010. This is expected to increase going forward, while refinancings are likely to be done at higher cost to borrowers and on stricter loan to value terms.

Restructuring expert Matthew Prest at investment bank Moelis & Company says: “Continued market volatility will challenge companies’ ability to refinance as debt maturities loom. There will be further focus on high quality credits meaning the air will get pretty thin at the sub-investment grade end of the spectrum. Companies need to be ready to move quickly to take advantage whenever there is positive market sentiment to issue new equity or debt because the window of opportunity may shut again very quickly, as we have seen recently.”

So how should borrowers approach a restructuring? If companies cannot do a deal with their lenders they could be forced to offload assets through an initial public offering, for example, and hope they can realise decent value from the original investment. Or perhaps private equity can be persuaded to come in and refinance the business.

The only alternative appears to be going to lenders and saying they are prepared to pay back a loan but at a lower rate of interest or over a longer term. Stronger creditors will be able to pull it off but weaker ones will be reliant on their existing lenders because they cannot refinance so lenders will be seeking more equity in return for extending a higher rates.

If things start to go really sour, some experts reckon that could force lenders to swallow discounts of 30 to 50 per cent of the original loan terms – potentially meaning they have to write off hundreds of billions of dollars.

Yet for their part, lenders are now more confident and are less prepared to take a haircut when it comes to restructuring debt. Instead they are more prepared to just take the keys to an asset. The people who own all this debt are either asleep at the wheel or hoping things will be better when the time comes for the debt to come to maturity. They must wake up now to avoid disaster in the months ahead.
ben.griffiths@cityam.com