Industry players see large amount of distressed debt funding waiting for better opportunities

By Jennifer Lanning Drey

Portland, Ore., Sept. 24 - A large amount of distressed debt funding raised by opportunities funds and private equity funds is sitting on the sidelines of the market after witnessing money initially get invested too early, Keith J. Shaprio, Greenberg Traurig co-managing shareholder and co-chair of the national business reorganization practice, said Wednesday.

"I think most of the smart money, including a lot of the sovereign money that's out there in addition to the funds, is now sitting aside trying to figure out just how low this is going to go before they re-enter the market," Shapiro said during a web seminar on emerging trends in the credit market crisis, hosted by the Turnaround Management Association in Chicago.

"At some point, there's going to be a tremendous level of investment by the distressed funds, real estate and otherwise, into the market."

The move by these funds into the distressed arena is also reshaping how bankruptcy cases are playing out, the presentation panelists said.

Unlike the bankruptcies resulting from economic downturns of the past, today's cases are quicker, driven by the distressed debt investors and lenders seeking a fast recovery. In haste, cases are also more likely to end with a liquidation or sale of major portions of the bankrupt business, said Stephen G. Moyer, director of Tennenbaum Capital Partners and a presentation panelist.

Additionally, inter-creditor issues have become more complex, he said.

"There are a lot of participants in the market over the last 10 years who have come in to trade distressed securities or to loan-to-own or to buy into a case to gain control coming out the other side of a reorganization," panelist Todd R. Snyder, managing director of Rothschild, Inc., said.

In the past, institutional players only cared about recovering par on their notes, which allowed for a broader array of potential outcomes in a reorganization, he said.

"It's just gotten harder to go at it alone as a debtor in possession or a borrower if you're not bringing any consensus of your strong and well-financed creditors with you," Snyder said.

The additional players also means there is increased tension between hedge fund-type investors who want to drive a quick restructuring process and private equity sponsors who want to hang on to their equity option value.

"I think the tension is more apparent in this particular cycle than it's ever been before," Moyer said.

Covenant-lite maturities coming

Panelists also said the level of bankruptcy filings is likely to continue to increase, particularly as the "covenant lite" loans of recent years begin to mature during a period of limited liquidity.

The combination of the covenant-lite loans, along with features such as PIK toggle provisions, has pushed lenders away from being able to get involved when EBITDA starts to decline, while providing companies an option to make interest payments even when cash is scarce.

The result is a declining trading value of the paper as the outlook for economic recovery is diminished, Moyer said.

As more companies find themselves in the position of opting to use their PIK option rather than pay investors with cash, lenders may be forced to resort to aggressive tactics such as declaring anticipatory breaches or trying to use the material adverse change provision to gain influence, Shapiro said.

Past cycles less dramatic

Panelists also said the current credit cycle has a few unique features that were not seen in the credit downturns of the early 1990s and 2000s.

The primary distinguishing feature mentioned was the breadth and depth of the current crisis, they said.

"Today, because of the excesses of the prior credit market, we are seeing the current distress reaching all the way into our corporate activity, whether that's on Main Street or Wall Street," Snyder said.

"I think the last cycle really didn't reach outside certain industrial sectors or tech sectors to investment-grade borrowers who, no matter how tight the credit markets, always had access to capital for capex and business plan implementation if they were of a certain quality or category."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.