The Refinancing Cliff Is Coming

The problems of the last leveraged buyout  bubble are still with us.  From 2004 through 2007, the U.S. experienced an unprecedented level of LBO activity.  That all ended with the collapse of the debt markets in the summer of 2007 (and the disappearance of the debt markets after the Lehman bankruptcy). LBOs are funded primarily with debt – somewhere between 60% and 80% of the capital structure.  These are the debt products used: Institutional Term Loans (also know as “Term Loan B” or “TLB”) – often the single biggest tranche of debt, these loans are sold to institutional investors, such as collateralized debt obligations (CDOs) and prime rate funds.  They have very little principal amortization and a final maturity of 6-7 years. Pro-rata Loans (comprised of a revolving credit facility and a Term Loan A) – these loans are sold to banks and typically make up a smaller part of the capital structure than the TLB.  Standard terms for a Term Loan A include significant principal amortization and a final maturity of 5 years. High Yield Bonds – are sold to institutional investors.  They have a bullet maturity (i.e. no principal amortization) and a final maturity longer than the Institutional Term Loans, typically 7-10 years. The Debt is Coming Due! Starting in 2012, we will see significant amounts of LBO debt coming due.  Knowing the typical maturities of the debt products and counting forward from the boom years of 2006 and 2007, first we’ll see large amounts of pro-rata loans come due, then institutional term loans, then high yield bonds, as this chart shows: What is the solution? Highly...

Jarden Compares Loan and Bond Costs

Jarden Corporation (Ticker JAH) is a diversified consumer products company whose brands include First Alert, Holmes, Mr. Coffee, and Sunbeam.  On June 30, 2009, it had approximately $2.7 billion of debt outstanding, half of which was in the form of Term Loans due through 2012.  Management was eager to begin refinancing these term loans in order to gain additional covenant flexibility and extend maturities.  Over the next 7 months, it completed two transactions.   August 2009: “Amend and Extend”   In August 2009, the company extended the maturity of $600 million of Term B loans (“TLBs”) from January 2012 to January 2015 through the creation of a “Term B4” tranche.  This new tranche was priced at LIBOR + 3.25%.  The remaining $724 million of term loans remain due through 2012. Along with the TLB extension, the company extended the maturity of $100 million of its (unused) revolver from 2010 to 2012 and amended the covenants on its loan facilities to allow for additional securitization and other indebtedness. January 2010: Senior Subordinated Notes In January 2010, the company completed an offering of 7.5% Senior Subordinated Notes due 2020.  The offering consisted of two tranches: $275 million offered in the U.S. and EUR150 (approximately $217) offered in Europe. The company used a portion of the proceeds from this bond to repay a portion of its term loan, presumably those maturing through 2012. The U.S. tranche was priced at 99.139, for a yield of 7.625%, or a spread of 385 basis points over the 10-year treasury.   So which is cheaper? With LIBOR at 0.25%, the cost of the loan is 3.5%...

Amend and Extend or Amend and Pretend?

In the last 6 months, we’ve seen a number of “amend and extend” transactions. Typically they involve: The extension of the maturity of a term loan and/or revolver (typically for syndicated, non-investment grade loans). This is only for lenders who agree to the extension (i.e. some lenders may keep the original maturity Increasing loan pricing for lenders who agree to extend (to reflect current market conditions and the higher credit risk of the borrower) and an amendment fee. Covenant relief for the borrower (reflecting operating performance below original the targets). Why an Amend and Extend? During normal economic times, a borrower would do a new syndication as the maturity date for an existing facility approaches. So why are we seeing amend and extend agreements rather than new facilities? Because many of these companies would have a hard time getting a new syndication done. The loan market is much more selective for high risk credits, and many of these companies have high leverage and weak cash flows. Amend and Pretend? It is clear why a borrower would want an amend and extend (despite the higher cost) – they get covenant relief and one or two more years to turn around the business and generate cash for debt repayment. But why are lenders agreeing to these transactions? Do they really believe the borrowers will be able to repay the loans 2 years later, or are they just deferring the day of reckoning – the day when the borrower will need to do a major financial restructuring (or even a bankruptcy) and the lenders will have to write down the value of...