Looming Wave Of LBO Debt Bankruptcies
The looming wave of bankruptcies is unlikely to be kind to bondholders. And they have only themselves to blame.
Bond investors may pay the price for allowing themselves to be subordinated by junk-rated companies that borrowed a record $2.2 trillion of bank loans in the past three years.
Rather than receiving the historical average recovery of 42 cents on the dollar in a default,
owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents. About 22% are likely to get 11 cents to 30 cents.
James Keenan, co- head of leveraged finance at BlackRock: "When leverage was so ample, private equity firms were able to buy companies at multiples that didn't make sense.
Most people use the assumption senior unsecured bonds are going to recover 40%. I don't think you're going to see that."
Moody's anticipates defaults will quadruple to 5.9% in 12 months. That assumes a mild recession.
Judging by the amount of distressed debt, investors expect an 8% default rate.
Along with the surge in bank loans came covenant-lite loans, which typically don't limit the amount of debt a company can have relative to earnings.
A record $141 billion of covenant-lite loans was made last year.
The value of companies with those loans is likely to be 25 percent less when they ultimately default than if they'd been forced to restructure earlier.
The Nattering One muses... We have already warned on massive LBO debt defaults
during a major recession, with dwindling profits and plunging market valuations.
Mr Keenan echoes our sentiments, but with regard to the real estate market...
We do believe it really will be different this time. When money was cheap and stupid, borrowers could pay prices that didn't make sense.
Most people assume they will recover 100% of their equity or the price they paid, I don't think you're going to see half of that.
Hattip to Bloomberg.
Bond investors may pay the price for allowing themselves to be subordinated by junk-rated companies that borrowed a record $2.2 trillion of bank loans in the past three years.
Rather than receiving the historical average recovery of 42 cents on the dollar in a default,
owners of a third of high- yield, high-risk bonds rated B+ or lower may get no more than 10 cents. About 22% are likely to get 11 cents to 30 cents.
James Keenan, co- head of leveraged finance at BlackRock: "When leverage was so ample, private equity firms were able to buy companies at multiples that didn't make sense.
Most people use the assumption senior unsecured bonds are going to recover 40%. I don't think you're going to see that."
Moody's anticipates defaults will quadruple to 5.9% in 12 months. That assumes a mild recession.
Judging by the amount of distressed debt, investors expect an 8% default rate.
Along with the surge in bank loans came covenant-lite loans, which typically don't limit the amount of debt a company can have relative to earnings.
A record $141 billion of covenant-lite loans was made last year.
The value of companies with those loans is likely to be 25 percent less when they ultimately default than if they'd been forced to restructure earlier.
The Nattering One muses... We have already warned on massive LBO debt defaults
during a major recession, with dwindling profits and plunging market valuations.
Mr Keenan echoes our sentiments, but with regard to the real estate market...
We do believe it really will be different this time. When money was cheap and stupid, borrowers could pay prices that didn't make sense.
Most people assume they will recover 100% of their equity or the price they paid, I don't think you're going to see half of that.
Hattip to Bloomberg.
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