Henny Sender’s article “Private equity debt cycle is wobbling again” in her “On Wall Street” column in last week-end’s Financial Times is a thought provoking read for restructuring professionals currently contemplating a lazy summer by the beach. Soothsayers to the restructuring industry have been trumpeting the wall of corporate debt maturing in 2014 as the trigger for the average default rate to return to its baseline of 4.2% (from 1985 to 2010) from its 2011 low of 0.088%.
As noted in our piece on March 23 reporting on Dr. Altman’s presentation to Weil and certain clients (Current Conditions and Outlook for Global Corporate and Sovereign Debt Markets), new credit is currently readily available, the terms are favorable, and there are ample opportunities to refinance existing debt. Whether or not refinancing the $657 billion in upcoming high-yield bond, leveraged loan and commercial mortgages expected to come due in 2014 will be possible, however, will depend largely on the level of liquidity in the markets at that time.
Citing data from Standard & Poor’s Leveraged Commentary and Data, Sender’s piece points to the 2014 wall as being more of a steeplechase hurdle. Of the $506 billion in deal loans that have to be repaid by 2015, nearly $300 billion, or 59% of that total, have already been amended and extended or repaid, or otherwise dealt with by way of a default. Bloomberg has also recently carried a piece citing analysts at Moody’s, noting that new CLOs will have the ability to meet as much as $100 billion of refinancing needs through 2015 should the current pace continue. With existing maturities being hacked away at, and new sources of financing coming online, there may just be rubble to stumble over by the time 2014 rolls around. Still, Sender does note that with inflows into loan funds and high-yield funds having recently slowed, the market for junk debt may yet lose its appetite.
In any event, to quote from Dr. Altman, “Never forecast. But if you do, never put it in writing. But if you do, do it frequently, and revise.” (quoting unknown source). So, taking this sage advice, although we can’t predict what will happen in 2014, maybe you can. Let us know your thoughts!