A $6 Trillion Bond Wall Revives an Arcane Corner of Wall Street

Locked out of debt markets and facing significantly higher borrowing costs, executives at troubled companies are looking for help in an almost dormant corner of Wall Street.

(Bloomberg) — Locked out of debt markets and facing significantly higher borrowing costs, executives at troubled companies are looking for help in an almost dormant corner of Wall Street.

High-profile financial advisers including Houlihan Lokey Inc., Lazard Ltd. and Evercore Inc. say they’re experiencing a surge in enquiries for so-called liability management as corporates bloated with debt find themselves searching for solutions to the end of a decade of almost free money.

Companies are grappling with the twin burdens of higher interest rates and slower economic growth, and some have already suspended dividends or put assets up for sale to pay debt. But with $6.3 trillion of outstanding corporate bonds alone coming due by the end of 2025, many are seeking alternative ways to protect their balance sheets.

Mall landlord Unibail-Rodamco-Westfield is one firm that’s been selling assets to pay down debt after its purchase of Westfield for about $22 billion in 2018 soured.

“We over-levered the company,” Unibail-Rodamco-Westfield Chief Executive Jean-Marie Tritant said in an interview. Falling values after the acquisition meant “our loan-to-value started to increase to a point where investors were somehow concerned about our ability to face our obligations.”

Tritant took over the firm in 2021 after a successful activist campaign backed by French technology billionaire Xavier Niel. As well as the disposals, the CEO stabilized the company by axing the dividend, limiting capital expenditure and extending debt maturities.

“It allows us to have access to the debt market when we see it and when it makes sense,” said Chief Financial Officer Fabrice Mouchel.

The reopening of credit markets since October, as traders bet that central banks wouldn’t tighten as much as previously expected, has helped delinquencies to stay low. Weakened investor protections – the result of money managers chasing deals during the years of central bank money printing — also give troubled companies more options to avoid defaults.

“The four horsemen of the apocalypse have arrived. We have a war, a plague in the form of Covid, increasing regional food scarcity given Black Sea shipping blockages, and high inflation which can be thought of as form of financial pestilence,” said Joe Swanson, co-head of Houlihan Lokey’s EMEA Restructuring Group. “Yet default rates on non-investment grade haven’t really moved.”

That looks set to change. In a sign of looming problems, about a quarter of companies in the S&P 500 that reported earnings missed estimates in the fourth quarter, analysis by Bloomberg Intelligence shows.

Over in Europe, almost 9% companies are in distress and need a turnaround, according to adviser Alvarez & Marsal Inc., a figure expected to increase in part because interest rates around the world keep rising.

Default rates among junk-grade companies in the US and Europe may more than double by September to 3.75% and 3.25% respectively, S&P Global Ratings said in December. 

That rate could reach 12% this year among high-yield US retailers compared with just 0.2% at the end of 2022, according to Fitch Ratings, as some industries will be battered more than others.

New Options

Traditional liability management includes selling off units, amending and extending debt deals and discounted bond buybacks. But the rise of weaker investor protections in recent years is giving troubled firms more leeway.

New options, according to two advisers who asked not to be identified, can include no longer sharing updates on financial performance in certain scenarios. Companies may also be able to get additional liquidity from lenders in return for renegotiating debt documents or improving a creditors’ position in the capital structure. Sometimes, borrowers can extend the grace period for withholding interest payments until the notes mature.

“Given the level of flexibility in the documentation, the tool kit available to issuers is vastly greater than it was in the global financial crisis,” said Sam Whittaker, a managing director at Lazard Financial Advisory.

Rising levels of distress are a source of opportunity for some. A number of private equity firms are weighing buying back bonds issued by companies acquired in 2020 and 2021 because they’re trading at a substantial discount, according to three people with knowledge of the matter.

“We have had some of those conversations, but we haven’t advanced a lot of those because they’re opportunistic and there’s not a catalyst,” said Greg Berube a senior managing director at Evercore’s restructuring and capital markets advisory group. “I don’t want anyone to think that any sponsor embarks on any of these transactions willy-nilly; there is a lot of thought that goes into reputation, execution and implications.”

Walking Away

Still, alternative asset managers have so much cash that many will prefer to focus on newer opportunities and walk away from underperforming investments rather than work out problems, one of the people said.

In the meantime, heavily-indebted companies are trying to whittle away at the problem. Hanesbrands Inc. has eliminated its quarterly dividend to help cut debt, Enel SpA plans to sell assets worth as much as €21 billion for the same reason and American Airlines Inc. launched a $1 billion leveraged loan to buy time on existing debt.

Companies may need a year to work out the best option, according to Roopesh Shah, a senior managing director at Evercore, meaning that those with 2025 maturities are starting to address them this year to give them time to implement plans. The market’s appetite for risky credit will be key to the number of companies needing liability management.

“We’re in this slightly on-off market in terms of pessimism and optimism for companies with large levels of leverage,” said Tom Campbell, head of the EMEA restructuring and special situations group at PJT. “Interest in liability management is definitely elevated and we’re in for an interesting four to six quarters.”

Back at Unibail, Tritant plans to sell US malls this year to reduce exposure there.

The company and its partner didn’t repay a $195 million loan due January on the Westfield mall in Valencia in Los Angeles county. It’s in talks to sell the property, which will probably be foreclosed if a deal doesn’t materialize. Either action will result in group debt falling by almost $100 million as the loan is non-recourse.

Other real estate firms that went on a borrowing binge over the last decade are likely to need liability management to pay down debt, advisers say. Interest is also expected from chemical companies in Europe, technology firms, health care providers and leisure operators.

“We’re able to be involved in transactions where it’s not just you know ‘Call 911, I have a potential bankruptcy,’” Andrew Bednar, chief executive at Perella Weinberg Partners, told analysts last week. It “extends much further beyond that to perfectly healthy companies that need assistance in accessing markets and managing maturities.”

–With assistance from Tasos Vossos and Adeola Eribake.

(Adds quote and details on issuance from first paragraph above Walking Away subheadline)

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