Firms Accelerate Refinancings, Convey Fragility of Recent Credit Recovery

Jun.26.09 | About: Cablevision Systems (CVC)

Sometimes it pays to ignore the blizzard of economic numbers that the government spews out and just pay attention to what business has to say about how business is going. On that score, in the last few days we’ve had Warren Buffett, GE and FedEx (NYSE:FDX) all saying they don’t see any stinkin' green shoots.

If you want to take it a step further, watch what they do with their money. In other words, ignore the talk and look at the actions. On that basis, there are some companies which are giving us some fairly pessimistic views of the longer-term future of the capital markets.

An article in the WSJ highlights a rush to lock up term debt by leveraged borrowers:

A growing number of companies, looking ahead to a massive pileup of debt maturing in the next few years, are rushing to refinance their loans, fearful that the window in the credit markets could close at any time.

Companies from SunGard Data Systems Inc. to Cablevision Systems Corp. (NYSE:CVC) are buying extra time to repay their debts — even though many of their loans don’t mature until some time from 2012 to 2014.

These companies are seeking to sidestep what is likely to be the biggest-ever wave of loan refinancing among risky companies as $440 billion in debt comes due in a span of three years. That is about 85% of the $518 billion in current leveraged loans outstanding, according to Standard & Poor’s Leveraged Commentary & Data.

Some firms have asked banks and other holders of their loans to give them two or three additional years to repay, offering higher interest rates to those lenders that agree. Others are issuing junk bonds or stock, using the cash raised to repay some of their loans well ahead of schedule.

The pre-emptive moves demonstrate rising concern about the massive bubble of lending that developed from 2005 to 2007. Bankers and borrowers alike worry that the overhang could create serious problems in the years ahead if financial markets don’t heal enough to allow hundreds of non-investment-grade companies to refinance their debt. The rush to refinance underscores the fragility of the recent recovery in the credit markets, which has pulled up prices of risky corporate bonds and leveraged loans over 30% this year.

Most of the companies that are undertaking these refinancings or extensions are paying a pretty penny for the privilege. When sophisticated borrowers are willing to pay up big just to make sure capital is available several years out, I’m inclined to conclude that we have a very badly broken financial system. If that’s the case then the Japanese experience becomes a more real possibility.