Highly Leveraged Borrowers to Compete for Limited Dollars

Excerpts from Refinancing the Buyout Boom: Profiles of Select Leveraged Credits (complimentary download)

In the next five years, an unprecedented amount of leveraged loan and high yield bond debt comes due. Each dollar of the more than $800 billion in debt maturing in this period will need to be addressed on a company-by-company and highly negotiated basis.

Many, if not all, of the companies that issued such debt have seen deteriorating operations while the credit markets remain selective. Furthermore, maturity
concentration ensures that many companies will be vying for lenders’ dollars and attention over the next several years. As a result, upcoming maturities will remain the
largest medium-term overhang to those highly leveraged credits that incurred a significant amount of debt (notes and loans) as a result of LBOs in 2005-2007.

Fitch Ratings believes that managing these maturities will be among the primary issues facing these companies over the next several years. Alternatives include: 1) repayment from cash flow (operations or asset sales); 2) refinancing in the bank or bond market; 3) retirement from IPO proceeds; 4) debt exchanges; or 5) bankruptcy court.

Fitch believes the fight for liquidity and solvency will be won or lost based on individual business risk characteristics, prospects for growth, features/restrictions within debt agreements.

In this report, Fitch provides an in-depth analysis of nine ‘B’ and ‘CCC’ category companies in Fitch’s rated universe that represent over $100 billion in total debt across six sectors, and presents detailed assessments of their capital structures, financial covenant flexibility, and recovery prospects.

The companies profiled are: ARAMARK Corp. (RMK) ; Energy Future Holdings Corp.; First Data Corporation; Freescale Semiconductor, Inc (FSL).; HCA Inc (HCA); The Nielsen Company B.V.; SunGard Data Systems Inc.; Toys “R” Us, Inc.; and Univision Communications, Inc. (UVN).

In conducting its analysis, Fitch made the following key observations:

• Although most of the companies have generated free cash flow during the downturn and are expected to continue to do so, it will fall far short of the amount necessaryto repay maturing loans, requiring refinancing and/or negotiating with lenders.

• Although the companies profiled here do not compete with one another in their core businesses, they will compete for a potentially limited supply of debt capital over the coming years.
• Fitch does not expect the institutional loan market to be able to absorb all of the institutional loan debt that comes due during the next five years. The high yield bond market will likely expand to absorb a portion, but its capacity could be stressed by the absolute volume of debt that comes due in this period.

Comments

[Dave Wrixon:]

All this means is that interest rates need to rise very substantially to stimulate supply to meet demand. Nobody is going to lend at near zero percent in a collapsing currency.

Nov 06 11:09 AM

[The Geoffster:]

Not a problem. Uncle Sam will guarantee everything. Treasuries will collapse, everyone will default and Uncle will will take over the collateral. It's called socialism. Barry wins, you lose.

Nov 06 02:27 PM

[untrusting ...:]

Dave,
Exactly correct. Interest rates have to rise, very substantially, and they will both for private debt and government debt. The Fed can attempt to artifically keep the rate low, but reality will win out over time. By far the smartest "investment" right now is paying down debt, and that is exactly what the average American is doing and will continue to do, for those than afford to do so. In this interest rate environment, there simply is no reasonable investment as almost everything is overvalued. Another smart "investment" is too make cost-saving purchases that will pay off for years to come. In our area, the power company has scheduled rate increases of almost 10%, just total nonsense in this economic environment. We will be looking at alternatives to attempt to significantly reduce power costs. Our time and dollars are far better spent on reducing costs rather than attempting to find ever increasing risky investments in today's environment.


On Nov 06 11:09 AM Dave Wrixon wrote:

> All this means is that interest rates need to rise very substantially
> to stimulate supply to meet demand. Nobody is going to lend at near
> zero percent in a collapsing currency.

Nov 06 10:55 PM

[Michael Clark:]

Great article. Let's no forget that capitalism has two sides: the sunny side, expansion; and the dark side, when many companies die, and the companies that survive do so because they are better at survival -- they saved money, the prepared better for the dark times. And lets not weep and cry and try to find ways to prevent Nature from happening.

We cannot preserve the status quo -- wherein all things created survive equally and there is no pain in the world.

Capitalism is about competition (price competition). Inflation is about the lack of competition (price fixing). When the government uses inflation to make all boats rise, you do not have capitalism, you have state capitalism, which is a form of economic fascism: business/state first; consumer is but an after thought.

If we have REAL capitalism, we'll have prices deflate. Until prices deflate (which they are doing now), you do not have real capitalism. Real capitalism always favors lower prices.

Nov 09 02:24 AM

[Michael Clark:]

Yes. Rates have to go up.


On Nov 06 11:09 AM Dave Wrixon wrote:

> All this means is that interest rates need to rise very substantially
> to stimulate supply to meet demand. Nobody is going to lend at near
> zero percent in a collapsing currency.

Nov 09 02:25 AM