💥LME = FEE!💥
RX Bankers Crush. A bunch of filings: ProSomnus Inc., KidKraft Inc.
We’re nearing the midway point to ‘24 believe it or not and by Gawd the in-court restructuring activity has been weak AF. When the biggest cases to file are, like, a South American airline (Gol) and a domestic healthcare company (Steward), it’s no wonder we’ve got law firms fighting other law firms (the bankruptcy equivalent of Kendrick v. Drake), lenders who’ve (apparently) made out at par-plus suing other lenders, and other tomfoolery. See you on the pre-summer event circuit, folks!
But … ⚡️BUT!⚡️ … is this just the calm before the storm? JP Morgan Asset Management is sounding the alarm:
“But even as leverage has broadly declined, high debt costs have pushed interest coverage ratios — the ratio of EBITDA, less capex expenditures, to interest — significantly lower. In December 2023, 62% of B3 rated companies recorded an interest coverage ratio below 1x, versus 29% one year earlier, according to Moody’s data cited by the asset manager.
JP Morgan cited other warning signs, including elevated pay-in-kind interest usage compared to pre-pandemic levels. Market participants attest that PIK is a useful loan structuring tool for preserving cash and provides a competitive advantage in winning deals. However, in some cases PIK interest can delay or exacerbate credit losses in a distressed scenario.”
Fitch Ratings also seems to think the party is just getting started, 🎉:
“…restructuring activity is expected to grow as bankruptcy filings continue to rise toward pre-pandemic levels, as protracted higher-for-longer interest rates and refinance risk from approaching maturities add strain to distressed borrowers. Overall corporate bankruptcy filings surged by 40% to 18,926 in 2023, normalizing from 13,481 filings in 2022, but remain around 18% below the pre-pandemic average from 2016 to 2019. Chapter 7 liquidations rose 32% yoy in 2023, while Chapter 11 reorganizations were up by 58% for the year.”
Funny. Even with higher rates, the number of bankruptcy filings is still lagging behind pre-pandemic levels. We’re old enough to remember when RX pros predicted higher rates would lead to a Point Break-esque wave of bankruptcies.
Not so much. Robust cap markets are crashing the party: the leveraged loan market has remained strong through refinancing activity spurred by tighter spreads. Per Fitch:
“The U.S. leveraged loan market posted strong activity in 1Q24 as sentiment improved around inflation, fears of a recession reduced and expectations rose that the Fed would cut rates in the first half of 2024, Fitch Ratings says in the North American Leveraged Finance Chart Book – 1Q24 … Tighter spreads drove refinancing and repricing activity as issuers sought to reduce interest expense, while M&A and leveraged buy-out activity remained muted.”
Look at this maturity wall:
But, despite all of this, isn’t there a rising default rate? Ok, fine. Back to Fitch:
“However, default rates rose in 1Q24 across the leveraged loan and HY markets despite the strong opportunistic deal flow. The trailing twelve month (TTM) leveraged loan default rate was 3.8% at 1Q24, up from 3.4% in 4Q23 while the TTM HY default rate was 3.04% in 1Q24, up from 2.94% at YE2023. Highly levered issuers with declining operational performance face significant challenges to refinance near term debt, and are often unable to access the public capital markets.”
Huh. How could that be? Well…
Which gets us to our friends at the investment banks who play in RX. They are, quite frankly, absolutely killing it when it comes to restructuring business — noticeably so when juxtaposed against the bulge bracket banks:
What do they have to say about the current state of affairs? What could possibly be driving their robust revenues, 🙄?