Trying to anticipate the next credit market trouble spot, some investors and economists have had a wary eye on leveraged loans. There were $522 billion of these outstanding in 2009, according to Standard & Poor’s Leveraged Commentary & Data, and the concern is about what would happen as a large concentration of debt approached a critical point known as a “refinancing cliff.”
Meredith Coffey, executive vice president of research and analysis for the Loan Syndications and Trading Association, sees cause for optimism. Compared with April 2009, which she considered “not a good environment” with considerable liquidity issues on the horizon, she says, “The cliff is smaller and has flattened because more maturities have shifted from near to longer terms.”
That lengthening of maturities is a result of A&E – amend and extend – agreements between lenders and borrowers. In a March report, “Bridging the Refinancing Cliff,” Fitch Ratings concluded that A&Es, along with bond-for-loan takeouts, a revived collateralized loan obligations market and mandatory and voluntary pre-payments, would all help absorb refinancing demand between 2012 and 2014.
“A&Es are expected to effectively refinance a portion of the refinancing cliff, although under some scenarios at the apex of the cliff in 2013, there may be up to $125 billion in maturing, non-defaulted leveraged term loans with no reasonably likely source of refinancing,” Andrew Herr, a New York-based partner in Canadian law firm Osler, Hoskin & Harcourt, wrote last year. Herr and colleagues at the firm see A&Es spreading beyond higher-rated leveraged credits, and becoming “a viable financing alternative for lower-rated leveraged credits as well. Indeed, at least one A&E has been executed on a ‘covenant lite’ credit facility.”
Fitch, which expects A&E volumes to rise through 2014, said in the March report: “Most lenders are likely to arrange an A&E on favorable terms rather than endure a default or a difficult restructuring that could result in substantially lower loan recoveries.”
The “dramatically better” outlook this year stems from several factors, says Coffey, including a number of high-yield bond paydowns, refinancings through the application of excess cashflow, cash raised from IPOs and reprocessed debt via mergers and acquisitions. Defaults also serve to lower outstanding debt loads.
“A&Es don’t reduce the need to refinance, but they extend the deadline so not everyone is trying to refinance at the same time,” notes Coffey. “They afford some breathing room. Nevertheless there is a lot of debt still to be refinanced.”
Maureen Nevin Duffy is a freelance financial journalist based in New Jersey.
