Friday, June 19, 2009

Leveraged loans - a race against time

Companies that borrowed in the leveraged loan markets are racing to refinance the wall of maturing debt. Today you saw both Wendy’s and Quicksilver issue bonds to refinance some of their leveraged loan liabilities (and paying up for it). They are effectively extending maturities hoping there will be time for their businesses to grow and give them room to deleverage somewhat.

From Leveraged Finance News:

Wendy’s priced $565 million on the high yield primary market Thursday, giving the fast food company a boost in its effort to reduce its debt. The Atlanta-based company sold $565 million in 10% senior unsecured notes due 2016. The notes priced with an OID of 97.53 to bring the total yield to 10.5% and net the company $551 million. Credit Suisse, Citigroup and Banc of America Securities were joint bookrunners for the issue. Wendy’s/Arby’s will use the proceeds to repay approximately $132.5 million of its senior secured term loan and for general corporate purposes. Moody’s Investors Service assigned a B2 rating to the notes. Standard & Poor’s assigned a B+ rating.

Quicksilver Resources issued $600 million in 11.75% notes due 2016 with an OID of 97.72 for a total yield of 12.5%, which was in line with price talk. The Fort Worth, Texas-based oil and natural gas exploration company plans use the funds, along with funds from some recent asset sales, to pay down a $700 million second-lien term loan facility due 2013. Quicksilver recently amended its credit facility to allow it to raise new debt. Credit Suisse, Deutsche Bank and JPMorgan were joint bookrunners for the issue. Moody’s rated the notes B2 and S&P issued a B- rating.

It's a race against time. A massive wall of leveraged loans will mature between 2012 and 2014. This is the secured debt used to finance the frenzy of LBO transactions completed between 2005 and 2007.


...right now, the leveraged loan market is fixated on one number: $430 billion, the amount in leveraged loans due to mature between 2012 and 2014. Despite the big numbers of the past, this might be simply too big. Indeed, the $430 billion figure is already worrying lenders, borrowers and loan-market investors alike as they struggle with the possibility that a large portion of those loans will neither be repaid nor refinanced, raising the specter of a wave of defaults among the debt-fueled LBO borrowers of 2005 through 2007.

Here is what the wall looks like (from

Leveraged firms will be issuing HY debt at record pace to try to refinance all of this. They are desperately hoping the the HY mutual funds inflows will stay strong, generating demand for new paper. Some will not be able to roll debt. If the US economy does not improve or has another leg down before 2011 -2012, we will see numerous defaults.

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