Wednesday, August 12, 2009

"Amend and extend" saves the day for many leveraged companies

A couple of months back we discussed the dilemma facing LBO financed companies(Leveraged loans - a race against time) as the leveraged debt maturities loom. Many firms have been trying to issue bonds to refinance their term loans. But a new approach is taking hold as investor demand for leveraged loans continues to be strong. It's called "amend and extend". The idea is that the loan remains in place, while the lenders permit a maturity extension in return for better terms. The new terms may include higher spread, better covenants, and a reduced notional. From Thomson Reuters:
So far this year, approximately $28.9 billion in amend and extend issuance has been completed with another roughly $1.8 billion in process. Just this week it was learned West Corp. is in market to push out the maturity on $750 million of its $2.3 billion term loan from 2013 to 2016. In return, extending lenders will get a 125 bps price bump to LIB+362.5.
Here is an example (from PRNewswire)
SANDUSKY, Ohio, Aug. 6 /PRNewswire-FirstCall/ -- Cedar Fair Entertainment Company (NYSE: FUN), a leader in regional amusement parks, water parks and active entertainment, today announced that it has received consent from its lenders to amend its credit agreement. It also announced that lenders holding $900 million of its term debt will extend the maturity date of their commitments by two years. The extended term debt will mature in 2014 and bears a rate of LIBOR plus 4.0%.
The chart below shows the recent "amend and extend" transactions and the corresponding spread increases.

This strategy buys leveraged companies time to try to de-leverage by improving their earnings or cutting costs. "Amend and extend" process is the reason we may not see the levels of defaults many have been forecasting, such as the JPMorgan/S&P projections below.

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