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Distressed Debt
Although the default rate of bond-issuing corporations is projected to drop by half (to about 7% in 2010, according to Fitch Ratings), there is also evidence that many CFOs will have to renegotiate with creditors this year. They may not be as successful the second time around.
The credit default swap (CDS) market is pricing in expectation of more corporate defaults. The Baird CDS Index, an index of 36 CDS contracts for non-investment-grade debt, dropped throughout 2009 but remains six times its base level of January 31, 2006.
One reason for pessimism is the prevalence of distressed-debt exchanges in 2009 as a "cure." More than 100 issuers bought back or exchanged for equity billions of dollars of bonds at steep discounts, according to Standard & Poor's, compared with only 70 issuers that filed for bankruptcy. But bond exchanges, which count as a default, don't wipe the balance sheet as clean of debt as bankruptcy does, according to studies by Fitch Ratings.
Additionally, about $163 billion of speculative-grade debt must be refinanced in 2010, with greater amounts maturing between 2011 and 2014. The concern for 2010 is not only a risk of new defaults. If business growth proves timid, the restructuring that occurred in 2009 simply deferred the bankruptcies that it was intended to avoid.
It may sound odd, given tougher lending criteria, but in some cases lenders are bending over backwards to keep borrowers in business.
Some turnaround experts say that lenders are not being aggressive enough in dealing with their distressed-loan portfolios, often due to unwillingness to record loan losses or a lack of necessary capital to absorb them. It has been reported that some lenders have not restructured any loans for the last eight months, which in this kind of market seems absurd.
Most lenders don't want to force the hand of companies that are in need of liquidity as they believe that their best bet is to keep these companies going, hoping that a turnaround occurs or an acquiring company comes around.
However, lenders can't wait forever: at some point they must confront the situation. A key advantage for lenders managing troubled debt is to have the technology tools that allow the lender to deal with the numerous accounting and servicing requirements in an efficient manner. SS&C's LMS Loan Suite has the technology solution that will address these issues throughout the life cycle of the loan, from performing to work out to foreclosure or REO; the total loan system will handle all these issues. Please contact John Stone at jstone@sscinc.com or at 860-298-4659 for additional information.
Want more information on LMS Loan Suite? Download our brochures, request more information or a demonstration or email us at solution@sscinc.com.
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This article first appeared in the 2/5/2010 edition of our Commercial Lending eBriefing.
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