Reasons to Worry, or Not, About the 2013 Refi Cliff
June 11, 2009
Being there when you need help is at the heart of countless love songs and even more insurance commercials. But if someone were to write a ballad about the future prospects of refinancing billions in leveraged loans, based on the numbers available today, it might have more of a cry in your beer quality—i.e. they will not be there for you.
The good news is that the peak of the loan market’s refinancing needs is four years off, and companies have a number of options available that will improve the situation by then.
The sad song goes like this: most leveraged loans that were issued during the LBO boom between 2005 and 2007 will need to be refinanced between 2010 and 2013. And some market participants say CLOs, the buyers of much of that paper, will still be under pressure or even static—an industry term for when a CLO is essentially frozen—and unable to fund this wave of refinancings, or so-called refinancing cliff.
A look at the numbers illustrates the problem. Between now and 2017, a total of approximately $576 billion in loans will need to be refinanced, with the peak hitting around $230 billion in 2013, according to the Loan Syndications and Trading Association. However, in 2013, the maximum amount of re-investible dollars coming from CLOs will be just below $50 billion, compared with just over $200 billion now. And if, say, only half of the CLOs can reinvest in loans in 2013, there will only be about $25 billion in re-investible dollars to go around.
Simply put, “There is clearly a problem,” said a New York-based banker.
In a recent LSTA survey, the industry trade group asked participants whether the refinancing cliff will be possible to avoid. Approximately 29% of respondents chose the answer: “No, liquidity will not be available and many companies will default.” Another 41% chose: “Partially, the government will need to step in to repay these loans.”
Companies that are rated B+ or B represent the largest group with loans that will need to be refinanced. The volume of those loans will hit $110 billion in 2012 and peak around $125 billion in 2013. Companies with loans rated BB- or higher make up less than half that in terms of what will be needed to be refinanced. Nearly half of all companies with loans rated B- won’t be able to get the refinancing they need, according to Standard & Poor’s Leveraged Commentary and Data and the LSTA.
But while tackling these refinancings may seem like a daunting task for an embattled leveraged finance market, there are several factors that could reduce the volume before we arrive at the precipice. One of the biggest factors is that many of these loans will simply default. This should bring the 2013 peak (as seen in the chart below) down to around $150 billion, according to S&P LCD and the LSTA. Also, those better-rated companies may be able to find the financing they need in the high yield bond market, which has been red hot lately and already a source of funding for loan refinancings.
Approximately 60% of the proceeds from high yield bonds sold so far this year, or roughly $24 billion, has gone to pay down bank debt, according to S&P LCD. That’s the largest amount LCD has seen in its 13-year history. In 2007, only 17% of the bonds sold went to pay down bank debt.
“Some companies will roll loans into secured bond issues, while others will convert their loans issues into equity. We are already seeing this trend,” said an analyst at an international bank.
Issuers can also amend and extend their maturities, paying investors a higher spread for the privilege to do so.
“Companies will have to pay higher spreads than they would have had to three years ago in order to get the deals done and to clear the market,” said Steven Bavaria, managing director of leveraged finance for DBRS. “Banks will be back to lending themselves, rather than selling the deals off to so many institutional investors, like CLOs. Other institutional investors—pensions, endowments, hedge funds, insurance companies—will be lured into the leveraged loan market, but only for wider spreads than used to exist.”
And companies can initiate cost cutting or revenue generating strategies or relieve the pressure through a merger or by being acquired.
These options give the market, “reasons not to worry about the 2013 cliff,” a Connecticut-based investor said.
And yet there are still reasons to worry. In 2013, the same year that $230 billion worth of loans will need to be refinanced, slightly more than $100 billion worth of high yield bonds and almost $40 billion worth of revolvers will also need to be refinanced as well, according to S&P LCD and the LSTA. The entire amount of institutional loan and high yield bond debt coming due between 2011 and 2015 will be $936 billion.
“In some ways, this refinancing cliff issue is similar to the overhang of leveraged loans from 2007,” said the New York-based banker. “Eventually, the overhang worked itself out, and I expect the same will occur with the refinancing cliff. There seems to be a lot of cash in the market and, today, most of it is being put to work in the bond market. Eventually, cash will return to the loan market and, at a price, and debt will be refinanced. Four years is a long time, and many things can happen as we’ve seen in the last couple of years.
The analyst echoed that thought. “2013 is a long time from now. Think about what the world looked like three and a half years ago. A lot can change for the better or worse.”
For more information on related topics, visit the following:
