The Entrance of the Exit Facilities
January 7, 2010
After the wave of bankruptcies last year, market participants expect a second surge to hit the leverage loan market’s shores—exit facilities. And judging by the number of exit loans already on the primary calendar, this wave could be a whopper.
“I think the volume will continue to grow based on the pipeline of companies in bankruptcy and the fact that the bankruptcy process allows these companies to clean up their capital structure, making them more attractive candidates from an underwriting standpoint,” said a California-based investor.
A New York-based banker added, “We will see a healthy supply of exit facilities, and [exit loans] should be received well because most of the time the company has cleared up its balance sheet and has low leverage. They are also priced attractively.”
Cooper-Standard Automotive, an auto parts maker that filed for court protection in August, and LyondellBasell, which filed for bankruptcy in January, are probably the two most anticipated exit loans, sources said. Lyondell’s exit loan alone could be as much as $5 billion.
Already, banks have arranged four exit facilities for companies that have recently emerged from bankruptcy, launching two of the four deals this week.
JPMorgan this week kicked off a $680 million exit loan for theme park operator Six Flags, which filed for Chapter 11 bankruptcy protection in June. Price talk on the term loan when it launched was at Libor plus 425 bps, with an OID of 99.
Likewise, Bank of America Merrill Lynch began marketing a $360 million term loan for Big West Oil, an Ogden, Utah-based oil refinery and subsidiary of truck stop operator Flying J. Price talk was at Libor plus 950 bps, with an OID of 96. Commitments are due on Jan. 21. Big West and its parent company filed for Chapter 11 in December 2008 because of falling revenues.
Meanwhile, a bank group has arranged a $1.2 billion exit loan for Smurfit-Stone, the Chicago-based box maker. The banks—JPMorgan, Deutsche Bank and Bank of America—set the interest rate on the loan at Libor plus 500 bps, including a 2% Libor floor. Smurfit-Stone filed for Chapter 11 bankruptcy protection in January 2008 in Delaware’s bankruptcy court, citing the economic downturn as the cause of decreased demand for its products. The company was also hobbled by lower prices and revenues and a bloated inventory.
And two weeks ago, banks arranged a $775 million term loan B for Pilgrim’s Pride, part of an exit facility that also includes a $375 million term loan A, both priced at Libor plus 500 bps. The bank group consists of CoBank, Rabobank International, the Bank of Montreal, Barclays Capital, Morgan Stanley and ING Capital. CoBank is serving as the facility’s collateral agent and administrative agent. The company filed Chapter 11 on Dec. 1, 2008, so it could “address certain short-term operational and liquidity challenges,” Pilgrim’s Pride said in a statement at that time. The company emerged from bankruptcy protection on Dec. 28.
Sources said the loan market this year could see exit facilities exceed last year’s total, which was $2 billion more than the previous eight years combined (see chart below).
“I think we will continue to see exits of companies that filed last year as the natural progression of the process,” said a New York-based investor.
In 2009, 207 public companies filed for bankruptcy, according to BankruptcyData.com. That represents a 50% increase from the number of bankruptcies in 2008, and a 140% increase from 2005 numbers. With so many bankruptcies, it’s no surprise that the loan market saw close to $15 billion in new debtor-in-possession loans last year, more than in any other year of the decade. All of which means a sizable bump in exit facilities.
The question is: How will investors respond to these loans?
“This will be an interesting opportunity for investors,” a CLO manager said. “After the recession earlier in the decade, there were some attractive exit facilities. Investors may look back at Six Flags and say, “Hey, that was a nice piece of paper. It was attractively priced. We’re looking at each [exit facility] as they come out.”
Of all the companies to default on their debt last year, media and broadcasting, automakers, cable companies, casinos, and hotels and restaurants represented 56%, according to Fitch Ratings. Paper and container companies, computer and electronics, telecommunications, chemical companies, realtors and banks together represented 27.6% of the total default rate.
This is important to note because the recovery “will be sector specific,” the New York-banker said. “So the key for these companies—to see how well investors receive their exit facilities—will be if the fundamentals of their sector have improved. Investors want to see that what got the company there in the first place has changed.”
The number of exit facilities, however, could slow as the year progresses, sources said, as the default rate is expected to drop to between 4% and 5%, depending on who you ask.
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