Wall Street's Arcane Corner Is Revived By A $6 Trillion Bond Wall

A nearly dormant corner of Wall Street is offering help to distressed companies unable to access the debt markets and facing significantly higher borrowing costs. In recent years, financial advisors such as Houlihan Lokey Inc., Lazard Ltd., and Evercore Inc. have experienced an increase in inquiries regarding liability management, as companies looking for solutions to the end of nearly free money find themselves bloated with debt.

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Several companies have already suspended dividends or sold assets to pay the debt due to high-interest rates and slowing economic growth. The balance sheets of many companies are being threatened by a staggering $6.3 trillion in outstanding corporate bonds alone by 2025.

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As a result of its $22 billion purchase of Westfield in 2018, Unibail-Rodamco-Westfield has been selling assets to reduce debt.

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In an interview, Jean-Marie Tritant, Chief Executive of Unibail-Rodamco-Westfield, said, "I think we overleveraged the firm.". The rise in our loan-to-value caused investors to worry about our ability to meet our obligations due to falling values after the acquisition.

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A successful activist campaign led by Xavier Niel, a French technology billionaire, helped Tritant take over the company in 2021. Aside from disposing of assets, the CEO cut dividends, limited capital expenditures, and extended debt maturity dates in order to stabilize the company.

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Fabrice Mouchel, Chief Financial Officer, said, "It gives us access to the debt market whenever necessary and when it makes sense."

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Traders betting on a softer monetary policy after central banks opened up credit markets in October have helped delinquencies to remain low. In the midst of central bank money printing, investors have become less protected, which gives troubled companies more options to avoid default.

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The apocalypse has arrived with the four horsemen. In addition to war and plague in the form of Covid, we are experiencing regional food shortages because of the Black Sea shipping blockage, and we are experiencing high inflation which can be seen as a form of financial pestilence," said Joe Swanson, cohead of Houlihan Lokey's EMEA Restructuring Group. In spite of this, the default rates on non-investment grade bonds have not changed much.

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It appears that will change in the near future. According to Trade Algo, about a quarter of S&P 500 companies missed fourth-quarter earnings estimates.

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According to Alvarez & Marsal Inc., almost 9% of companies in Europe require turnarounds. Interest rates are rising everywhere, which is expected to contribute to the increased number.

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As S&P Global Ratings reported in December, junk-grade default rates in the US and Europe may surpass 3.75% and 3.25% by September. 

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In some industries, the rate will be higher than others and could reach 12% among high-yield US retailers this year, compared with 0.2% at the end of 2022.

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A New Option

The traditional approach to managing liabilities involves selling off units, amending or extending debt arrangements, and purchasing bonds at a discount. However, some troubled businesses are getting more leeway due to weaker investor protections.

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There are new options, including no longer sharing financial performance updates in certain scenarios, according to two advisers who declined to be identified. In addition to renegotiating debt documents or improving the position of creditors in the capital structure, companies may be able to get additional liquidity from lenders. Notes can sometimes be extended until maturity so that the borrower can withhold interest payments.

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According to Sam Whittaker, managing director of Lazard Financial Advisory, "issuers have a much greater toolkit available because of the level of flexibility in the documentation."

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Some people find opportunity in rising levels of distress. According to three people with knowledge of the matter, some private equity firms are considering buying back bonds from companies acquired in 2020 and 2021 because of their substantial discount.

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Greg Berube, senior managing director of Evercore's restructuring and capital markets advisory group, said that some of these conversations have been had, but many have not progressed since they are opportunistic. It's not the case that sponsors embark on these deals haphazardly; reputation, execution, and implications are all very carefully thought out."

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Walking Away

One of the people said that alternative asset managers have so much cash that instead of working on problems, they tend to focus on newer opportunities.

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The issue is being attempted to be resolved by heavily-indebted companies, however. A $1 billion leveraged loan to buy time on existing debt was launched by American Airlines Inc. in order to help reduce its debt. Hanesbrands Inc. eliminated its quarterly dividend to help cut its debt.

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A senior managing director at Evercore, Roopesh Shah, says companies may need a year to decide which of their options is best. This means they are starting to address their maturities this year to give themselves time to adjust. Liability management will likely be needed by a larger number of companies depending on the market's appetite for risky credit.

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PJT's Tom Campbell, head of the EMEA restructuring and special situations division, said, "we're in a slightly on-off market when it comes to companies with high levels of leverage." In the next four to six quarters, liability management is likely to be a hot topic.

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As part of its efforts to reduce exposure to US malls, Unibail plans to sell US malls this year.

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In January, a $195 million loan due on the Westfield mall in Valencia in Los Angeles county was to be repaid by the company and its partner. This property is being negotiated for sale, and if a deal isn't reached, it will likely be foreclosed. As this is a non-recourse loan, either action results in almost $100 million in debt reduction.

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Liability management may also be necessary to pay down debt for real estate companies that have gone on a borrowing spree over the past decade. Additionally, businesses involved in the chemicals and technology industries, as well as healthcare providers and leisure operators are expected to show interest.

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In his comments last week, Andrew Bednar, CEO of Perella Weinberg Partners, said that the firm has the ability to work on transactions that go beyond the "Call 911, I'm in bankruptcy." scenarios. As it relates to accessing markets and managing the maturities of perfectly healthy companies, it extends much further than that.