The easy days of bankruptcy financing may be drawing to a close as volatility in global markets has made investors nervous about putting money into this already uncertain sector.
Only a few months ago, Lyondell Chemical Co. was able to line up $2.25 billion in exit financing by selling high-yield bonds, an approach that signaled a certain appetite among investors for risky debt.
Today such a deal might not be possible, according to lawyers and bankers that specialize in restructuring broken companies. Concern that the door may be closing is creeping into negotiations and has turned up as a factor in at least two exit deals in the works — Smurfit Stone Container Corp. and Arizona grocery chain Bashas' Inc.
Exit and bankruptcy financings are typically tied into the capital markets and the amount of liquidity available, according to Brian Trust, head of the bankruptcy practice for law firm Mayer Brown LLP.
Bankruptcy-related financing went from drought conditions caused by the worldwide credit crisis in 2008 and early 2009 to a flood earlier this year as markets rebounded.
Indeed, companies have been able to move beyond the constraints of the leveraged loan market to tap the flexibility of the bond market to support exit financings. "Through the end of April, when we saw a tremendous amount of capacity soaked up for Lyondell Basell, it looked pretty frothy," Trust said.
Bashas' Inc. was not so lucky with its timing. The company has been exploring refinancing its $200 million in prebankruptcy debt by issuing high-yield bonds, a stretch from its original plan of rolling over the obligations.
"Then things got choppy (in markets) over the last couple of weeks," said Michael McGrath of Mesch, Clark & Rothschild, the law firm representing Bashas'.
"We have not determined if take-out finance can be put together because of the volatility in markets and because of the pricing," McGrath said.
Just a few months ago, creditors benefited from dragging out bankruptcies. For example, junior creditors of theme park operator Six Flags Inc. battled management for months, and in the end they received a much larger recovery, in large part due to strengthening credit markets and rising asset prices.
Now the opposite is true, and shaky markets helped end the legal spats that have kept Smurfit Stone in bankruptcy, according to sources close to the negotiations.
A protracted fight between the packaging company and its shareholders threatened to torpedo the exit financing that had been provided earlier this year on relatively generous terms. If the fight continued, no one expected Smurfit to get a new commitment that would be so favorable.
The result: Unsecured creditors gave up some of their equity to shareholders in return for a settlement.
Smurfit Stone officials were not immediately available for comment.
Michael Kramer, a partner at boutique investment bank Perella Weinberg, said deals are not collapsing. Rather, the volatility in markets is driving parties to give ground and forgo potentially larger recoveries in return for reducing risks.
"People aren't fighting as much to grab every last penny off the table," Kramer said. "There's a huge premium right now for transaction certainty — meaning the certainty to close, the ability to close."
Memories of the market storms of 2008 are still fresh.
"I think that since the collapse of Lehman Brothers, the depth of the leveraged loan market has remained somewhat tenuous, despite the recent pickup in the first quarter," said Michael Torkin, a bankruptcy lawyer for Shearman & Sterling.
"When the markets are open, investors don't want to miss the window," he said, "especially if they see macro events on the horizon that could jeopardize liquidity in the market."
To minimize their risk if a loan gets stuck in a soured exit deal, banks are partnering with other lenders. They are also less willing to hold the loans on their books.
That means the process of making the loans could take longer or cost more.
At the same time, advisers to bankrupt companies that are exploring financing in high-yield bonds are also lining up term loans, just in case.
"People hope for the best and brace for the worst," said Rob McMahon, the head of General Electric Corp.'s Restructuring Finance Group.
"If you have some ground to cover in the reorganization process, you have to be concerned."
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