Loan buybacks to complicate restructuring
LONDON (Reuters) - Loan buybacks by private equity firms could potentially create problems of interest in crowded restructuring scenarios as activity picks up, a senior Morgan Stanley (MS.N) banker told the Reuters Restructuring Summit.
"It is unclear how that (buybacks) will impact restructuring. We are in unchartered territory where equity owners can acquire debt to use as a currency to recapitalize or negotiate leverage in some form," Ben Babcock, EMEA head of restructuring, said.
Europe is heading toward a much more active restructuring market in the debt of leveraged companies loans that make up private equity firms' portfolios and a number of public corporate situations, Babcock added.
But restructurings are likely to be lengthy due to the increased complexity of capital structures and the numbers of investors involved, he said, which now include some private equity firms after recent loan buybacks.
Europe is seeing a flurry of waivers and amendments to leveraged loans as declining earnings and underperformance on business plans push companies into renegotiating covenants on their senior debt -- and more are anticipated.
"Covenants that were set tend to be reflected through all parts of the capital structure. They are biting in the senior debt not the junior debt," Babcock said.
The most common problems currently requiring adjustment are leverage and debt coverage covenants, as declining earnings and cashflow stretch balance sheets and illiquid and expensive debt markets mitigate against full blown refinancings.
"Leverage and coverage covenants are first to bite," Babcock said.
British directories firm Yell (YELL.L) launched a major amendment to its 4.65 billion euros ($6.85 billion) leveraged loan this week to allow the company to reset its leverage and interest cover covenants to 20 percent, along with an aggressive debt reduction plan and a 100 basis points margin increase on its loan.
Restructuring experts are focusing on the twin balance sheet pressures of debt maturity and covenants and liquidity.
A combination of the two is likely to give rise to the most acute problems, but either could be a trigger for addressing capital structures, Babcock said.
Restructurings are however likely to be lengthy and complex due to the increased number of players to talk to after the inclusion of bull-market debt instruments such as second lien, mezzanine and Payment-In-Kind loans in capital structures, which are as yet untested in an economic downturn.
(Reporting by Tessa Walsh; editing by Sue Thomas)
