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💥LME = FEE!💥
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💥LME = FEE!💥

RX Bankers Crush. A bunch of filings: ProSomnus Inc., KidKraft Inc.

May 12, 2024
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We’re nearing the midway point to ‘24 believe it or not and by Gawd the in-court restructuring activity has been weak AF. When the biggest cases to file are, like, a South American airline (Gol) and a domestic healthcare company (Steward), it’s no wonder we’ve got law firms fighting other law firms (the bankruptcy equivalent of Kendrick v. Drake), lenders who’ve (apparently) made out at par-plus suing other lenders, and other tomfoolery. See you on the pre-summer event circuit, folks!

But … ⚡️BUT!⚡️ … is this just the calm before the storm? JP Morgan Asset Management is sounding the alarm:

“But even as leverage has broadly declined, high debt costs have pushed interest coverage ratios — the ratio of EBITDA, less capex expenditures, to interest — significantly lower. In December 2023, 62% of B3 rated companies recorded an interest coverage ratio below 1x, versus 29% one year earlier, according to Moody’s data cited by the asset manager.

JP Morgan cited other warning signs, including elevated pay-in-kind interest usage compared to pre-pandemic levels. Market participants attest that PIK is a useful loan structuring tool for preserving cash and provides a competitive advantage in winning deals. However, in some cases PIK interest can delay or exacerbate credit losses in a distressed scenario.”

Fitch Ratings also seems to think the party is just getting started, 🎉:

“…restructuring activity is expected to grow as bankruptcy filings continue to rise toward pre-pandemic levels, as protracted higher-for-longer interest rates and refinance risk from approaching maturities add strain to distressed borrowers. Overall corporate bankruptcy filings surged by 40% to 18,926 in 2023, normalizing from 13,481 filings in 2022, but remain around 18% below the pre-pandemic average from 2016 to 2019. Chapter 7 liquidations rose 32% yoy in 2023, while Chapter 11 reorganizations were up by 58% for the year.”

Funny. Even with higher rates, the number of bankruptcy filings is still lagging behind pre-pandemic levels. We’re old enough to remember when RX pros predicted higher rates would lead to a Point Break-esque wave of bankruptcies.

Keanu Reeves GIF
Source: GIPHY. RIP Swayze, you stud. The new Road House movie was an abomination that spits on your memory. Don’t @ us.

Not so much. Robust cap markets are crashing the party: the leveraged loan market has remained strong through refinancing activity spurred by tighter spreads. Per Fitch:

“The U.S. leveraged loan market posted strong activity in 1Q24 as sentiment improved around inflation, fears of a recession reduced and expectations rose that the Fed would cut rates in the first half of 2024, Fitch Ratings says in the North American Leveraged Finance Chart Book – 1Q24 … Tighter spreads drove refinancing and repricing activity as issuers sought to reduce interest expense, while M&A and leveraged buy-out activity remained muted.”

Look at this maturity wall:

Source: Fitch Ratings

But, despite all of this, isn’t there a rising default rate? Ok, fine. Back to Fitch:

“However, default rates rose in 1Q24 across the leveraged loan and HY markets despite the strong opportunistic deal flow. The trailing twelve month (TTM) leveraged loan default rate was 3.8% at 1Q24, up from 3.4% in 4Q23 while the TTM HY default rate was 3.04% in 1Q24, up from 2.94% at YE2023. Highly levered issuers with declining operational performance face significant challenges to refinance near term debt, and are often unable to access the public capital markets.”

Source: Fitch Ratings, take a look at ‘20-’22, it’s amazing what ZIRP can do!

Huh. How could that be? Well…

Source: PETITION Meme Department

Which gets us to our friends at the investment banks who play in RX. They are, quite frankly, absolutely killing it when it comes to restructuring business — noticeably so when juxtaposed against the bulge bracket banks:

Source: FT

What do they have to say about the current state of affairs? What could possibly be driving their robust revenues, 🙄?

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