Record number of U.S. businesses seek relief on loan terms


[ad_1]

A record number of US companies requested loan modifications in May after rising debt and falling profits left them at risk of breaching their loan terms.

Last month, 43 US issuers of leveraged loans asked their lenders for relief from the conditions attached to their debts. This surpassed the previous record of 25 set in March 2009 for these generally lower-rated borrowers, according to figures from LCD, a unit of S&P Global Market Intelligence.

Closures put in place to slow the spread of Covid-19 have sapped revenues and led companies to take on more debt in order to survive the economic crisis that followed. In doing so, companies have risked breaking lending rules known as restrictive covenants that govern things like the amount of leverage they are allowed to take on or the amount of money they are allowed to take out. they must keep.

When borrowers do not comply with these covenants, lenders can usually either renegotiate the loan or demand repayment. In extreme scenarios, they could start to restructure and take control of a company’s assets.

“Businesses are worried they won’t be able to get by without these amendments,” said Jessica Reiss, head of US leveraged loan research at Covenant Review, a credit research firm. Additional flexibility should “give businesses the trail they need to get back on track when things get back to normal,” she added.

The most significant amendment concerned ailing cruise line Royal Caribbean Cruises and affected $ 4.5 billion in the company’s debt, according to LCD. The lenders have agreed to waive the company’s fixed fee commitment, which measures the company’s ability to pay fixed costs such as debt and interest payments, until next year.

Minnesota-based Polaris Industries, which makes motorcycles and snowmobiles, has secured an amendment to a bank line of credit and another bank loan to increase its leverage until the first quarter of next year, according to LCD.

From January to May, 80 companies requested relief from their covenants, up from 17 during the same period last year, LCD said. Investors have largely been willing to ease the terms of corporate loans as the viral outbreak is out of their control and the alternatives – enforcing default and possibly flipping a business overboard – could be worse.

“Most would agree that this is of a ‘one-off’ nature, so you get a temporary easing of the terms,” said Vivek Bommi, CEO of Neuberger Berman. “For most creditors, it is better that a business does not go bankrupt,” he added.

The vast majority of the changes involved “pro-rated” loan packages. As defined by LCD, this includes term loans made directly with a bank or group of banks, and emergency bank lines of credit that have been pulled by desperate businesses looking for cash to help them get through. the Covid crisis.

In the remaining “institutional” market, where loans are sold to a larger pool of investors, many covenant protections have been reduced after years of strong demand from fund managers who have given investors the edge. companies financed by private equity to obtain more favorable conditions.

January to May alliance relief volume bar chart (in billions of dollars) showing the increase in emergency funding in 2020

However, lines of credit still tend to have financial covenants that come into effect after a certain percentage of the loan is used up. “As leverage increases, the number of companies trying to get relief will increase,” said Marina Lukatsky, senior director of LCD Research.

Some companies have avoided breaching commitments by other means, such as using last year’s profit figures or adding profits that would have been made if the coronavirus had not spread across the world .

Last month, events group Live Nation Entertainment said it would soon begin substituting last year’s earnings for this year’s earnings when calculating its net leverage commitment, while German maker Schenck Process said he could use a “pre-coronavirus earnings” measure when testing engagements.

[ad_2]