One hundred companies were forced to undertake debt exchanges last year. Given the scale of the bank liquidity crisis, and the doom-laden default predictions that were made at the end of 2008, that figure might seem to be relatively low. Indeed, although distressed exchanges accounted for roughly 35% of total global defaults in 2009 most of them took place in the first half of the year. The sharp improvement in sentiment in mid-2009 enabled the pace of exchanges to slow dramatically. In the fourth quarter of 2009 there were just 18 corporate distressed debt exchanges and in the first quarter this year just eight. The scene should therefore be set for distressed exchanges to return to their pre-crisis levels of roughly 10% of corporate defaults.
But things might not work out that way this time around. And the problem is yet again the sheer size of the debt burden that many corporates took on before 2007. In a recent research note on the subject Moody’s points out that many corporates that have undertaken debt exchanges are still on extremely shaky ground.
The research shows that of the six largest distressed debt exchanges that took place in 2009, four of the corporates remain rated at triple-C and one has filed for bankruptcy. Only Ford Motor Company, the subject of the largest exchange – the blockbuster $9.8 billion trade – is rated above triple-C (but only at single-B). Indeed, three-quarters of the companies that completed debt exchanges in 2009 remain triple-C rated or lower. The second-largest exchange last year, a $6 billion deal for Hurrah’s Entertainment, has left the company still teetering on a Caa3 rating.
So rather than fixing their problems, even debt exchanges the size of Hurrah’s seem to have had little perceptible impact on the companies’ financial position. Debt exchanges are supposed to stabilize the capital structures of the corporates that undertake them but in this cycle they have often only postponed the need to sort out excessive leverage on the balance sheet. So rather than the predicted tailing off in exchange activity that the numbers might suggest, the reality might actually turn out to be a second wave of deals. If a full three-quarters of corporates that have already exchanged are still deemed at a high risk of near- to medium-term default then debt exchanges – far from being a magic bullet – might prove to be merely a temporary stopgap in this financial downturn.
