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LBO market braced for messy restructurings

Anyone with a brief to outline the benefits of mezzanine lending over the hedge fund and CLO money that recently replaced it could do worse than sit back and wait for the first wave of recent LBO deals to go wrong.

Another fine mezz

Lenders rewrite their terms of engagement

Most of the deals written in the past few years still have some way to go before they need to be refinanced, but if economic conditions continue to deteriorate many could hit the buffers well before term.

Just how the restructuring of a distressed corporate with large amounts of debt in the hands of institutional lenders will play out is the great unknown in this market. The restructuring process will be very different from previous cycles because of the fragmentation of debt providers. "Some larger transactions were widely syndicated so that it may be difficult for sponsors to obtain a majority from a class of investor on any kind of waiver request," says Nathalie Faure Beaulieu, regional managing director at European Capital in London.

This process will be made even more difficult by the presence of CLOs at the restructuring stage. Market wisdom has always been that CLOs will trade out of distressed names long before the restructuring stage is reached – but no one foresaw the current market conditions where they simply can’t. "There are perfectly good credits now trading at 80.

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