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Distressed debt buyback bargains prove elusive

Corporate lending has slowed to a trickle, so distressed issuers are turning to debt exchanges and buybacks to avoid bankruptcy. While the leveraged loan market trades well below par, owners and sponsors see this as a no-brainer, but noteholders may have very different ideas. Louise Bowman reports.

Buybacks become minefield for distressed names

Rating implications

LIABILITY MANAGEMENT OPTIONS for sub-investment grade corporates have dwindled to a very short list in this downturn. With no new money available from the banks, debt exchanges and buybacks have become in many cases the only tools at these companies’ disposal, short of renegotiating existing terms or resorting to a debt-for-equity swap. But undertaking exchanges or buybacks has proved something of a minefield for many distressed companies – the result of a disparate investor base with very different and often conflicting motivations.

So while loan market trading levels have proved a boon for investment-grade corporates, who have gorged on the opportunity to buy back debt at well below par – New York University Stern School professor Ed Altman recently revealed that the $30 billion of US debt exchanged during 2008 was more than three times the total amount exchanged during the 23 previous years – high-yield names have found it harder to reduce their debt burdens in this way.

But for many there are few alternatives. "There is a massive gap between the levers available to investment-grade and high-yield corporates," states Andrew Sheets, head of European credit strategy at Morgan Stanley.

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