Restructuring Activity Beset by Lack of ‘Dip’ Financing and High Capital Costs, Says New Morgan Joseph Quarterly Report

2009-11-11 16:08:11 -

Despite the recent firming of the high yield after market, and an improving appetite for those securities, default rates continue to increase and distressed companies are still finding it difficult and expensive to secure all types of financing, limiting their ability to restructure.

That is among the observations contained in an inaugural comprehensive “Restructuring Quarterly Newsletter” published by the Financial Restructuring

Group of the middle market investment banking firm of Morgan Joseph & Co. Inc.

“While restructuring activity has picked up lately, compared to a relatively slow Spring and Summer, and perhaps due to somewhat improved confidence in the economy, the fact is that a high rate of defaults continues,” said James D. Decker, a Morgan Joseph Managing Director and Head of the Restructuring Group. “In addition, direct lending by hedge funds has virtually dried up as they are focused now on trading existing paper, with the result that new financing remains very expensive.”


The report notes that rolling 12-month principal defaults through August 2009 totaled $55 billion, compared with only $0.49 billion in the corresponding year-ago 12-month period. Domestic middle market M&A transaction volume (involving enterprise values up to $750 million) has declined sharply, resulting in increased waiver and amendment activity by lenders and borrowers as temporal solutions for avoiding a distressed sale at low values.

The 12-page report also makes these points.



- The market continues to experience reluctance on the part of most lenders to accelerate and force borrowers into bankruptcy, and there is limited DIP financing available to sustain reorganizations. The result is that many borrowers have successfully negotiated six to 18 month extensions by paying up front fees and agreeing to adjust loans to provide lenders with yields more closely reflecting the current lending environment.


- Fragmented lender groups – CLOs, banks, funds and distressed investors – have made it difficult for bank groups to agree on courses of action when confronting a default. However, in those situations where groups have been able to identify a unified path forward, they have generally seen superior recoveries.


- Despite headlines suggesting otherwise, debtors and their advisors are continuing to struggle to find exit financing, especially at attractive terms. This has led to increasing attempts by debtors to “cram up” and “term out” existing senior lenders at below market rates.

In commenting on DIP financing, the Report indicates that despite slowly recovering credit markets, such financing continues to prove relatively difficult to obtain for many troubled companies. For those that are successful, pricing has remained at significant premium to historical norms, pointing out that approximately 35 percent of the fifteen most recent DIP facilities analyzed had actual or implied spreads to LIBOR of 1000 bps or higher.

“DIP loan spreads have increased precipitously with the general trends of the financing market,” the Report comments. “The average DIP loan in 2009 was priced a spread to LIBOR of almost 800 bps, versus 2008 where spreads averaged in the 500 bps range. Additionally, letter of credit and unused revolver fees have more than doubled over the past couple of years.”


The new report also provides a “Financing Market Snapshot” focusing on the availability of debt capital for mid sized companies, including discussions of Secondary Markets, Asset Based Loans and Revolvers, Middle Market Loans, Second-Lien Loans, Mezzanine Market and High Yield Bonds.


About Morgan Joseph

Morgan Joseph & Co. Inc., a New York City headquartered full service investment bank, provides financial advisory and capital raising services including M&A and restructuring advice, and equity and debt private placements and public offerings. In addition, Morgan Joseph provides research and trading for institutional clients. Morgan Joseph’s staff of over 130 includes more than 70 investment bankers, who are highly experienced professionals mostly from major Wall Street firms and intimately familiar with the issues facing middle market companies. The firm is a member of both the Financial Industry Regulatory Authority (FINRA) and the Securities Investors Protection Corp. (SIPC).

The 10 Principals managing the Morgan Joseph Financial Restructuring Group collectively have over 70 years of financing and restructuring experience. Since 2001 they have completed more than 75 company and creditor transactions, and restructured approximately $20 billion of debt in in-court and out-of-court transactions.

Note to the Media: A copy of the full report is available by contacting Cristina Bacon, of Anreder & Company, at cristina.bacon@anreder.com : mailto:cristina.bacon@anreder.com , or 212-532-3232.



Media:Anreder & CompanySteven S. Anreder, 212-532-3232 steven.anreder@anreder.com : mailto:steven.anreder@anreder.com orCristina
Bacon, 212-532-3232 cristina.bacon@anreder.com : mailto:cristina.bacon@anreder.com orMichael
Shallo, 212-532-3232 michael.shallo@anreder.com : mailto:michael.shallo@anreder.com