A record number of corporate defaults last year is driving sales of new leveraged loans in 2010, as companies look to this risky debt to support their emergence from bankruptcy.
More than $2.5 billion of exit loans already are being prepared this year, accounting for 42% of new institutional leveraged loans announced since January, according to Standard & Poor's Leveraged Commentary & Data unit. That is nearly twice the $1.5 billion of exit loans priced in all of last year, when only 5% of new leveraged-loan sales were used in exit financing.
"Mathematically, we should see more exit financings," said Russell Morrison, managing director at Babson Capital Management. "There were record defaults last year, and that will translate into more exit loans."
S&P said 189 companies defaulted on debt last year, which drove a wave of leveraged loans for the debtor-in-possession, or DIP, financing that companies used to operate while reorganizing under bankruptcy-court protection.
Part of the reason for the anticipated increase in exit loans is because the bankruptcy process is becoming shorter as restructurings have aimed to get creditors' support before filing for Chapter 11 or to skip lender scrutiny altogether.
Last year, the number of prearranged bankruptcies, in which many creditors approve a reorganization plan ahead of a filing, tripled to 30 among publicly listed companies, compared with 2008, according to BankruptcyData.com.
In some cases, the firms were in and out of the bankruptcy courts within a matter of weeks or months, and some of the companies that filed for Chapter 11 in 2009 are now exiting that process and looking for financing.
"Typically, exits have taken longer, usually 18 months or more, but companies have been exiting bankruptcy sooner than expected compared to previous cycles," said Gautam Kakodkar, an analyst at Barclays Capital in New York. "It's a function of more prepackaged filings and a market that is open to new issuance."
Last week, New York theme-park operator Six Flags Inc. said J.P. Morgan Chase & Co., Bank of America Corp.'s Bank of America Merrill Lynch, Barclays PLC's Barclays Capital and Deutsche Bank AG were putting together an $830 million senior secured credit facility to finance its exit from bankruptcy.
Meanwhile, Chicago packaging company Smurfit-Stone Container Co., which went into bankruptcy court last January, is putting together $1.2 billion of loans to pave the way for its Chapter 11 exit.
Barclays Capital and Morgan Stanley are arranging a $450 million exit loan for Spansion Inc., a California developer and manufacturer of flash memory technology, which filed for bankruptcy protection in March. The company said at the end of last year that it expects to emerge from bankruptcy sometime during the first quarter of this year.
"After a few year-end exits [from bankruptcy], the pace has certainly picked up," said Mr. Kakodkar. "We expect exit financing and DIP refinancing to add to the $8 billion forward calendar [for leveraged loans]."
The leveraged-loan market had been dormant for two years after the subprime-mortgage market cratered and investors shied away from risky assets, such as leveraged loans and high-yield bonds.
But interest in making new leveraged loans to companies with below-investment-grade credit ratings returned in 2009, driven by a rally in the price of existing leveraged-loan debt. The Barclays Capital Loan Index posted record returns of more than 53% last year.
And even though earning a low-double-digit-percentage total return may be the best leveraged loan portfolio managers can hope for this year, it likely will be enough to woo buyers and spur sales of new leveraged loans as investors look for riskier asset classes.
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