“Kick the Can” Is Running Out of Road Unless the Fed Paves Some More
In April, as the U.S. economy contended with the early stages of an unprecedented pandemic induced recession whose severity and duration is unknowable, dozens of stricken speculative grade companies, many underperforming and over-levered before COVID-19 arrived, addressed their busted business projections, limited earnings visibility and pressing liquidity needs in the usual way—they borrowed more money.
Why? Because they could.
Let’s not try to normalize what happened last month. As the Fed began cranking up its money-printing moral hazard machine to 11 (that’s a “Spinal Tap” movie reference for anyone under 40), investors rejoiced as if the cavalry had come to the rescue just in the nick of time.
Credit markets soon reopened for business and deal flow resumed, including speculative-grade issuers, who reported nearly $90 billion of total debt issuance just one month after new issuance nearly came to a standstill.
Moreover, these spec-grade issuances were dominated by companies in the media and entertainment, travel and leisure, and hospitality sectors, where business prospects and recovery timing are the murkiest.
Nonetheless, many of these debt issuances were oversubscribed as fixed-income investors snapped up bonds and loans with juicy coupons.
Some of these issuers still had senior or secured borrowing capacity that they utilized to issue new debt, while many others were able to issue subordinated debt. Still others opted to max out on their revolvers to the extent that loan documentation permitted.
In short, many high-risk companies facing the certainty of sharply deteriorating operating performance in 2020 (and likely beyond) have further leveraged themselves with pricey new debt as they enter the teeth of a recession.
Global Co-Leader of Corporate Finance & Restructuring