Creditor Corner

Labor Day Edition

for the week ended August 30, 2024

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September 10, 2024

BREAKING NEWS

Testing Double-dips, Big Lots & Azul hit the skids, big winners in Lumen, net short lender provisions on the rise and much, much more...

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Bruce Richards on the Markets:

Bringing out the Big Guns

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Tweet of the Week

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The Original Double-Dip Transaction (graphic below)

Sub-con anyone?

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Featured Event

Join the Creditor Rights Coalition and Cooley for a Roundtable Discussion on:

• LMEs Revisited: Incora & Robertshaw and their aftermath

• Emerging retention and independent director issues

• The Day After: Third-Party releases and Purdue Pharma

This event is off the record and Chatham House rules apply to encourage a robust discussion among participants.

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Our take:

It is somewhat comical to see CCP on the sponsor-side of some of the most aggressive LMEs yet complain when they miss the boat in Lions Gate...

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Data Download

Market-implied rate cuts (bps)

Source: Bloomberg; as of August 23, 2024; JFL Credit Roundup

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Bringing out the Big Guns

The Fed is about to enter an easing cycle that will prove supportive for Private Equity. While PE sponsors do not hibernate like bears in the winter, sponsors have been quiet from an acquisition/exit standpoint since the past two years have proven difficult given equity valuations and higher financing costs (SOFR rose +525bps). Ditto for perspective homeowners who have bemoaned the fact that home prices/mortgage rates/operating costs make ownership less attainable. But relief is coming. Looking forward, I expect SOFR to gradually decline by 200bps in the next two years as the Fed eases and inflation normalizes. Other considerations will come into focus for LBO sponsors: 1) potential for higher corporate tax rates, 2) changes in supply chain cost structure derived from nearshoring and tariffs, 3) slower economic growth, 4) regulatory scrutiny from FTC and EU that impacts (e.g. technology, healthcare) and 4) valuations have risen to all-time highs. Despite this, PE is sitting on $1.2T of undrawn capital globally. $1.2T of dry equity powder with lower future financing rates as lenders are willing to provide a dollar of debt for every dollar of equity.

During the past two years, PE has focused on value creation with add-on acquisitions, revenue growth, improving operating metrics, technology investment, CapEx, streamlining costs, improving margins all to minimize/offset higher interest charge. By and large, PE has performed admirably despite the higher interest rate regime, and slower deployment/exits. Going forward, I expect greater exits plus dividend recaps to return capital to LPs. The average LBO PE-multiple is 12x EBITDA with stapled financing of 6x debt-to-EBITDA.

LBOs on the rise, the lull coming to an end, the big guns are out and ready for hunt.

To follow Bruce's thoughts on the markets, investing and more, follow

@bruce_markets

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Our take:

Does putting limits on shorting set a dangerous precedent for the market? Read on...

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The views of our Contributors should not be attributed to their respective firms or the Creditor Rights Coalition. In addition, the Coalition may take positions as part of its Advocacy efforts that do not necessarily reflect the view of Contributors and should not be attributed to any Contributor.

Announcing New Data Initiative to Analyze Bankruptcy Costs

Our Take:

The Daily Cost of BK Legal fees Are Increasing.

Are we shocked? No.

Our proprietary analysis supports anecdotal evidence that bankruptcy has gotten more expensive. We will be providing additional analysis in the future to show how other factors affects fees. We hope our database will help make bankruptcy a more efficient forum for all stakeholders.

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