A massive wave of corporate distress is pitting beleaguered companies against their lenders in brawls that are shaping up to be nastier than ever before.
Desperate firms and their private equity owners are seeking to take advantage of years of weakening creditor protections to help cut obligations and raise cash after the coronavirus outbreak brought businesses to a standstill. Be it via allowances written into borrowing documents when times were good or simply loopholes in deal terms, they’re siphoning collateral and transferring assets while pushing deeply discounted debt swaps onto investors, who risk seeing the value of their bonds and loans plunge if they don’t go along.
Still, money managers aren’t just rolling over. Credit powerhouses like GSO Capital Partners, BlackRock Inc. and HPS Investment Partners have lined up scores of lawyers and financial advisers to defend their interests, often finding themselves at odds with one another as they fight for the biggest piece of a shrinking pie. As the gloves come off, industry veterans say tensions are as high as they’ve ever seen.
“You have more and more aggressive people holding this stuff and private equity firms have gamed every nook of credit agreements,” said Dan Zwirn, chief executive officer of Arena Investors, which manages $1.4 billion. “As people get desperate, there are going to be a lot more of these.”
The conflicts underscore how the legacy of the last crisis is being felt as the current one unfolds. The Federal Reserve’s relentless interest-rate cutting and quantitative easing spurred a surge in demand for higher-yielding assets, helping risky companies sell debt with fewer lender safeguards. Now, amid a fresh bout of economic pain, the effects of those policies are coming to bear.
One such fight recently played out between Sinclair Broadcast Group Inc. and its creditors.
The company through a subsidiary sold $1.8 billion of unsecured notes last year to fund the acquisition of Walt Disney Co.’s regional sports networks. Those securities have plunged as the pandemic left stations with no professional sporting events to televise.
Relatively loose provisions in the bond documents helped embolden Sinclair to pursue a debt exchange that asked holders to take a 40% haircut and swap into debt secured by the company’s assets.
Lenders late last month balked at the terms, and a group led by Shenkman Capital Management organized to block the exchange. The response from Sinclair was ominous: the company said it was weighing other options including a possible maneuver that would shift company collateral out of creditor reach if the exchange offer was not successful.
The potential moves were “threats” that appeared designed to pressure lenders, according to Covenant Review, which called the outstanding bond’s safeguards among the weakest it had ever seen.