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By Ronald Fink
Banks' unwillingness to lend freely poses a threat to the corporate bond market's nascent recovery, according to an analysis published on Thursday.
The note put out by research firm CreditSights warned that high-yield investors are increasingly at risk in new corporate refinancing deals as a result of banks' heightened demands for protection in case of default. The report cited lenders' particularly strict terms on recent deals by Harrah's, HCA and Univision.
To be sure, high-yield bond issues during the credit bubble were notoriously "convenant-lite" in so far as bond investors yielded to banks' demands that they cede or at least limit their rights to recovery. But CreditSights analyst Chris Taggert noted in Thursday's report that the terms of those deals paled in comparison to restrictions on investors' rights this year. The new deals are designed largely to extend the maturities of debt about to come due, often used to support leveraged buy-outs.
"Even relative to credit bubble loan underwriting standards, the lien position for most of these bonds is not well protected," Taggert wrote.
In HCA's $1.5 billion refinancing in April, for example, bondholders relinquished the right to object to the size, pricing and collateral of any debtor-in-possession financing extended by banks in the event of bankruptcy. The investors also accepted the fact that there would be no cap on the amount of DIP financing the banks could provide.
"Without a cap," Taggert observed, "bondholders have to rely more heavily on the objections of other creditor classes and the judgment of the courts to protect against loan-holders from overly improving the seniority of their claims."
Despite the refinancing, and a similar one for $1.25 billion in July, HCA still has some $10 billion in bank debt coming due in the next three to four years as a result of its $21 billion LBO in 2006, which CreditSights says "continues to remain a concern."
While investors have nonetheless shown little hesitancy to buy HCA's and other issuers' latest bonds, Taggert suggested that could change on future deals unless banks eased their demands.
The analyst conceded that the lack of investor protection so far is "unlikely to be the swing factor between buying a new issue and passing on a deal," but added that interest rates on new debt are "dramatically higher than the norm" and that "a substantial amount of refinancing needs to be done in the years ahead by borrowers with sizable loan maturities and high financing costs."
He called the deals at Harrah's, HCA and Univision "the tip of the iceberg."
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