Restructure This! Podcast Ep. 8
Private Credit Intensifies Lender Competition
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Sheppard Mullin’s Restructure THIS! podcast explores the latest trends and controversies in Chapter 11 bankruptcy, commercial insolvency and distressed investing. In this episode, we’re joined by Stacey Rosenberg, partner in the Finance & Bankruptcy Group in Sheppard Mullin’s Los Angeles office. We discuss the rise of direct lending and private finance, current trends in middle-market loans, predictions for whether the overall volume will drive restructuring activity in the near future and the role of private debt financing in the motion picture and entertainment industry.
Guests:
Stacey joined Sheppard Mullin a little over a year ago, and has been representing lenders, borrowers and equity sponsors in a variety of debt finance transactions for more than 25 years. While her practice in recent years has primarily focused on private lending, Stacey’s expertise and experience includes senior secured credit facilities, leveraged buyouts, workouts and out-of-court restructurings, exit financings and secured bond transactions.
Her in-depth experience and transactional knowledge, combined with a unique focus in the entertainment industry, allows Stacey to provide clients with highly specialized advice in connection with credit facilities, film securitizations, motion picture co-production and distribution arrangements and sale transactions.
Transcript:
Justin Bernbrock:
On today's installment of Restructure This! we welcome Stacey Rosenberg, a finance partner in Sheppard Mullin's Los Angeles office. Stacey has over two decades of experience in advising lenders, borrowers and equity sponsors across a variety of debt finance transactions. During today's episode, Stacey discusses current trends in middle market lending and private credit, including how rising interest rates and overall deal volume may or may not contribute to more restructuring activity in the near future.
As always stay tuned after the interview for a quick rundown of current restructuring news and notable stories.
And welcome back to another episode of Restructure This!. Today, we welcome my partner, Stacey Rosenberg. Stacey, it's great to have you on the podcast. Thank you very much for doing this.
Stacey Rosenberg:
Thank you.
Justin Bernbrock:
And we're very much looking forward to having a conversation about your practice, your experience and your expertise. I think a lot of folks, to get a sense for our guests, enjoy hearing your background story, your bio, and how you came to be a partner in the Finance and Bankruptcy group of Sheppard Mullin.
Stacey Rosenberg:
Well, thank you very much for the opportunity to participate today. I have been representing lenders and borrowers in a variety of finance transactions for more than 25 years now. I started my banking career at a firm called Skadden Arps, and I was there for about six years. I then went to Latham & Watkins for about 13 years before moving to Hogan Lovells for four years, and then most recently to Sheppard Mullin just over a year ago. And I've been thrilled with my experience here at Sheppard, I think it's a... It's been a great opportunity to continue to expand my practice. I have worked as a set of a variety of different finance transactions, do leveraged finance, I used to do leveraged buyouts, leveraged recapitalizations, workouts, restructuring, DIP financings. But my primary focus now is direct lending, which I got into about 9 years ago.
Justin Bernbrock:
And it's so hard to believe it's been over a year since you've joined the firm. I'm coming up on two years at the firm and it seems to have flown by. As you mentioned, you advise lenders, borrowers, sponsors in debt finance transactions. Tell us what you are seeing in the middle market or just in the lending market, generally. I think a lot of folks who listen to the podcast are probably very interested to hear the thoughts of a debt finance lawyer in the hopes that restructuring activity will pick up this year. So what are you seeing?
Stacey Rosenberg:
Sure. One of the areas I think it's been interesting has been the deal sizes. They vary considerably based on the size of the credit fund involved. And again, I'm focusing primarily on direct lending here, but most of the deals that I personally see are in the $50 to $200 million range, although I have done considerably smaller and considerably larger deals. What's been so interesting is that there have been a lot of new alternative lenders entering the market, and in some cases, the fund sizes are much, much larger than we had historically seen. For example, there are some multi-billion dollar private credit funds out there, which means that some lenders are able to write very large checks. One of the other things that's really been interesting, particularly over the last couple of years, has been the intense competition for deals among credit providers.
Stacey Rosenberg:
It's a very competitive market, particularly for investments that are "good." It's again, a lot of new players entering the market. There's a ton of capital out there that needs to be deployed. Frankly, it's a good time to be a borrower. Direct lenders really need to distinguish themselves not only from banks, which I think they do already, but also from each other. I think that to really be able to win a deal, not only obviously does the price and the terms have to be acceptable to the borrower, but the lender has to show a willingness to provide flexibility and work with a borrower as a partner to help grow the business. I think that's a really important factor in terms of whether a lender is going to get the deal.
Stacey Rosenberg:
Some of the other things that I've been seeing include, whether or not financial covenants are included in a transaction; again, it's going to vary deal to deal. A lot of the transactions that involve equity sponsors, for example, tend to be covenant-lite. That's something that's really migrated into this space from initially the large cap syndicated facilities, but that's moved into the middle market and into some of the direct lending deals. But the ones that I typically do include at least one financial covenant, sometimes more, I will typically see at minimum a minimum liquidity covenant and then there might also be a minimum EBITDA or a maximum leverage ratio covenant. Again, it'll just depend on the transaction. Holidays for the covenant—which I mean by that is, a period of time where it's not applicable—they're not uncommon, particularly if it's a distress situation or if the borrower has negative EBITDA at the start.
Stacey Rosenberg:
And then of course, the cushions that you'll see on these covenants will also vary anywhere from 20 to 30% of the borrower's model. You'll usually see cushions along those lines. But once again, so much of the direct lending deals are bespoke—they're really tailored to the individual company and the transaction. You can see a lot of variation in that.
Couple of other things I've seen, some of the trends, I think, in intercreditor agreements, for example, not a lot of new ground per se in the documents themselves, but there seem to be more of the cross lien structures. So what I mean here is that, you might have an asset-based revolver alongside a term loan where the revolver will take the first lien on the accounts receivable and the inventory, and the term loan will take the first lien and everything else and then they'll each get a second lien and the others priority collateral. I think with the advent of more direct lending deals in the market, which are primarily term loans, you're seeing a lot more of these crossing lien structures than we used to.
Stacey Rosenberg:
I think that they're a little easier to negotiate because they're more reciprocal in nature. Of course, each of the two facilities has both a first and a second lien so, you might be pushing for certain aspects of intercreditor relationships on your first lien hat, but then you have to realize you've got your second lien hat on as well. So I think they tend to be, as I said, a little bit easier to negotiate than some of the straight first and second lien intercreditors that we see. Those can be quite difficult depending on the strength of the negotiating power of the two facilities.
Stacey Rosenberg:
I think the last thing I wanted to note that I've been seeing most recently is holdco loans, there's definitely been some direct lenders who have an appetite for loans that are made at either a holding company or a super holding company within a structure where there's already debt down at the operating level. These loans are often used for dividends. They're typically either unsecured or they'll have very limited security, maybe just a pledge of stock, that usually also are PIK deals so the interest is paid in kind rather than in cash. So those are, I think, the most interesting things I've been seeing lately.
Justin Bernbrock:
I want to just double back to a point you made about covenant-lite deals. And I'm curious to get your thoughts on the advantages and disadvantages of light, particularly, from a... I guess you can answer from the lender perspective or the borrower perspective. I think as a restructuring lawyer with a cov-lite deal, the likelihood of getting sort of an early warning blip about a distressed situation reduces in proportion to the lack of covenants in the document. Do you have thoughts on that particular topic?
Stacey Rosenberg:
It has been interesting to see how prevalent covenant-lite deals have become particularly given the concerns that you've raised. The whole point of a financial covenant is to give that early warning system, and so if the credit facility doesn't have those covenants, or they might have something like you'd see in a syndicated loan where there's a revolver and a term loan in the same credit agreement where the covenant will spring. So it will only apply if there's been a certain amount of usage of the revolver, and then it will only apply on the revolver, the term loan won't be able to take advantage of that covenant, unless there's actually a termination of the commitments or an acceleration.
Stacey Rosenberg:
When you don't have that early warning system, it means that the company could really go south before the banks are even aware of it. And I think that, ultimately, the fear is that a situation that might have been resolvable or easier to deal with had the banks known about it sooner, you get to a point where the company is essentially ready to collapse and file before you can even get a seat at the table.
Justin Bernbrock:
Have you seen any other provisions or practices that attempt to correct for this? For example, an increase in reporting requirements or a heavy focus on porting or ways that a bank or lender can have meaningful, real time information about a company?
Stacey Rosenberg:
It really depends what part of the market you're looking at, in broadly syndicated deals, oftentimes the best you'll get is an annual lender call, maybe you'll get a quarterly lender call. So you might be able to get information that way, otherwise reporting does tend to be pretty standard annual and quarterly financial statements, notices of certain events, but it's generally not very sort of drilled down reporting that would bring some of these issues to light in advance. Direct lending is a bit different, even in deals where you might have a covenant-lite transaction, a lot of direct lenders do want to have a bit more oversight over their investments, and of course, part of the reason for that is that, direct lenders generally hold their investments. They hold those loans through the life of the deal. So they're definitely focused on understanding what's going on with the borrower. So they'll often require a non-voting board observer as an example. So they'll be able to see if there's a problem hopefully sooner rather than later.
Justin Bernbrock:
Yeah. I hadn't considered that, but that makes good sense. Last question about cov-lite deals. I mean, is it the case that, if you have a panel of lenders that are bidding to get into a situation and one is offering a more robust covenant package... I mean, is it the case that just the market of sophisticated lending today is going to exclude that lender because they're not offering the most favorable covenant package? I mean, is that... Are we essentially in a race to the bottom in respect of what provisions are in these credit facilities?
Stacey Rosenberg:
I mean, that's definitely part of it, I'm sure. It goes to that very competitive situation that exists today because there's so much liquidity in the market. But I think that the covenant is really just one piece of the puzzle. Obviously, pricing is going to be a big component. Whether there's warrants in the transaction, which again goes to the pricing point. What flexibility the lender is going to offer—is the company acquisitive? Does it want to be doing a whole bunch of acquisitions? Is the lender going to give it enough reign to do that? Is there an incremental facility built into the deal to help finance acquisition or other types of situations where the borrower is going to need additional money?
Stacey Rosenberg:
The willingness, as I mentioned earlier, to work with the borrower in a way that really... Again, it goes with that flexibility concept. So a lot of different things go into it. A lot of times you'll have a covenant and it's said it's such a high cushion. I mean, the cushions that I mentioned, the 20 to 30%, is what I typically see, but in some of the broadly syndicated deals, sometimes the cushions are 35, 40%. So if you've got a covenant that's set so high, that it's easy to not meet it, unless things really fall off a cliff, whether or not there are covenants there, may not have as much impact in the decision.
Justin Bernbrock:
Got it. Yeah. Shifting gears a bit, I think at this point, the Fed is going to raise rates. I think that's a pretty guaranteed outcome. What, from your perspective, will have the greatest effect on middle market companies’ access to capital, generally?
Stacey Rosenberg:
I think that interest rates probably will go up somewhat on deals, but I don't think the borrower is going to end up having to bear the full brunt of those increases, because the market is so competitive, as I mentioned, not only are there new players, but there's also much larger deals. There's a lot of capital that really needs to be put to work. And these funds can't sit there, just sit on the capitol forever, they have to be able to report to their investors and their limited partners that they're actually using the money that they've raised. So with all of that liquidity, that just adds to the competitive pressure. I think that lenders are just, not necessarily going to be able to pass along the full increases to borrowers. Pricing is just one component of the deal, so while there may be some increases, I think lenders are going to have to really focus on some of the other aspects of the transaction to remain competitive.
Justin Bernbrock:
What about, looking at the back end of the leverage finance picture, how have default rates been recently... We know that there has been significant leverage lending. I'm curious as to really what the status of default rates is and where it might be headed.
Stacey Rosenberg:
Defaults have actually been extraordinarily low. I actually saw in LSTA, the Loan Syndication Trading Association—they have a weekly newsletter—I recently saw in one of those articles that Fitch had reported that the leverage loan default rate at the end of 2021 was 0.6%. It's the lowest level it's been in a decade. So it's pretty amazing that even with so much lending and with everything that's gone on in the pandemic, we're still seeing such low default rates. Of course, at the same time, as you mentioned, leveraged lending volume was absolutely enormous last year, and with so much debt out there, I mean, I think at some point when the cycle turns again, we're going to see more restructurings. But, again, that huge growth in the private credit market might help to mitigate some of the difficulties associated with that. Because again, with so much liquidity and lenders who may be less risk averse, they may be willing to finance some of these distressed companies. So we'll have to see how it plays out.
Justin Bernbrock:
Is there any belief or chatter amongst your colleagues and folks you interact with about the shift away from LIBOR as to whether that is going to have any meaningful impact on restructuring, leveraged finance, generally?
Stacey Rosenberg:
I mean, the replacement of LIBOR is obviously a huge topic of discussion in the industry, but I don't think it's really going to have much impact in terms of restructurings. There are several different alternative floating rates out there now, the Secured Overnight Financing Rate, or SOFR, I think is the one that the most of the industry is gravitating towards and certainly has been recommended by the alternative reference rates committee. But there are others, there's credit sensitive rates like BSBY and Ameribor. There's definitely options for lenders and for borrowers for what they want to use. I don't think that there's any reason that a borrower would get stuck borrowing in prime or some high fixed rate. Of course, given the likelihood that interest rates are going to go up, I mean, a smart, borrower is going to probably have a good hedging program in place to make sure that they're not getting hit with too high of an interest rate, but whether it's LIBOR or ends up being something else, I don't think that's really going to impact things.
Justin Bernbrock:
I think you mentioned this in the intro and particularly it has dominated your experience recently, there has been this significant increase in private credit transactions. What gives? Why the rise?
Stacey Rosenberg:
Yeah. Over the last 10 years, it's really exploded. It's been pretty amazing actually. There's some real advantages to direct lending. The biggest one is that you're generally, as a borrower, dealing with one lender, maybe it's a small group of lenders, a club deal, but typically it's one or two in a transaction and now with some of these really large credit funds, you can have really large direct lending deals. I remember reading just a couple years ago, one lender wrote a billion dollar check. I think having only to deal with one party, that's going to make the execution a lot easier and a lot faster. You don't have a huge syndicate where you have to post everything up to Interlinks and wait for responses, and then negotiate and try to deal with comments from 60 lenders or something like that. You're really able to streamline the process. So that's probably the biggest advantage.
Stacey Rosenberg:
I think that most of the direct lenders, at least, that I've seen have a little bit more flexibility, I think, in terms of negotiating the terms of the transaction, not only at the outset, but if there's a need for an amendment or a waiver, I think it also goes to the philosophy between your syndicated lending deals and direct lending deals. With a syndicated credit facility, you typically have an arranger, oftentimes, it's an investment bank or large commercial bank, and they don't have any intention of keeping the loan on their books.They'll go ahead and syndicate it out to a group of lenders and they'll negotiate terms, whatever the market will bear, they'll commit to provide the financing with some, what we call flex, to be able to say that in order to syndicate, they may be able to change certain things, tweak certain things, but the borrower has that comfort that the money is committed under certain terms.
Stacey Rosenberg:
So you'll have that philosophy of, as long as I can get the market to take the loan off my books, I'm good. And the syndicate members are also looking at it from the perspective of, well, if something happens or I just don't like this credit anymore, I'll just trade out of it. With a direct lending deal or private credit deal, the philosophy tends to be very different. These lenders are generally looking to make a loan and hold it until maturity, or if there's some type of exit event like an IPO or something. And so they're going to hold that loan on their books the whole time, so they're going to have a very different viewpoint in terms of the covenant package and sort of having to be that partner with the company to really understand their business, understand the potential shocks of the business and how they can ride those out. So I think all of that provides a different viewpoint towards working with the company.
Stacey Rosenberg:
And again, from the borrower's perspective, they are going to know who they're going to be dealing with if there's a problem, if they need a consent, if they want to do that next acquisition and need more money to do it, they know that that lender is most likely going to still be there as opposed to having to negotiate with a whole bunch of different entities and not knowing whether they're going to be supportive or not. So all of those things, I think, really make a difference in terms of whether a borrower is going to go the syndicated deal or a private credit transaction.
Stacey Rosenberg:
I mean, one of the things that used to direct or push borrowers more towards broadly syndicated deals was deal size. If the borrower needs a lot of money, you generally couldn't get it from an alternative lender. That's just not the case anymore, as I mentioned, some of these credit funds are very large, they can write very large checks. And so that's really opened up a lot of transactions to the private credit market that hadn't been available before.
Justin Bernbrock:
It's interesting. I mean, in one sense, you were almost inviting another sponsor-like participant into the company with how closely these lenders presumably are staying in the situation, as you mentioned. So you did mention the inherent limitation by deal size, and I'm curious that, given the large number of market companies that are sponsor backed, do you think that the existing equity sponsors prefer these private credit deals and not worrying about a syndicate whom they may or may not know?
Stacey Rosenberg:
Yeah. I do think that there's been a move towards direct lending private credit transactions for all the reasons I mentioned previously. The ease of execution is key, again, when you're only dealing with potentially one lender on a transaction, the deal can get done much more quickly. I mean, the deals that I do, when we've got something that's pretty urgent, we can get them done in eight days if you have to—it can be painful, but it can be done. And other deals take eight weeks or eight months depending on the transaction. But I think that, for the most part, equity sponsors who are looking for ease of execution will move more in the direction of private credit transactions.
Justin Bernbrock:
And in looking at the situation more from the restructuring perspective—and I know you've been involved in workouts and out-of-court restructurings and DIP financing and so on—it does seem that there are some real advantages to a borrower who has the one lender rather than a group of syndicated lenders who may have interests and goals. We've seen of course, over the last 18 months, significant amounts of M&A activity in and funds buying up companies, particularly in the middle market. Do you expect that to cause or lead to additional restructuring activity perhaps to refi out some of the syndicated facilities with private credit deals?
Stacey Rosenberg:
Yeah. We're definitely seeing some of that already, again, in another recent LSTA article, I saw that something like $7.5 billion of formerly broadly syndicated loans were refinanced into the private credit market. So they are no longer tracked the same way, but it's interesting that they started in one place and moved to the other. I think that as we see more and more of these private credit transactions taking place, I mean, eventually we're going to see more restructurings if and when the cycle turns again, or really “when,” I'm sure, I don't think “if” is really a question. But what those restructurings will look like. It's kind of anyone's guess, I think that there may be more out-of-court restructurings only because there is so much flexibility, there is so much liquidity.
Stacey Rosenberg:
You may have a distressed credit fund that's more willing to take on a borrower and difficulty and refinance out either what's already currently a syndicated loan or a bank loan into what becomes a private credit transaction. But it's still hard to say; there's still significant advantages to, in court restructuring, bankruptcy filings from a borrowed perspective. It's expensive, obviously, but I think that as we have so many more private credit transactions than we used to, and have players who have different viewpoints, a lot of the entities in this market are willing to take on distress companies as their borrowers more so than maybe other parts of the market are. It will be interesting to see how that plays out and where the restructurings really go going forward.
Justin Bernbrock:
And to pick up on that thread, and I know you've been involved in a number of DIP financing deals, perhaps most notably or recently the LATAM case, what is the state of the debtor in possession financing market? What are your perspectives on DIP financing as we move forward? Because I think that, or my sense at least, is that that is another area where competition among lenders can really heat up.
Stacey Rosenberg:
Yeah. I think we're going to see a little bit of movement in the types of lenders that have historically provided DIP financings. I think that, usually it's been the revolving lender in a capital structure who has done that. I think with more and more these direct lending deals, which again, as I mentioned, tend to be more in the nature of term loans, I think some of these lenders are going to really be thinking about how do they protect their underlying investments if the company is going to file for bankruptcy, and DIP financing is a good way to do that. So I suspect that we're going to see more direct lenders acting as DIP providers. I think some of the deal sizes may also be larger for the reasons I've previously mentioned, if you're a larger fund, you may be able to write a larger check.
Stacey Rosenberg:
Obviously, the needs of the debtor will be relevant in terms of actually sizing the deal, but I think larger ones can be provided by these private credit funds. And I think the other thing we may see is possibly an increase in credit bidding. A lot of direct lenders have what I call a “loan and own” mentality. What I mean by that is, they will frequently take warrants or they'll take advantage of co-investment opportunities at the time they do the original transaction. Other funds have a more of a “loan to own” viewpoint, and they're, frankly, the primary goal of the time of doing the deal is to take the company if things go badly. I think that both of these philosophies lead me to think that we'll probably see, at least the same level, but possibly a higher level of credit bidding as more of these direct lenders get involved in the bankruptcy process.
Justin Bernbrock:
So in addition to the “lev fin” experience that you have, given that you're in Southern California and Los Angeles in particular, you've had the opportunity to work on deals in the entertainment industry, in the motion picture space, what's that like? I mean, how has that been? It's very interesting to us here in Chicago.
Stacey Rosenberg:
Yeah. The sexy world of film finance.
Justin Bernbrock:
That's right.
Stacey Rosenberg:
It's interesting when I first got into doing film finance back in, oh, I think it was 2000, boy, it's been a long time, I also thought, "Wow, it'll be so great to be involved in financing motion pictures." And it's definitely been an interesting area of my practice, but not at all what I thought it would be at the time, I think. And there's a lot of different pieces that go into film finance. There's a lot of different parts of the process that can be financed anywhere from an independent film with a single project finance—so basically just financing one film—to print and advertising deals to ultimate facilities—ultimate is referring to the gross receipts—to slate co-financings to just your straight corporate financing of an established company.
Stacey Rosenberg:
The players can be a lot more colorful as I'm sure you can imagine. And of course there's a ton of risks since the cost of the film are all incurred at the very beginning before any revenue is earned. And you've got issues of taste change, technologies change, you really don't know whether a film is going to be successful or not. I still remember I had a conversation with an investment banker in the entertainment industry one time, and he told me that he only counsels people to get out of the industry as opposed to getting into it, because you really have to know what you're getting into to avoid losing your shirt. The accounting is different, and again, with all the costs and all the risk incurred up front, it's definitely a risky prospect.
Justin Bernbrock:
Yeah. I can only imagine. In particular, we've seen a transition to the various streaming platforms, how has that changed the finance aspect of the entertainment or the motion picture industry?
Stacey Rosenberg:
When the streaming services first came in and really became just huge purchasers of content, it really did change things and become very disruptive to the process. The normal way before this all happened, if you had an independent film for example, and you wanted to get it distributed, you'd hire a sales agent, and the agent would go around to distributors in foreign countries and make deals, and you would basically get your distribution done that way. With these streamers, a lot of times, Netflix, for example, will come along and say, I'll buy your film and I'll distribute it everywhere in the world. And so they've made it much easier to get distribution deals. In a lot of cases, the streamers will finance the product themselves. So you don't even have to go out and get a bank deal to finance your film. And so it's been very interesting to see how all of this has changed with this advent of really this new technology.
Stacey Rosenberg:
The other thing that we've seen that's been so interesting has been some of these new services like HBO Max and Disney+, and what's happened with them over the course of the pandemic. They are starting to do what we call “day-and-date releases,” where the film is released in the theater and on the streaming service at the same time. And as you can imagine, if you are, say your talent and your pay is based on box office, well, all of a sudden effectively the film is competing against itself by being on the streaming service at the same time it's in the theater. And of course, with the pandemic and people not wanting to go out to theaters, it really can have a significant impact. As an example, Scarlett Johansson had some pretty well publicized claims against Disney in connection with the Black Widow movie.
Stacey Rosenberg:
So these things have to be taken into account as well when you're looking at financing a film, because you have to determine how exactly will the accounting be done to take into account the fact that the film isn't just in the theater anymore. A lot of this said goes to the changes in technology and the changes in the way films are distributed, but really have to be taken into account, and it's not something that we've ever seen before. I think we're all learning something new as we go.
Justin Bernbrock:
Definitely. And in perhaps more ways than we all even fully appreciate. Speaking of Scarlett Johansson, she hosted SNL recently. I don't know if her fiancé or husband, Colin Jost, is a member of the cast. I think there was some joke that she made during the monologue about being just fine if Colin lost his job on SNL, that they would be okay on her salary alone. Notwithstanding the kerfuffle with Disney, it does sound as though things will be okay in the Jost-Johansen household.
Well, Stacey, this has been really terrific and so helpful to get your thoughts. I do have a final question, not related to your practice and it's something we've been asking all of the guests who've been gracious enough to come on and chat with us: If you were not a finance partner at Sheppard Mullin, and assuming no limitations, earthly or otherwise, what would you be doing?
Stacey Rosenberg:
I would be a fantasy novelist. I'm a huge science fiction and fantasy reader. At one point I actually took my hand at trying to write a book. I think when I was in law school, I got about 180 pages in and then real life and work got in the way.
Justin Bernbrock:
Well, there's always time. There's always time to pick that up.
Stacey Rosenberg:
That's true.
Justin Bernbrock:
Well, again, Stacey, thank you so very much, this has been hugely informative and valuable. We really appreciate the time.
Bryan Uelk:
Hello again, everyone. This is Bryan Uelk of Sheppard Mullin for Restructure This! with this week's curated restructuring news. Attention, all of you restructuring professionals that have been twiddling your thumbs for the last year: The yield on 10 year US treasuries dropped below the yield on two year treasury notes on Friday, April 1st, thereby causing the yield curve to invert with respect to two year and 10 year treasuries for the first time since 2019. An inverted yield curve is generally understood to mean that the market predicts economic headwinds are on the way. Indeed, an inversion in these particular points on the curve has correctly predicted a recession with a lead time between eight months and two years in each of the last eight recessions, at least according to Yahoo Finance. Similarly, the results of a recent survey conducted by S&P Global indicate that market participants believe the US loan default rate will significantly spike in the next year.
Bryan Uelk:
The current default rate is just 0.19%, the lowest it's been in approximately 10 years. And survey participants believe it will be between 0.75% and 1.5% at the end of March 2023. Heck, even hiring and the restructuring industry seems to be picking up. Over 40 restructuring lawyers just left Stroock for Paul Hastings this past week, perhaps harbingering things to come. Still as of Monday, April 4th, the yield on the five year treasury note remains above the yield on the two year note, which is inconsistent with an upcoming recession. Time will tell, of course, whether these recessionary predictions are premature or not.
Bryan Uelk:
In other news, on March 27th, 2022, the increased debt limit for Subchapter V eligibility under the Bankruptcy Code expired. As you may recall, Congress raised a limit from approximately $2.7 million to $7.5 million as part of the CARES Act. Congress actually extended the limit once before and one wonders why they didn't do so again. The National Law Review reports that the higher debt limit has generally been received by partisan political support and some suggest the expiration will effectively foreclose the possibility of Chapter 11 for some small businesses, which could be all the worse if we eventually find ourselves in a downturn recession.
Bryan Uelk:
Well, that's it for this rundown of restructuring news and notable stories. This has been Bryan Uelk of Sheppard Mullin for Restructure This!
Contact Information:
Stacey Rosenberg’s website bio: https://www.sheppard.com/srosenberg
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