- The economic consequences of the corona virus are becoming more serious and are unlikely to wane as quickly.
- Companies in debt in the early stages of the pandemic, largely thanks to the Federal Reserve's economic stimulus, may have prepared to fight as the crisis progressed.
- Houlihan Lokey, Wall Street's top advisor for distressed companies, has changed his outlook: instead of the initially expected strong but rapid downturn, they predict a deeper, ongoing crisis that will last three to five years and will bankrupt many more companies .
- "Everyone wanted to save the economy and keep people working, but at some point there will be pain and it will not be quick or easy to deal with the effects of all this additional debt." William "Tuck" Hardie, a managing director of Houlihan Lokey's restructuring business, told Business Insider.
- You can find more stories on the Business Insider homepage.
When the severity of the corona virus in the U.S. began to dawn in March and the economic world suddenly stopped spinning, most companies reacted to the resulting market crash in the same way: unbelief followed by panic and a mad shot to find extra money Business afloat.
The good news is that the debt was cheap. The Federal Reserve did so by cutting interest rates and promising to buy government and even corporate bonds to bring lending back to life.
The bad news is that it worked a little too well. Corporations accumulated record levels of debt and built their capital structures to survive a natural disaster that looks increasingly less like a brief but angry hurricane and more like a runaway bushfire.
According to top restructuring bankers advising companies in financial need, the race for liquidity has put companies that had healthy balance sheets before Covid in a compromised position and are far less able to recover what they value from them to reach three to five years.
"Everyone's first reaction was to raise liquidity in the form of debt. The reason was that they were cheap, available, and quick to do something to save their businesses," said William "Tuck" Hardie, a managing director of the restructuring business by Houlihan Lokey, told Business Insider. "What will happen if you have to repay everything?"
Hardie has a prime location to assess the challenges as a 20-year veteran of Houlihan Lokey, Wall Wall's largest restructuring company with approximately 240 employees, including nearly 50 MDs. Because of their breadth, they not only handle the most complex, huge bankruptcies – such as Lehman Brothers or Enron – but also smaller restructuring mandates up to a debt of around $ 100 million or even less for long-term customers.
You have a look at how the crisis affects companies in difficulty across the spectrum.
Houlihan, a listed company, changed its own guidelines for investors this week. In the past quarter, the company had anticipated a faster cascade of restructuring efforts as the companies went bankrupt in the crisis.
"90 days ago we would have expected a much steeper increase in bankruptcies, but in a shorter period of time," said CEO Scott Beiser this week.
But government incentives and aid measures worked, stabilized the markets and pushed companies back from the margins.
According to a Dealogic report, global companies issued new $ 1.9 trillion bonds in the first half of 2020, largely thanks to the Fed and European Central Bank stimulus packages. This is the most common number, and American borrowers led the way with just over $ 1 trillion in new bonds, an increase of 92% over the previous year.
"The tiny virus has proven to be the most powerful agitator that can bring bond markets to record historic levels," Dealogic wrote in the report.
The calculation has changed for Houlihan, which is already working on more restructuring orders than ever before and achieved a quarterly record of $ 89 million in restructuring revenues last quarter.
Given that virus cases are still widespread across the country and the US saw its GDP slump 33% this week – the worst ever – there is growing concern among borrowers and private equity in an interview. Companies that raised the money Spring will not be enough to overcome the economic consequences of the pandemic.
Houlihan now believes that an increase in debt linked to the course of the virus will result in more restructuring work than they originally thought – a more widespread crisis, but slower and longer.
"This pandemic is not a short-term slip, and it will take much longer and is likely to harm the economy," Beiser said on the call to win.
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Pour gasoline on a fire
In a conversation in early May, a senior banker for restructuring told Business Insider that he was concerned about borrowing all of the debt – and that the companies had placed themselves in weaker positions than before the outbreak of the corona virus.
"Why don't companies make stock offers? Why don't they do debt reduction? Do they do debt-for-equity swaps?" he asked himself.
"I don't think people want to sell their equity when it's cheap," he said, answering his own question and nodding at the battered stock markets.
Markets recovered from a low in March, as did equity issuance, which exploded to record levels in May and June. The $ 244 billion in equity raised in the first half of 2020 was also a record, according to Dealogic.
But it hasn't cleared the debt build-up, and moreover, much of the emissions – in the form of convertible bonds and sales of secondary stocks – came from companies that were already doing well in a troubled environment, not from companies on shaky ground.
When examining the corporate landscape, around 80% of companies before the corona virus had an adequate debt burden, while 10% were overfunded and 10% underfunded, explains Hardie. Now the same 80% group of companies is over-priced and ready to fight, even if the economy is back to 100% normal.
"It was like throwing gas on a fire," added Hardie. "Instead of throwing water on what would be equity, they were in debt, which is the equivalent of gas."
We will likely only experience a serious payment default in early 2021, given that many creditors – given the overwhelming situation that Hardie compares to a lightning strike – were willing to waive a contract for all of 2020. if not until the first quarter of 2021.
But as the pandemic drags on and the economy recovers less than expected, Hardie thinks, "You'll see attitudes worsen."
"Everyone wanted to save the economy and keep people working, but at some point there will be pain and it will not be quick or easy to deal with the effects of all this additional debt," said Hardie.
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