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The State of the Credit Markets: Implications for the Restructuring Community

By James D. Decker and James S. Hadfield

Notwithstanding the market's recent shaky demeanor, the recovery of the credit markets from early 2009 has been nothing short of spectacular. The recovery in the secondary debt markets, which saw yields on first-lien paper decline from equity-like returns in the 20s to traditional single-digit levels, forced capital to return to the primary markets in a quest for yield. Consequently, borrowers were able to tap the new-issue market at greater volumes year to date than during all of 2009. This access to loan dollars fueled the refinancing market and even sparked leverage buyout and recapitalization activity. However, in the last couple of months, capital has begun to once again retreat from the market in the face of uncertainty in Europe and a slower than expected domestic recovery. Correspondingly, loan supply has surged as eager refinancing and buyout borrowers have flocked to a market perceived to be reopened. The impact has been a recent regression from credit recovery trends, calling into question whether the momentum from early this year can be regained.

The dynamics of the credit market, its recovery, and current state have numerous implications for workouts, restructurings, and reorganizations. With collateralized loan obligation (“CLO”)-backed funds accounting for such a substantial portion of credit in existence today, the diversity of interests and number of participants in any one facility has been greatly expanded. When considering the diversity of loan participants (CLOs, banks, hedge funds) and the fact that each might have a different cost basis in the same credit (e.g., some at par, some secondary buyers at premiums or discounts), the prospects of just reaching consensus within a single tranche of a capital structure can become daunting. The resulting outcome of such dynamics is that the role of the restructuring advisor, turnaround professional, and bankruptcy practitioner has continued to evolve in the current cycle.

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