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Maximizing Value

By Michael H. Torkin
May 02, 2014

The U.S. corporate default rate currently is below historical averages, hovering slightly below pre-crisis levels in 2008. Restructuring professionals, however, are cautioning that a rising interest rate environment, exacerbated by the Fed's reduction in fiscal stimulus, could lead to a softening of the ongoing robust multiyear credit cycle. In addition, it has been reported that the Department of Treasury's Office of the Comptroller of the Currency has “suggested” to a number of U.S. institutional lenders that they begin to more closely scrutinize credit standards ' focusing on reining in issuances of covenant-light high yield debt as well as tightening leverage ratios. If credit tightens, leveraged companies that have successfully and routinely accessed traditional credit markets could face significant challenges.

Directors of a leveraged company should begin to consider the implications of not being able to access traditional debt markets on appropriate terms. This concern is particularly acute for companies with near-term debt maturities, prior difficulty achieving financial projections, a declining EBITDA forecast and/or capital funding needs reliant on low interest rates. This article highlights the initial steps, questions and concerns typically facing a director in this new environment.

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