Lender-Borrower Relations Turn More Contentious as Firms Grow Desperate for Cash

Chris Gaetano
Published Date:
Jun 11, 2020
Lenders and borrowers have come into increased conflict over the past few months as cashstrapped companies increasingly try to wriggle out of their initial agreements and force new deals on terms more to their liking, said Bloomberg.

For instance, Sinclair Broadcast Group—which was burned on a $1.8 billion acquisition of a sports network that, now, has no sports to broadcast—asked its bondholders to take a 40 percent haircut and swap into new debt backed by the company's assets. Bondholders balked, and eventually an asset management group organized lenders to block the maneuver, but this apparently led to threats that the broadcaster would just move its assets out of their reach if the transfer was not allowed to go through. Ultimately, the firm was able to swap about 3.6 percent of eligible notes.

Several other companies have come into similar conflicts with creditors, a marked difference from when times were good and credit was casually given away like cupcakes to a class of third graders. Travelport, for example, did what Sinclair threatened to do and moved $1 billion of intellectual property into a subsidiary that creditors could not reach; the company said that it would reverse the transfer only if they gave the firm a $500 million line of credit, plus rolling up existing debt at a discount. Lenders said this basically means the company has defaulted on its loan, but Travelport believes it is acting within the terms of the original agreement, at least in letter. The ongoing dispute has become so contentious that Bank of America bowed out as the loan's administrator and Travelport's legal representation on the matter resigned.

A recent report from Fitch
noted that debt exchanges like the ones these companies are demanding have been on the rise and are expected to further increase as the year goes on, although it is unknown the degree to which they have arisen from conflict with lenders rather than through cooperative negotiations. Moody's came to similar conclusions, noting that 80 pecrent of the syndicated leveraged loan market is composed of covenant-lite loans, meaning they lack financial maintenance agreements. It also said that the rise in distressed debt exchanges can be attributed at least partially to the heavy presence of private equity firms in this sector, which tend to prefer swaps to bankruptcy, as they are more likely to allow the firm to retain ownership. Overall, Moody's expects that lenders will wind up experiencing higher than average losses as the year goes on. Typically, the recovery rate for firms with a private equity sponsor is 75 percent, but Moody's is projecting the recovery rate instead to be 58 percent; in contrast, in areas where private equity is not present, the recovery rate is expected to be 62 percent.

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