Insolvency: A different landscape
The next cycle of corporate debt restructuring is set to be very different to that of 2001-03, thanks in part to the rise in popularity of leveraged private equity buy-outs, as James Roome explains
September 27, 2006 at 08:03 PM
8 minute read
As the level of default and the volume of distressed debt start to climb again, the next round of corporate debt restructuring will have very different dynamics to those seen during the last peak in default rates in 2001-03.
Many of the early defaults in the last cycle arose in new technology companies funded with large amounts of public high-yield bond debt and, often, no significant bank debt. The European high-yield bond market had grown from a few billion dollars in issue at the end of 1997 to more than $50bn (£26.27m) by the end of 2000. Of this, 70% was concentrated in technology, media and telecoms, including long distance cable, such as GTS and Viatel, and local exchange providers, such as Energis, Versatel and Song Networks. Subsequent restructurings of large companies such as Marconi, British Energy and Drax also involved substantial levels of bond debt.
By contrast, most of today's large distressed companies are the product of leveraged private equity buy-outs funded by buy-out debt. At the same time, the volumes of debt traded on the secondary market – both senior and junior – have increased dramatically as hedge funds and proprietary bank investors have stepped up their investments in distressed debt. These changes will have a significant effect on the dynamics of debt restructuring negotiations.
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