The refinancing wall.

Transcription

1 The refinancing wall

2 This may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS SHALL NOT BE LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, EXEMPLARY, COMPENSATORY, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES, COSTS, EXPENSES, LEGAL FEES, OR LOSSES (INCLUDING LOST INCOME OR PROFITS AND OPPORTUNITY COSTS) IN CONNECTION WITH ANY USE OF THEIR CONTENT, INCLUDING RATINGS. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. 2 The refinancing wall

3 Introduction At a time when the global economy is struggling to maintain momentum, businesses and financial institutions are looking ahead to a challenging wall of refinancing. Over US$4 trillion of corporate debt 1 matures in the next four years, a legacy of the increasing refinancing requirements of the boom years, leveraged loans in the US and Europe and the short term funding arrangements made during the global financial crisis. The scale of the refinancing requirement would be challenging at the best of times, but current economic circumstances suggest there are some very difficult negotiations ahead. The options for some companies could be very limited. Uncertain and uneven growth The round of refinancing that lies ahead is set to take place against a backdrop of continuing economic uncertainty. For one thing, the global recovery has generally been stuttering and uneven. In most advanced economies, the robust growth normally witnessed after a deep downturn is proving elusive. Meanwhile, a return to rapid economic expansion in the emerging markets of Latin America and the Asia-Pacific region has triggered unwelcome inflationary pressures. Rising commodity prices feeding through to higher inflation rates have added to the problems of policy makers at a time when many governments are battling to reduce borrowing and retain the confidence of the markets. Question marks over sovereign creditworthiness particularly in the Eurozone hang over a number of countries and the success or failure of governments to address the problem will have a major impact on the ability and willingness of banks and other institutions to refinance corporate debt. Pressure on banks And of course, the banks have their own housekeeping to attend to, with many continuing to repair their balance sheets while also facing tighter capital adequacy rules under Basel III and increased regulation within national regulators jurisdictions. This will also affect availability and cost of financing to borrowers. This will also affect availability and cost of financing to borrowers, as will the shrinkage of the Collateralized Loan Obligation (CLO) market, which was a significant factor in driving the volume of leveraged loans, accounting for up to 60 percent of current holdings of LBO debt. This has reduced dramatically and with many CLO reinvestment periods expiring in the next few years, funding from this quarter will have to be refinanced from elsewhere. Consequently, many companies will need to look beyond bank lending to manage upcoming maturities. The good news is that the high-yield bond market has grown, with record levels of issuances in 2010 (over US$300 billion). Investors in this market are looking for yield and therefore have an appetite for speculative grade debt. However, the market is susceptible to shocks and can close down quite quickly when faced with an event such as the Greek debt crisis and its ability to absorb potential funding gaps left by the banks is at best uncertain. We re looking at a refinancing wall that will present challenges to a great many companies. Some will have to explore alternative sources of funding and there is certainly a need for proactive deleveraging and renewed focus on working capital management. That s particularly true in the EMEA countries and North America but the ASPAC countries face their own challenges. 1. References to corporate debt, throughout the document, refer to debt owed by corporates which are classified as being outside the financial sector. Data for US and EMEA corporate debt refers to rated non-financial corporate debt (from S&P and Moody s respectively). Data for Canada, Latin America and Asia-Pacific is sourced from either the Thomson Reuters or Bloomberg databases. The refinancing wall 3

4 EMEA Corporate debt maturities >US$1.3 trn LBO debt maturities >US$420 bn Commercial real estate loans maturing US$750 bn (Europe) AMERICAS Corporate debt maturities >US$2.2 trn LBO debt maturities >US$670 bn Commercial real estate loans maturing US$2 trn (US) ASIA-PACIFIC Corporate debt maturities >US$1.4 trn LBO debt maturities >US$30 bn 4 The refinancing wall

5 Global and regional perspectives Over US$4 trillion of corporate debt matures in the next four years. This refinancing wall may well present substantial challenges to many companies. A percentage will have to explore alternative sources of funding and there is certainly a need for proactive deleveraging and renewed focus on working capital management. 58% of EMEA speculative-grade debt maturities ( ) will arise from corporates in these sectors $29 bn $26 bn $38 bn Automotive Metals and mining Telecommunications Media Transportation $37 bn $35 bn Source: Moody s 62% of US speculative-grade debt maturities ( ) will arise from corporates in these sectors $94 bn $84 bn $162 bn Media and entertainment Consumer products, retail and restaurants Telecommunications Healthcare High technology $112 bn $132 bn Source: S&P 63% $98 bn Industrial Cyclical consumer Energy Basic materials of Asia-Pacific bank facility maturities (Q ) will arise from corporates in these sectors $117 bn $204 bn $129 bn Source: Bloomberg The refinancing wall 5

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7 Europe, Middle East and Africa >> Increasing level of speculative-grade and LBO debt maturing over the next four years. >> Banks face pressures from Basel III, national regulators and Eurozone financial instability impacting lending conditions and cost of borrowing. EMEA: Corporate investment-grade, speculative-grade debt (bank facility and bond) and unrated LBO debt maturities (US$ billion) EMEA: Corporate speculative-grade debt maturities by country (US$ billion) Source: Moody s Investors Service Spain Netherlands Italy Middle UK France Germany East CIS Other Source: Moody s Investors Service Investment grade Speculative grade Unrated LBO Bank Bond In the EMEA region there is currently over US$1.3 trillion of corporate debt due to mature over the next four years, and within that overall figure is a material level of maturing lower rated speculative-grade debt and unrated LBO debt. Around US$470 billion of the debt coming to maturity is speculative-grade and unrated LBO debt, much of which is related to deals carried out during the years of the credit boom. The challenges are clear. Overall lending conditions remain tight, as banks continue to repair balance sheets and face up to additional constraints imposed by Basel III and national regulators. Added to that, is the fact that in Europe as in the US LBO refinancing will be impacted by reduced levels of activity in the CLO market which, according to S&P, only had issuance of US$1.4 billion in 2010 (compared to US$38.6 billion at the height of the market in 2006) and constraints in CLO reinvestment periods. Against this backdrop, there has been a shift in focus towards the bond markets with the European high yield bond market having a record level of issuance of over US$65 billion in 2010 (compared to US$43 billion in 2009), according to Thomson Reuters. However, the high yield bond market is susceptible to shocks such as seen during the Greek debt crisis in There remains significant financial instability in the Eurozone as evidenced by uncertainty over the future of Portugal s debt reduction measures following the resignation of the Prime Minister (and subsequent request for EU and IMF funding) and the revelation that Irish banks needed a further 24 billion capital injection. The continuing political and economic turmoil underlines concerns over sovereign creditworthiness in the Eurozone and the links to the banking system, which is leading to pressures in the funding markets. Despite this, the ECB s decision in April 2011 to raise interest rates for the first time in three years will add further pressure to cost of borrowing. Political unrest in the Middle East and North Africa has provided further uncertainty both locally and globally. Tensions in this region will, inter alia, put pressure on the oil price affecting economies across the world. The refinancing wall 7

8 Americas >> Increasing level of speculative-grade and LBO debt maturing in the US over the next four years. >> Low interest rate environment and Quantitative Easing have aided the lending environment. However, the banking system faces challenges from new international and domestic regulation and high levels of real estate loans. US: Corporate investment-grade and speculative-grade debt (bank facility and bond) maturities by year (US$ billion) US: Corporate speculative-grade maturities by rating category (US$ billion) % % Source: Standard and Poor s % 60% 55% 50% Source: Standard and Poor s Investment grade Speculative grade BB B CCC/below Percentage B and below There is over US$1.7 trillion of corporate debt maturing in the US over the next five years with US$946 billion being speculative grade reflecting the maturities of leveraged loans written in the boom years. There is an increasing level of maturing lower-rated speculative grade debt with over US$700 billion of the debt maturing in the next five years rated B or below by S&P. The lending environment in the US has been helped by Quantitative Easing and a low interest rate environment. However, the banking system still faces significant challenges. On the regulatory front, lending by US banks will be affected not only by the internationally applied constraints of Basel III but also by the domestic Dodd Frank legislation, designed to tighten regulation in the financial sector. Meanwhile, high levels of real estate loans are still a significant concern for the banking industry. Recent activity suggests the bond market will provide a source of refinancing over the next four years. There was a record level of high-yield bonds issued in 2010 coming in at over US$200 billion, compared to US$138 billion in 2009 according to Moody s. However, the market, despite being more established than in Europe, is still vulnerable to shocks, even to those occurring in Europe (as seen during the Greek debt crisis). As in Europe, there is a relative lack of appetite for securitization and marked decline in CLO activity (with CLO issuance of only US$5 billion in 2010 compared to US$107 billion at the height of the market in 2006, according to JP Morgan). That fact, combined with CLO reinvestment periods starting to expire, will cause some challenges for leveraged loan refinancing. New CLO issuance is occurring but at modest levels and regulatory changes may restrict this further. Another important factor to consider is that capital inflows into the growing Latin American economies (aided by the low interest rates in advanced economies and investors looking to profit from the differentials in interest rates with emerging markets) have driven an increase in corporate debt levels as a percentage of GDP. This over time may lead to the lowering of the average credit quality of assets and there is also a risk of reversal in the capital inflows. 8 The refinancing wall

9 Asia-Pacific >> The banking system in Asia-Pacific came out of the financial crisis in relatively good shape and liquidity has returned to the financial system. >> Refinancing requirements should be manageable. However, there is uncertainty from inflationary pressures, monetary policy being used to cool economies, regulatory authorities targeting banks and the recent natural disaster in Japan. Asia-Pacific: Corporate bank facility and bond maturities Q (US$ billion) Asia-Pacific: Corporate bank facility and bond maturities Q by country (US$ billion) Bank facilities Bonds Source: Bloomberg Bank facilities Bond 1 Other 6 Hong Kong 11 Japan 2 Thailand 7 India 12 China 3 New Zealand 8 Taiwan 4 Malaysia 9 South Korea 5 Singapore 10 Australia Source: Bloomberg Asian banks generally came out of the financial crisis in considerably better shape than their western counterparts, benefitting from the high saving ratio in the region. However, that s not to say that the ASPAC region is immune from the problems of Europe and North America. Asian banks do use funding from western counterparts which can cause some risk in the event of renewed concerns in the wider financial system. Likewise, corporates in Korea, Australia and India have sizeable foreign refinancing needs. Liquidity has returned to the financial system with 2010 having the highest ever level of loans and bonds issued on record, partly driven by the increasing levels of international funds flowing into the region. However, along with it is an increase in the level of private sector debt to GDP ratios (particularly in China, India and Korea where levels are approaching historic highs) which present its own risks. There may well be capacity to absorb the upcoming refinancing requirements, much of which is from short term funding arranged during the financial crisis. However, there are potential dark clouds on the horizon. Core inflation is on the rise and a continued appreciation in currencies is having a clear impact on exports. Meanwhile, monetary policy is being aggressively used to cool economies (and, in particular, hot sectors such as real estate) and regulatory authorities with China leading the way are beginning to target the banks by raising reserve requirements. This may present new constraints. The region has also been rocked by a series of natural disasters, such as the earthquake and tsunami affecting Japan. This created further economic uncertainty, with the Bank of Japan feeling the need to inject US$285 billion into the financial market. The full economic implications have yet to be felt but there will clearly be challenges for companies with manufacturing plants shut down by the disasters with knock-on effects on the global supply chain, and those in the nuclear industry (all over the world). The ramifications for overseas lending by Japanese financial institutions is also at best uncertain. The refinancing wall 9

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11 Conclusions In summary, at just the time when there will be an increased demand for refinancing in the years ahead, there may well be constraints on the capacity of some financial institutions to satisfy that demand. Some borrowers, and in particular non-investment-grade borrowers, may find the circumstances especially challenging and need to explore alternative sources of finance and deploy effective operational strategies to negotiate successfully the debt refinancing wall. The circumstances facing the regions of the world are different, but there are clearly some common factors, namely: Pressures on availability, and cost, of funding. Increasing financing requirements whether for growth, sovereigns or refinancing. Companies with maturing loans will have a range of options and many will be looking to (or have to) refinance their debt through the bank or bond market. However, if the debt can be financed in this way, it may well be at a higher cost. Arguably, the biggest concern is over the increasingly lower rated speculative-grade, LBO debt and commercial real estate debt maturing over the next five years. Companies seeking to refinance this kind of debt will be more susceptible to macroeconomic and industry trends providing significant challenges. The bond markets, particularly the high-yield bond market, have been buoyant but are sensitive to macroeconomic changes and shocks and cannot be relied upon to meet the entire shortfall in refinancing requirements on their own. This market is also less suitable or inaccessible to smaller and medium sized companies. Alternative solutions As well as traditional bank and bond refinancing we will no doubt continue to see a variety of other solutions to manage upcoming maturities, including: other sources of financing (such as private placements, asset based lending and convertible bonds), M&A activity, IPOs, non-core disposals and companies deleveraging through cash generation. The appetite of lenders to participate in amend and extend (where lenders extend the maturity of leveraged loans in return for better economic returns) will be dependent on the macroeconomic environment and lenders may prefer to see an alternative solution and debt restructuring. The range of available options to smaller and medium sized companies will be more limited and they could face greater challenges with their upcoming maturities than larger companies. Action points During this period of uncertainty, companies should consider their refinancing requirements and options as early as possible. Meanwhile, it s important to remember that businesses can put themselves into a stronger position ahead of refinancing and/or restructuring through a range of measures, including: Improving working capital and free cash flow. Implementing cost rationalization. Formulating a clear strategy, underpinned by a clearly articulated business plan. In addition, businesses facing situations of increasing distress will require effective contingency planning to help preserve value in cases where a consensual restructuring may not be achieved. The next four years will see pressure on the ability of banks and the capital markets to cope with demand for finance. Companies that will be refinancing during this period should begin preparations now. Private equity firms may also be a source of funds. At present, PE funds reportedly have access to US$400 billion, which could be used in M&A, equity injections and debt buy-backs to maintain control of existing investments. However, we will undoubtedly increasingly also see situations where debt restructuring will be required to provide a sustainable capital structure. The refinancing wall 11

12 Contact us Restructuring Philip Davidson Global Head of Restructuring t: e: Tony Thompson Partner Russia t: +7 (495) e: Tammo Andersch Partner Germany t: e: Drew Koecher Partner United States t: e: Nick Brearton Partner Canada t: e: Bjorn Dahl Head of Restructuring Sweden t: + 46 (0) e: [email protected] David Burlison Partner United Arab Emirates t: e: [email protected] Paul Kirkbright Partner UK t: e: [email protected] Eddie Middleton Partner Hong Kong t: e: [email protected] Damian Templeton Partner Australia t: e: [email protected] Debt Advisory David Madoc-Jones Partner UK t: e: [email protected] Richard Dawson Director Hong Kong t: e: [email protected] Thomas Dorbert Partner Germany t: e: [email protected] David Heathcote Partner Australia t: e: [email protected] The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation KPMG International Cooperative ( KPMG International ), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved Printed in the United Kingdom. The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. RR Donnelley RRD May 2011 Printed on recycled material.