Know How Financial Marketplace Works: A Short Introduction

 By: Jim Knight
According to a major news article about debtor in possession financing, over 150 companies defaulted on corporate debt in the previous year causing a spike in bankruptcy exit loan financing demand. Just who is exiting corporate bankruptcy?

In a large number of cases they are household names like Six Flags theme-park. Six Flags entered chapter 11 bankruptcy and exited with a secured credit facility of almost $850M financed by a syndicate including JP Morgan Chase. Six Flags is a great example of a company whose business is going well but due to maturing leveraged debt with no one was willing to refinance it. Hence, their only way out was to default and enter bankruptcy protection. Emerging from bankruptcy, there is a new market and a new class of financing available to them.

OK, don't start looking at your screen funny , first let me define a couple of terms for you. Ill start with the concept of exit loans.

When a company enters bankruptcy protection, they do so with the plan to exit from bankruptcy. In order to successfully exit, they need financing. This type of financing is referred to a leveraged loan or distressed debt.

A second question is why would someone loan money to a company that has a high chance of failure. The answer to the question is that the more risk the higher the payback and high flying investors love it! The are referred to as clo investors.

So where are the funds getting the capital ? Basically leveraged loans outperformed high yield bonds this past year. Thus investors are plowing their money into leveraged loan funds and pulling them from high yield credit. But it isn't just a shifting of money from the high yield credit markets, there is net new money pouring into this market. A few of the statistics that can be found on line are that is that the leveraged loan market attracted almost 1.4 billion dollars this year and over 450 million has fled from the high yield credit markets.

As a result of the leveraged loan markets are rising and the issuance of corporate debt is down significantly. Some estimates show that corporate debt issuance is down almost 45% from the same period last year.

The other outstanding question is what happens to exit loans, bank loans, and high yield debt if the Fed raises rates. This is almost certain to happen as the Fed is trying to steer companies toward private sector financing as they surface from the troubles of 2008/2009.

Due to companies emerging from bankruptcy quicker and in need of financing, leveraged loan investors are in demand. This has created opportunity . With opportunity comes investors who are looking to make money. It will definitely be a market to keep an eye out for as the markets and corporations shake loose from one of the worst economic crisis since the great depression. This coupled with record defaults in 09 will create a lucrative sales environment for the leveraged debt industry all together.
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