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Forbes.com, 6 May, 2009
GM, Harrah's and other deeply-indebted companies want bondholders to take the pain.
It isn’t enough that bondholders saw the value of their investments plummet over the past year. A chorus of executives, private equity investors and even President Obama are asking them to sacrifice so that companies such as General Motors, Harrah’s Entertainment and Unisys can survive.
While public attention focused on the effort by General Motors and the Obama Administration's attempts to get bondholders to swap debt for a 10% stake in GM over recent weeks, manufacturer Rexnord and Hexion Specialty Chemicals came to agreements with their bond owners to wipe out some of their debts. Faced with declining revenues more debt-heavy companies have turned to their creditors for a way out this year. The rating agency Standard & Poor’s counts 28 such cases of borrowers agreeing to such debt exchanges so far, up from 15 last year and 4 in 2007.
Others among the better-known names to negotiate new terms this year include BCBG Max Azria, Freescale Semiconductor and Ford Motor .
When a troubled company proposes an exchange, the implication for bondholders appears stark. Accept dimes on the dollar or a pile of equity and the promise of future gains or risk the company sliding into bankruptcy. The move seems to have paid off for both Ford Motor and its bondholders. The carmaker wiped away $10 billion in debt earlier this year and stands on a more solid financial ground than its rivals. (see “Ford Loss Narrower Than Expected”)
It’s usually obvious which companies are likely to haggle with their creditors, says George Cipolloni, comanager of the Berwyn Income Fund in Berwyn, Pa. He doesn’t feel bad for most General Motor’s bondholders. “I’m not sure why anybody owned those bonds,” he says. “The writing was on the wall.” And yet pension funds and mutual funds that hold the bonds have taken a hit.
Diane Vazza, S&P’s head of fixed income research, argues that the trend is likely to continue. Economic downturns make it easier for companies and their creditors to find common ground, especially when companies make better offers than what bondholders might receive in bankruptcy. The riskiest of borrowers needing to refinance debt may prefer haggling with existing creditors than trying their luck at selling new issues in the bond market.
Another factor: the disappearance of the shadow banking system that allowed companies to pile on debt over the past few years. With fewer buyers, companies may see no choice but to fight with creditors for new terms. The research firm CreditSights estimates that nearly $1 trillion in loans and bonds will mature from 2011 to 2015, much of it coming from companies layered with debt during the days of easy credit.
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