Members of Gordian Group team pick articles, posts or current news events that we found interesting and worth sharing with Gordian clients and our growing network on a regular basis. We provide some commentary and context and where applicable how Gordian Group can help. This month’s perspectives post discusses debt maturities and the impact on the potential significant upcoming financial challenges faced by Private Equity portfolio investments.
Upcoming Debt Maturities May Threaten Private Equity Returns
The US corporate sector in general, and Private Equity portfolio companies in particular, face significant upcoming financial challenges due to a wall of impending debt maturities totaling $700 billion through 2026 and nearly $2 trillion through 2028. These payments will have to be addressed, and concerns about an impending recession or runaway inflation compound the problem.
Importantly, borrowers should well consider addressing 2025 and 2026 maturities in the near term so that they do not run the risk of “going concern” opinions which could put them in default.
Following is a chart summarizing US leveraged loan and high yield bond maturities between 2024 and 2028:
Source: Bloomberg (Sub investment grade issuers; $10mm or greater per issue)
Rising Interest Rates and Flat Earnings Have Negative Credit Implications
Gordian believes that many issuers will have enormous difficulty in rolling over this debt given (i) recent increases in interest rates and (ii) the expected decline in the credit quality of many corporate borrowers. The secured overnight borrowing rate now stands at 5.3%, compared to 1.5% in mid-2022 – connoting a large and rapid increase in debt costs.
Further complicating matters, corporate earnings have stalled and even decreased over the last several quarters, all while yields continue to rise. The increases in interest rates and stagnation of earnings represents a significant challenge facing companies that have underperformed projections from when they secured financing.
RELATED: PRIVATE EQUITY SERIES
For Private Equity sponsors, this can have serious implications:
(i) Underperforming portfolio companies may end up “under water” if valuations disappoint,
(ii) Exit events may be adversely affected by difficulty obtaining financing in an environment with increased refinancing activity, and
(iii) Lender behavior may be “unfriendly” relative to the most recent cycle, depending on regulatory scrutiny and other factors at the time.
Gordian Is Uniquely Situated to Help Sponsors Address Portfolio Company Capital Structures
In fact, Gordian has seen an uptick in lenders being newly aggressive, exercising their rights and, we have seen in non-Gordian deals, lenders actually removing sponsors from control of their portfolio companies. The years of “amend and pretend” appear to be over, or at least greatly dialed back.
In our 35 years as a firm, Gordian has learned that the best way to address these kinds of challenges is to plan for them well in advance.
Further, since we have built our business on advising board and private equity and management constituencies to maximize their outcomes in difficult situations, and because we uniquely avoid creditor representations and thus alone have no creditor conflicts of interest – we are well-positioned to give unconflicted and effective advice to Private Equity firms looking actually to take advantage of capital structure stress and distress.
From an offensive perspective, we also advise buyers of distressed businesses, who can oftentimes find an attractive deal but need to be well advised given the esoteric nature of distressed M&A compared to traditional sales processes. Our advice extends to sponsors whose debt is quoted below par but who remain bullish about prospects and may wish to consider acquiring the debt at a discount.
Please feel free to contact us to speak about these issues in the context of portfolio companies or otherwise.
Gordian Group specializes in just this type of advice for Private Equity firms. We welcome the opportunity to discuss, and potentially assist. Please contact Leslie Glassman to set up a discussion. We look forward to our conversation.
Commentary by Gordian Group CEO Henry Owsley