(Ed note: the following are the author’s thoughts from a recent Goldman Sachs conference)
By far and away the presentation that was most interesting to me, and gave the greatest insight into likely future trends in the economy, was given by Bruce Mendlesohn, a managing director in Goldman’s leveraged restructuring advisory group. Mendlesohn addressed the aforementioned mountain of LBO debt to be repaid or refinanced over the next three years (see chart).
This “wall of debt” has an uncanny resemblance to the mountain of commercial real estate loans and CMBS debt under similar circumstances(View image). So it was of no small interest to me when Mendlesohn went through the extensive tool box being utilized to cope with this massive problem. These strategies included distressed debt open market buybacks, asset sales, exchange offers, refinancings and amend/extend agreements that are all being utilized prior to the last resort of bankruptcy filings. He discussed the strategies and bargaining tactics being utilized by various players in the capital structure to try and protect their interests – much like the “tranche warfare” being witnessed in the commercial real estate market. Mendlesohn mentioned in his presentation that despite the severity of the current downturn, 48 month default rates on corporate debt was running at 17%, which is much less than the 30.2% and 30.6% levels seen at similar points in the 1992 and 2003 recession years.
He did not opine on whether it was in fact creditors’ unwillingness to “take their medicine” which had resulted in this better performance, but he did aver that he expected to be very busy for several years to come. That said, Mendlesohn illustrated graphically how the efforts of restructurring artists were putting a pretty decent dent in the “wall of debt,” and how if you projected forward the current rates of debt rehabilitation, you can actually visualise a non-catastrophic conclusion to this situation.