The opening panel of Debtwire’s 2023 Restructuring Forum convened a group of experts to dissect the latest trends in the US restructuring market. Participants included David Geenberg of Strategic Value Partners, Daniel Flores from GoldenTree Asset Management, Steve Tesoriere of Oaktree Capital, Bradley Scott Friedman of Ares Asset Management, Brian Fox with Alvarez & Marsal, and David H. Botter from Cleary Gottlieb. Together, the group explored a range of issues, offering insights into navigating the current credit landscape.
See below for highlights from SVP’s David Geenberg, Co-Head of the North American Investment team.
The Bifurcation in High Yield Bond and Leveraged Loan Markets
Geenberg highlighted the growing divide between the high yield bond and leveraged loan markets, noting a significant improvement in the credit quality of the bond market over recent years, characterized by a higher presence of BB-rated bonds and a higher percentage of public companies. Conversely, the leveraged loan market has seen a decline in credit quality, marked by an increase in single B-rated loans and larger gaps in documentation. He sees this trend continuing, as each year a lower credit quality group of loans matures.
“Let’s assume that the US economy achieves the soft landing… You still then need to go through this slog of refinancing those 2017, 2018, 2019 deals in the loan market that were financed at 5-7%. They’re going to come up now at 9-12%. We’ve seen some at 14%. That’s going to drive this real grind of refinancing, and you’re going to see that in the loan market first.”
The Growth of Private Credit
The private credit market has grown significantly, with assets under management surpassing $1.5 trillion dollars, overtaking the syndicated loan market in size.
Geenberg said that what he finds particularly interesting is the intersection of private credit with the restructuring world, noting a trend of private credit investors focusing on stressed or distressed situations as an investment strategy.
“For our firm, investing into some of these complex situations has been an attractive opportunity. It’s been a growing opportunity. We’re finding ourselves specializing in helping to refinance highly leveraged situations… with structured pieces of capital tailored to help those companies recover.”
A Focus on Business Fundamentals
Geenberg emphasized the strategic importance of investing in companies’ recovery and growth, rather than merely restructuring capital.
“A lot of these capital structures can’t be solved with more debt or different debt. They need to be solved with less debt. They need to be solved with better business performance…We think it’s a really critical part, even if it makes less of a headline these days.”
Future Outlook and Sector-Specific Challenges
Looking ahead, the panelists discussed economic headwinds and sector-specific challenges. Geenberg suggested that regardless of whether the economy experiences a soft landing with low growth or a period of contraction, the outcome will be challenging due to higher interest rates and credit issues. He expects a volatile, grinding period for a few years.
Geenberg added that several sectors of the US economy, notably building products, home construction and packaging, are currently experiencing contraction, affecting both public and private companies. He noted that the telecom sector is also undergoing a significant restructuring phase, reminiscent of early 2000s airline industry challenges, with high capital expenditures, high leverage and intense price competition leading to a fundamental restructuring need.