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By default, bonds carry 99% of losses in the new era of American bankruptcies



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Investors who have purchased a term loan from J. Crew Group Inc. in 2014, they may have thought they were making a relatively secure pledge as it was secured debt. When the company began fighting a few years later, it moved intellectual property, including its brand name, to a new venture, a move allowed by relatively free covenants.

J. Crew's store in New York in May.
J. Crew’s store in New York in May. Photo by Nina Westervelt / Bloomberg files

The company then exchanged some of its existing bonds for new banknotes secured by intellectual property, as well as preferred shares and capital in the parent company, as part of a broad restructuring. The loan investors ultimately suffered: after the company filed for bankruptcy in May, the debt for 2014 cost less than 50 cents on the dollar, according to Bloomberg estimates of the loan. (J. Crew went bankrupt in September.)

Fhem’s Khemlani, who advises lenders with senior claims on borrowers’ assets, said investors should make an effort to “put a few teeth” in their agreements with borrowers now that they are in trouble, regaining some of the lost protection.

In addition to shifting assets, companies have also made stock markets more difficult in recent years, where troubled corporations offer creditors new debt, which often ranks higher in the repayment order in exchange for relief such as lower principal or more. late maturity or both. Participating creditors can reduce their losses in the event of bankruptcy, but investors who execute the transaction may find themselves in a worse position.

The popularity of troubled stock exchanges also contributed to the overall growth of secured debt in the capital structures of companies. This means that more investors – holders of loans and secured bonds – fight for the same balances when a company applies for bankruptcy. Nearly 20 percent of debt in the U.S. high-yield bond market is now somehow secured, according to Barclays, up from just 6 percent in 2000. The number of companies that have borrowed only and no other form of debt has nearly doubled. between 2013 and 2017, according to JPMorgan Chase & Co.

Bloomberg.com


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