A no-fault restructuring tool - comment

The virtual closure of the high-yield market is causing issuers and investors to fret about 1) When will the high-yield market re-open for highly leveraged names, and 2) the coupons they will have to pay. As an investor, we would prefer management to be able to focus on running the business rather than fretting about the capital structure. Nidda’s recent corporate actions show us a company readying to hunker down for an extended period and prompt the following thoughts:

Issuers don’t expect the market to normalise anytime soon: If you think there isn’t going to be a window for highly leveraged businesses to squeeze through in the medium term, paying up now is a lot cheaper than an equity cure or restructuring later. Nidda paid 8 points in cash and an additional 4% in coupon in order to shift its 9/2024 maturities out by two years to 9/2026. It will not be alone in that decision.

Investors need to be persuaded that this is a one-shot deal: The resulting exchange needs to be viewed as par paper, impaired by maturity not trading.

Issuer needs to be holding cash: Confidence in no further issues requires cash. The ability to ride out the next couple of years without recourse to markets to funds planned Free Cash Flow shortfalls.

In original investor hands: This will equate to the bonds trading near the 90’s and therefore not yet having moved on to the distressed universe.

In essence, hunkering down for an extended winter.