LFI: Covenant Review: Special Situations Weekly (Week of 3/23/2020 – 3/27/2020)
The Big News
Fitch released its leveraged loan and high yield default forecasts this week, predicting a surge to 5% – 6% in each category for 2020 and then a jump to as much as 9% in 2021, as the coronavirus pandemic works its way through the fixed income market over the next two years. The outstanding amount of troubled high yield bonds more than doubled to $178.5 billion from $82 billion in February, according to Fitch, 15% of the high yield universe. Energy makes up the vast majority of the lists, at 40%. Fitch’s stressed loan tally comes to $233.6 billion, exceeding 16% of the loan index, up from $102.1 billion last month and above the peak $110.1 billion in November 2019, according to Fitch.
Covenant Review this week discussed how to address when the Covid-19 pandemic results in companies becoming cash-strapped and seeking additional sources of liquidity. One source of liquidity could be the possibility of raising additional general purpose debt, whether in the form of short-term bridge financings or long-term debt, according to Covenant Review, which identified key sources in the US market of additional general-purpose debt and, if that debt will be secured, liens. (See Report on Key Sources of General-Purpose Debt Capacity for U.S. Companies). In Europe, meanwhile, the Financial Conduct Authority, the Financial Reporting Council, and the Prudential Regulatory Authority announced measures addressing challenges in financial reporting, including a two-month extension on the timetable for UK-listed companies to publish their annual financial statements. Covenant Review outlined European bond issuers’ ongoing requirements under the Reports covenant and how the Reports covenant interacts with regulatory and stock exchange requirements applicable to some European issuers, with a particular focus on how these requirements may be implicated by the coronavirus pandemic and related events.
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