This doesn’t refer to physical violence. It refers to out-of-court bankruptcy deals by private equity owners of zombie companies with some creditors but not others.
Zombie companies that borrowed when interest rates were low will be forced to refinance at higher rates, potentially bankrupting the companies. Private equity owners are famous for buying companies with borrowed money, stripping their assets and loading them with debt.
Coming to a Cash-Strapped Company Near You: Creditor-on-Creditor Violence
As private-equity-owned companies default, lenders are resorting to measures that seem extreme
By Matt Wirz, The Wall Street Journal, Aug. 19, 2024
Grand alliances. Secret pacts. Betrayal. It’s all in a day’s work in the booming market for low-rated corporate debt.
U.S. companies that struggle to repay their below-investment-grade bonds and loans have increasingly squeezed concessions from lenders by pitting them against one another. The private-equity firms and wealthy individuals who own most of the companies call the deals “liability management exercises,” or LMEs. Debt investors call them “creditor-on-creditor violence.”…
The market for below investment-grade bonds and loans has almost doubled in size since 2010 to about $3 trillion, as low interest rates encouraged companies to borrow. The default rate on the loans has roughly tripled since 2022 to about 4.5% as borrowers contended with inflation and higher interest rates. …
Owners can prolong their control over ailing companies and postpone losses by playing the financial equivalent of Game of Thrones with creditors. The proprietors coax certain lenders to exchange debt that is coming due for a smaller amount of longer-term debt by offering them preferential treatment—at the expense of other creditors who aren’t in on the deal. Once a majority of creditors agree, owners can push harsher terms on the rest of their loan and bondholders. … Private-equity firms can push the out-of-court deals through now because loan investors have been giving up legal protections for years in exchange for higher yields…
Debtholders have begun pre-emptively forming co-op groups, signing binding contracts committing not to accept any exchange offers from companies unless all agreed on it. … [end quote]
A recent study in the Associated Press found that through the summer and into September 2024, when many investors now expect the first and only Fed cut this year, zombies will have to pay off $1.1 trillion of loans. The analysis found their numbers have soared to nearly 7,000 publicly traded companies around the world — 2,000 in the United States alone.
The private equity owners of failing zombies will fight tooth and nail to stiff their creditors in order to fatten their own pay. Creditors are banding together to pre-empt these tactics.
The Macro problem is that so many people are employed by the zombies. After bankruptcy many of them will lose their jobs. Companies in the AP’s analysis employ at least 130 million people in a dozen countries.
The problem is concentrated in time because so many companies borrowed during the low-interest years and the debt will need refinancing at the same time. The job losses could exacerbate an economic turndown in the classic recession scenario.
Wendy