bankruptcy

In tough times, funds are muscling out the banks

Lender-on-lender violence is being seen with increasing frequency as private debt firms show their willingness to be aggressive in stressed scenarios.

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With defaults on the rise, lawyers say they are seeing an increasing number of litigation and bankruptcy cases – bringing into sharp focus the interactions between different lender groups when a borrowing company’s future is in doubt.

In past downturns – most obviously the financial crisis of 2008 – the lender groups were mostly or exclusively comprised of banks. Now, syndications frequently include private debt funds – and they are bringing different dynamics to the negotiating table.

Perhaps the most dramatic manifestation of this – certainly the most dramatically worded – is “lender-on-lender violence”, as seen in cases such as Serta, Boardriders and Speedcast. This is a scenario that emerges in bankruptcy where a lender agrees to prop the company up with additional capital in exchange for being given “super-secured” status – relegating those lenders that did have first-recovery status to second-recovery status.

What the lawyers say is that those making such moves – bold or perhaps confrontational depending on whose side you’re on – are often the private debt funds. They are often – not always, it should be noted – more aggressive than the banks, prepared to take greater risks and have more of a focus on potential upside.

Although forcing your way up the capital stack in this way needs the approval of the bankruptcy courts, lawyers say approval is likely to be granted. In the good old days of ultra-low interest rates and plentiful liquidity, it was much more straightforward to lenders to reach amicable agreements to secure a company’s future. These days, the courts will tend to take the view that the ends justify the means – if violence is the way to keep a viable company afloat, then so be it.

It has become fashionable these days to point out that – contrary to perception – banks and private debt funds can peacefully co-exist. But that was before the latest uptick of litigation and bankruptcy cases. Now, the talk is once more of conflict.

Write to the author at andy.t@pei.group