Payback Time - Avalanche of Maturing Junk Bonds Looms for... http://www.nytimes.com/2010/03/16/business/16debt.html?

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Payback Time - Avalanche of Maturing Junk Bonds Looms for... http://www.nytimes.com/2010/03/16/business/16debt.html?hp

PAYBACK TIME

Junk Bond Avalanche Looms for Credit Markets

By NELSON D. SCHWARTZ
Published: March 15, 2010

When the Mayans envisioned the world coming to an end in 2012 — SIGN IN TO
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at least in the Hollywood telling — they didn’t count junk bonds
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among the perils that would lead to worldwide disaster.
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Maybe they should have, because 2012 SEND TO PHONE

also is the beginning of a three-year
PRINT
period in which more than $700
SINGLE PAGE
billion in risky, high-yield corporate
REPRINTS
debt begins to come due, an
extraordinary surge that some analysts SHARE

fear could overload the debt markets.

With huge bills about to hit

corporations and the federal
government around the same time, the
worry is that some companies will have trouble getting new
loans, spurring defaults and a wave of bankruptcies.

The United States government alone will need to borrow

nearly $2 trillion in 2012, to bridge the projected budget
deficit for that year and to refinance existing debt.

Indeed, worries about the growth of national, or sovereign,

debt prompted Moody’s Investors Service to warn on
Monday that the United States and other Western nations
were moving “substantially” closer to losing their top-notch
Aaa credit ratings.

Sovereign debt aside, the approaching scramble for

corporate financing could strain the broader economy as
jobs are cut, consumer spending is scaled back and credit is
tightened for both consumers and businesses.

The apocalyptic talk is not limited to perpetual bears and

the rest of the doom-and-gloom crowd.

Even Moody’s, which is known for its sober public

statements, is sounding the alarm.

“An avalanche is brewing in 2012 and beyond if companies

don’t get out in front of this,” said Kevin Cassidy, a senior
credit officer at Moody’s.

Private equity firms and many nonfinancial companies

were able to borrow on easy terms until the credit crisis hit
in 2007, but not until 2012 does the long-delayed reckoning
begin for a series of leveraged buyouts and other deals that
preceded the crisis.

That is because the record number of bonds and loans that

The New York Times
Payback Time
Articles in this series will examine
the consequences of, and attempts
to deal with, growing public and
private debts.
were issued to finance those transactions typically come
due in five to seven years, said Diane Vazza, head of global
fixed-income research at Standard & Poor’s.
In addition, she said, many companies whose debt matured
in 2009 and 2010 have been able to extend their loans, but

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Payback Time - Avalanche of Maturing Junk Bonds Looms for... http://www.nytimes.com/2010/03/16/business/16debt.html?hp

Previous Articles in the Series the extra breathing room is only adding to the bill for 2012
and after.
Related
The result is a potential financial doomsday, or what bond
Moody’s Says U.S. Debt Could Test
Triple-A Rating (March 16, 2010)
analysts call a maturity wall. From $21 billion due this year,
junk bonds are set to mature at a rate of $155 billion in
2012, $212 billion in 2013 and $338 billion in 2014.

The credit markets have gradually returned to normal since the financial crisis,
particularly in recent months, making more loans available to companies and signaling
confidence in the pace of economic recovery. But the issue is whether they can absorb the
coming surge in demand for credit.

As was the case with the collapse of the subprime mortgage market three years ago,
derivatives played a big role in the explosion of risky corporate debt. In this case the
culprit was a financial instrument called a collateralized loan obligation, which helped
issuers repackage corporate loans much as subprime mortgages were sliced, diced and
then resold to other investors. That made many more risky loans available.

“The question is, ‘Should these deals have ever been financed in the first place?’ ” asked
Anders J. Maxwell, a corporate restructuring specialist at Peter J. Solomon Company in
New York.

The period from 2012 to 2014 represents payback time for a Who’s Who of private equity
firms and the now highly leveraged companies they helped buy in the precrisis boom
years.

The biggest include the hospital owner HCA, which was taken private in 2006 by a group
led by Bain Capital and Kohlberg Kravis & Roberts for $33 billion, and has $13.3 billion in
debt payments coming due between 2012 and 2014. Another buyout led by Kohlberg
Kravis, for the giant Texas utility TXU, has $20.9 billion that needs to be refinanced in the
same period.

Realogy, which owns real estate franchises like Century 21 and Coldwell Banker, was taken
private by Apollo in the spring of 2007 just as the housing market was beginning to
unravel and as the first tremors of the subprime crisis were being felt.

Realogy was saddled with $8 to $9 of debt for every $1 in earnings, well above the “$5 to
$6 level that is manageable for a company in a highly cyclical industry,” according to Emile
Courtney, a credit analyst with Standard & Poor’s.

Realogy has survived — barely. “The company’s cash flow is still below what’s needed to
cover the interest on its debt,” Mr. Courtney said.

1 2 NEXT PAGE »

A version of this article appeared in print on March 16, 2010, on page

A1 of the New York edition.

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Past Coverage REPRINTS

Moody's Says U.S. Debt Could Test Triple-A Rating (March 15, 2010)
NEWS ANALYSIS; I.M.F. Help for Greece Is a Risky Prospect (March 5, 2010)
Cautious Steps Expected on Bank Liquidity in Europe (March 4, 2010)
ECONOMIC SCENE; In Tracking Recovery, Jagged Lines (March 3, 2010)

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