Posted on September 22, 2009 at 2:50 PM
Filed under: Corporate Dealmaker | Deal International | Dealscape | Private capital
Tagged: bond markets , default , equity markets , leveraged loans , M&A , private equity , THL Partners , Warner Music

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Scott Sperling isn't worried. At least that's not how the co-president of private equity firm Thomas H. Lee Partners LP appears in this excerpt from an exclusive video interview with The Deal.

In addressing the issue of about $430 billion of leveraged loans coming due between 2012 and 2014, Sperling says that a rebound in bond and equity markets and M&A should help borrowers refinance much of that debt.



In particular, he points to his own firm's success in refinancing $1.1 billion of Warner Music Group Corp. (NYSE:WMG) debt in May with high-yield bonds, and he says that similar strategies will help borrowers manage their balance sheets.

The issue has been top-of-mind for borrowers -- particularly the private equity firms that loaded debt onto their portfolio companies in the debt mania of 2005-2007 -- as they contemplate what to do with their balance sheets. The disaster scenario that was being contemplated as late as this summer: The loans wouldn't be able to be refinanced by shuttered credit markets, leading to a slew of defaults.

Although no one is declaring the problem solved, there are signals that the markets are working through the problem, especially through a high-yield bond market that is "on fire," according to one analyst.

Standard & Poor's Leveraged Commentary & Data unit reports, for example, that some $23 billion of loans this year have been refinanced with bond offerings, while the outstanding volume of loans (representing the amount of all loans outstanding in the market) has fallen from $596 billion at the end of last year, to $560 billion on Sept. 2, a 6% drop that LCD analyst Steve Miller calls "unprecedented."

That's not to say that borrowers are out of the woods. After all, refinancing loans doesn't eliminate the debt, it just replaces lower-priced loans with more expensive bonds, increasing the interest burden on the companies. But the tactic does buy companies time for hope that an economic rebound will help grow their businesses enough so that the increased interest payment burdens don't sink the ship.

Whether forecasts for an anemic recovery pose a danger to that scenario is an open question. But, for the moment, people like Sperling are breathing as sigh of relief. See the video above or download it at iTunes. - Vipal Monga

Also see:
That worrying wall of debt
The future and other problems
Between reality and the mirage

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