As corporate bankruptcies increase, debt investors scramble to salvage as much money as they can from the wreck, and the early skirmishes aren’t going well, with several sources pointing to Bloomberg that it’s going very badly. The bankruptcy of GenesisCare, a specialist cancer treatment company backed by powerful venture capital fund KKR and China Resources Pharmaceutical (CR Pharmaceutical), is the latest warning about value being destroyed when companies fail.
In past default cycles, loan providers expected to recover between 70% and 80% of their cash from failing companies. Those days are over and nothing is like before. Some GenesisCare investors are bracing for a mid-decade percentage, according to multiple sources not authorized to speak publicly, a fresh blow to a lending market headed for record low recoveries.
End of the easy money era
It’s another financial pain point exposed by the end of the easy money era, as credit crunch pushes over-indebted companies to the brink. Although some investment banks expect a softer economic landing than feared, the slump in the recovery of leveraged loans is ominous for lenders.
Like the bankruptcy of KKR-backed Envision Healthcare last year, GenesisCare’s situation shows how companies are taking advantage of the laxer loan protections that lenders swallowed when seeking yield in a world of high interest rates. . low. GenesisCare has secured so-called “debtor-in-possession” financing, which includes a commitment of $200 million, about 185 million euros, to allow it to continue operating, hurting existing loan holders, say people familiar with the matter. . Both KKR and GenesisCare have declined to comment.
“Companies are doing financial alchemy because weak papers allow them flexibility,” says Fraser Lundie, head of fixed income at Federated Hermes in London. “Even if default levels are well below all-time highs, if recoveries look much worse, it may be about the same point.”
GenesisCare joins the list of companies that leave scars
GenesisCare joins a growing list of restructuring operations that have scarred US lenders of late. According to an August report from Bank of America strategists, the first lien loan to Envision is expected to recover to close to zero. According to the report, media company Diamond Sports and airline mileage specialist Loyalty Ventures have implied recovery rates of around 10%, while technology company Avaya and energy company Heritage Power are around 30%.
Strategists estimate that recoveries from bankrupt companies stand at 25% on average this year -based on loan prices 30 days after a default- and forecast 50% in the long term, the same is expected in Europe. The fate of GenesisCare, which borrowed in euros and dollars, also suggests that the trend of poor recoveries will go beyond the US, to which Europe will not escape.
Investors including Blackstone, Bain Capital and HPS Investment Partners were able to exit GenesisCare’s US loans, albeit some at punitive prices. But European “white list” restrictions, which limit sales to a select group of buyers, have prevented many companies from selling a half-billion-euro loan, according to people familiar with the process.
The European loan is currently marked at an offer price of 12 euro cents, according to the same people, and the dollar loan at 13 cents. “Restrictions on transfers can be challenging and create air pockets with limited liquidity,” says Tristram Leach, head of European credit at Apollo Global Management. “With strict whitelisting restrictions it’s harder for lenders to get out of loans where they’re going cold.”
