Are Lev Fin Bankers Trying To Create Work For Their Restructuring Friends?

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If you work in a pretty cyclical business, like bankruptcy and restructuring, it behooves you to moonlight in some other line of work since some days there are no bankruptcies. Some restructuring bankers and lawyers are golf instructors or lounge singers or cowpokes on the side, but many prefer to advise on debt issuance transactions when bankruptcies are scarce, since the skills are more overlapping.

But while some bankruptcy lawyers may enjoy the variety of litigating in bankruptcy court one year, and writing credit agreements or performing at the Tropicana the next, others tend to get sad in their off years, and pine for their true love. (That being bankruptcy.) "I'd really rather be running a bankruptcy process," they think, "but here I am stuck writing credit agreements. If only I could change that." And then some of them, cynically, think: "Oh wait, I can. I'll just convince this company to lever up 10x and put a reminder in my calendar to pitch the bankruptcy business in, say, two years."

Lots of people suspect something like this of all bankers and, to a lesser extent, lawyers.1 Which is understandable and probably not all that untrue: if you work in a transactional business, you want more transactions. Most transactions are reversible, and the more reversals you can talk a client into, the more money you can make. Transactions that contain the seed of their own reversal are the best transactions. (This is why private equity firms are good clients: every buy-side creates a sell-side, or IPO, in 3 to 7 years. Strategics sometimes just buy companies and keep them.)

Stephen Lubben knows what I'm talking about:

The debt issued today is the stuff of tomorrow’s bankruptcy cases. ... With interest rates this low – the yield on 30-year single A debt is below 5 percent – investors seem to be discounting the likelihood of a future bankruptcy.

But if this is the low point for interest rates for a good long while, 30 years from now could be interesting. The “wall of maturities” that will hit then could provide for some happy times for the bankruptcy lawyers of the future. Cold comfort for those with little to do today.

Well you just need to diversify! Like some people I guess are doing, as debt issuance is going gangbusters, with $700bn in US IG issuance so far this year and high-yield at all-time highs. So perhaps this levering-up-to-blow-up theory is worth a look? Here is a look:

This is two leverage ratios - net debt to total assets and net debt to EBITDA - measured over the last 8-ish years for the Russell 3000 index of big/medium/smallish companies, plus a simple payout measure - dividends plus buybacks divided by net income - for the S&P 500.2 Up = scarier, if you are scared of debt. Down = scarier, if your livelihood comes from shepherding companies through bankruptcy.

So ... I dunno. This does not seem like strong evidence that companies are levering up (1) to take on risky projects, (2) to buy back their stock and juice their capital structure, or (3) at all. It suggests instead that debt issuance is largely of the rainy-day, lock-in-low-rates, keep-cash-lying-around, get-in-while-the-QE-ing-is-good variety. Which should make you worry about the prospects of near-term bankruptcies, if you are a bankruptcy guy, or not worry, otherwise. But of course if you're a debt guy, this is great news. Look how underlevered companies are! Look how much room they have to run up debt! Look how low rates are! What could possibly go wrong?

Cheap Loans Could Spell Long-Term Headaches [DealBook]

1.And investors! See, for instance, this open letter to CFOs from a distressed debt investor, and the cynical comments it spawned ("I hope this is an attempt to spur more bankruptcy investment opportunities for yourself").

2.Because I didn't have it for the Russell, of course. Sources are Bloomberg RAY <index> FA LEV for the leverage data, S&P (here and here) for the buyback and dividend data.

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