In September 2008, as the fishermen who star in the hit show The Deadliest Catch crisscrossed the Bering Strait in search of snow crab, the show’s creator, Discovery Communications, braced for a major squall. The programmer had gone public the same week that Lehman Brothers filed for bankruptcy and Bank of America gobbled up Merrill Lynch. On the cusp of the biggest storm in banking in 70 years, the company needed to adopt a more durable capital structure, one that matched its assets and its new stature as a public concern.
But the timing couldn’t have been worse.
Discovery Communications CFO Brad Singer counseled patience, and after spreads tightened 400 basis points from January to July 2009, the $3.5 billion cable-television company pulled the trigger. It refinanced $1 billion of term loans and private-placement debt with an institutional loan and a bond offering, pushing out maturities from less than 18 months to 5 and even 10 years. The new debt didn’t wipe out all of the old, though. “I’m an incrementalist,” explains Singer. “Markets come and go, and as long as you have time, you’re going to get the best terms if you can pick when to access the market.”
For many companies, that “when” may in fact be right now, because financing markets have reopened — if even just a crack. “This is an excellent time to lengthen your maturities if you can,” says Varun Bedi, managing director of Tenex Capital Management, a restructuring and investment firm. “It’s not a huge opening, but it’s much better than I would have thought. Markets won’t open a whole lot more, and they may well shut again once people realize the economy will take a long time to recover.”
Not every CFO who needs to is actively refinancing debt, however. In a July CFO survey, 31% of finance executives said their approach to financing the next three years is to “hope for a recovery in bank lending that eases our access to bank credit.” But to stand and wait could be a big mistake. The queue of companies refinancing is growing long, thanks to the leveraged-buyout boom of 2005 to 2007. About $455 billion — around 91% of the institutional loan market — matures between now and 2014, says Standard & Poor’s.
If it’s time to lessen refinancing risk, you have some options, but they may not include a relationship-bank lender or an unsecured revolving line of credit. Indeed, companies are paring their bank debt as they prepare for a scenario in which that source won’t come back for years.
Time to Bond?
What will be the most attainable and cost-effective form of capital over the next three years? Finance executives surveyed by CFO think it’s bonds. There was $103 billion worth of high-yield issuance in the first half of 2009, $32 billion of which paid off leveraged loans, according to Thomson Reuters. “Almost all of the issuance [currently] is refinancing of bank debt,” notes Diane Vazza, a managing director and head of Global Fixed Income Research at S&P.