Typical terms for investments in the Middle Market companies: Purchase outstanding debt (now at a distressed discount) and Set up reserves (in trust) to cover the instrument’s contractual guarantees (embedded credit insurance) Stronghold designs and directs programs implemented within insurance company formed protected cells.įor each acquisition program, the insurance companies will: PE-owned companies with high leverage, small scale, niche business models, and fragile balance sheets will exacerbate the next, more prolonged default cycle.”Ĭurrent events have weakened economic activity to a degree the Federal Reserve and Moody’s could never have anticipated in 2019. Federal Reserve’s Financial Stability Report (May 2019) “Any weakening of economic activity could boost default rates and lead to credit-related contractions to employment and investment among these businesses” “There seems to be no other viable solution, in our view.”Ĭoncerns about a recession affecting this market sector began emerging in 2019: “Investors will either begin providing new funding to these issuers soon or face the risk that they will default,” wrote the Bank of America strategists. The main question is whether the financing floodgates soon open for those low-rated and stressed companies. In the first half of 2009, when the stock-market troughed and rebounded from the financial crisis, the ICE Bank of America Distressed High Yield Index returned 48%, outperforming the broader high-yield market.īonds rated in the lowest three tiers before default (CCC+, CCC, CCC-) have lagged behind higher-rated bonds as well, probably because of their perceived default risk. That underperformance is unusual for historical economic recoveries, Bank of America says. They are down 27% so far this year, ICE data show, while the broader high-yield market is down just 0.2%. Second, the performance of distressed bonds-debt of companies that are either in or close to default-has lagged far behind the rest of the market. The firm expects defaults will rise further from here to peak in the first quarter of 2021, in part because it rates a record amount of debt in the lowest four tiers before default. Overall, there were 54 corporate defaults in the second quarter, the most in any quarter since 2009, according to Moody’s. Consumer services companies, which have been hit especially hard by pandemic-related shutdowns, have been defaulting at the quickest pace since 2002, according to S&P Ratings. While high yield debt markets, have recovered since essentially closing in March 2020, concerns remain:įirst, the gains come as a rising share of companies miss debt payments. companies hold 60% of the $2.5 trillion outstanding in highly leveraged loans due between 20. Private equity ownership has driven these companies to focus on short-term financial results rather than product/service value, improving manufacturing processes, or developing new products and technologies. $10 trillion of the $30 trillion in annual U.S. Stronghold’s programs stand as efficient alternatives to private equity financing, IPOs, and SPACs and provide access to larger pools of institutional investment capital. Stronghold instrument's value to institutional investors in the current economic environment positions such a program to operate at a very significant scale. Senior fully secured debt instruments of an insurance company delivering an enhanced yield over the return on 30 year U.S. Stronghold believes the sector stands uniquely positioned for acquisition, debt restructuring, recapitalization, and relaunch made possible by Stronghold designed instruments: Middle Market businesses entered to current economic downturn piled high with unsustainable debt. A discussion of Middle Market acquisitions follows.Ī strategy to rebuild & relaunch a critical U.S. Stronghold solutions provide patient capital as debt or equity low cost of capital, use as mezzanine financing (synthetic equity) no requirement to retain equity and access to the world’s largest pools of capital.įor general terms and overview please see: Project Financ ing. Stronghold solutions enable acquisition teams to access monies from global capital markets at terms and scale otherwise unavailable.
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