Woody Allen once said, “Money is better than poverty, if only for financial reasons.” This is the golden rule of Wall Street. You’ve probably heard that money for subprime borrowers is getting scarcer. But for large businesses, the field is still pretty green.
According to the Wall Street Journal, highly leveraged businesses like Bally Total Fitness Holding Corporation have been little troubled getting loans to finance their way out of trouble. The financing has led to a remarkable drop in large Chapter 11 bankruptcy cases — a ten-year low — even while more debt is being piled onto corporate balance sheets daily.
These loans — often called “leveraged loans” — are designed to help struggling companies restructure their debt into more manageable payments. Over the last three years, the amount of such debt (which is similar in many ways to a “junk bond”) on the market has tripled to nearly $500 billion. That’s with a “b.”
But here’s the part that makes a consumer advocate like me cringe: Companies getting “rescue financing” are purported to be paying 1.25 – 1.5% over the London interbank offered rate, or LIBOR. That means many companies — some that may be on the verge of defaulting on their existing debt already — are able to finance their troubles away (temporarily at least) at well under 10% rates. Many highly leveraged families would love to be able to refinance their debt to LIBOR+1.5%, if they could find a lender to take their loan.
One reason why these loans are still available is that the default rate is relatively low (reported to be only about 1% right now) and there is a lot of money floating around internationally looking for a higher interest rate investment.
Is it a smart thing for the markets? I mentioned Bally’s above. According to the Journal, it took on $284 million in rescue loans in October, 2006. By Spring 2007, Bally’s was in trouble again and it has announced that it would go private (wiping out public shareholder’s interest) by way of a bankruptcy filing. How badly the “rescue” lenders will be hurt may be difficult to quantify after Bally’s becomes a private company and they become the owners, but surely it is a lesson that the grass is not always greener on the corporate side.
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