NEW YORK ( TheStreet) -- Banks will become very selective with credit in 2012, giving up on the "amend and extend" approach on loans of the past three years and forcing some businesses -- especially in retail and restaurants -- to restructure debt. Approximately $912 billion of high-yield debt is expected to mature between 2012 and 2014, according to Fitch Ratings, which is expected to trigger significant refinancing activity as companies seek to roll over their debt.
But "periods that experience a greater amount of refinancing needs often face instability, as lenders are forced to reevaluate where to lend," Fitch analysts noted in their report. Over the past two years, companies have been able to easily refinance their debt taking advantage of low interest rates and pushing out their maturities. Banks have also been willing to "amend and extend" loans in expectations that the economy will recover and borrowers will be able to meet their obligations. In an amend- and- extend agreement, a lender extends the maturity of a portion of a loan in exchange for better spreads and tougher covenants. But with the economic outlook remaining cloudy and mounting regulatory pressure to build capital and curtail risky assets, banks might be forced to make some tough calls on which loans they will refinance or restructure, according to Benjamin Schrag, vice president of business development at Kurtzman Carson Consultants, which provides administrative support solutions to companies through their corporate restructuring process. "Amend and extend deals were done based on expectations of economic improvement that have not happened," said Schrag. "It can't go on forever. The economic situation hasn't improved. While a lot of companies have focused on refinancing their debt, they have not really focused on restructuring their operations." While few restructuring advisors predict bankruptcies among the large companies, which have successfully de-levered and are cash rich, there is trouble looming for middle-market companies that have high debt levels, especially those that are in the retail, restaurant and media business. Those sectors have already seen their share of bankruptcies in 2011. Sbarro filed for bankruptcy in April while Friendly's ice cream parlor and Mexican restaurant chain Real Mex are two examples of recent bankruptcies in the restaurant business. Borders ( BGP) was among the high profile bankruptcies in the retail business in 2011.
Retail and other cash-flow dependent companies may continue to face challenges in the refinancing market. Peter Burke, a partner in the finance and restructuring group at Paul Hastings, says banks are being a lot more selective in the kind of companies they are choosing to refinance. "Companies that have hard assets that you can value or appraise, will find it easier to refinance," said Burke, noting robust activity in asset-backed financing. "Those in the restaurant or media sector are more cash flow dependent. If they have debt maturing in 2012 and are unable to refinance, that could lead them into bankruptcy." Banks' willingness to refinance debt might also depend upon their own financial situation. "Some lenders are under pressure to raise capital or sell assets. They might not be willing to amend and extend a loan or put more money behind a loan," said Burke. "Others willing to pick up market share might consider extending a loan but might have some conditions." While banks will have to tread cautiously, there is plenty of opportunity to make money, especially given the difficulties faced by European banks. Companies in Europe with refinancing needs might hit a wall in turning to European lenders, who are themselves lining up to tap the refinancing market in 2012. Such banks might be looking to sell assets rather than refinance them, which spells opportunities for private equity players and hedge funds hunting for distressed assets. U.S. banks, too, might be looking to buy assets at cheap prices or gain market share at the expense of their European rivals. Citigroup ( C) CEO Vikram Pandit said at a recent Goldman Sachs Financial Services conference that there were opportunities for the bank to pick up share in trade finance, where French banks have traditionally been active and are now pulling out. JPMorgan Chase ( JPM) CEO Jamie Dimon also said that they are seeing a large amount of trade finance revolvers and asset sales in mortgage-backed securities in Europe. He said the bank will bid for the assets if it's a rational asset.
Burke of Paul Hastings said an improvement in Europe is still the best outcome for U.S. banks because it is a better opportunity for everyone as capital market activity will pick up. Still, "there is an opportunity for U.S. banks to provide lending to companies that would have otherwise borrowed from European banks." --Written by Shanthi Bharatwaj in New York >To contact the writer of this article, click here: Shanthi Bharatwaj.
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