Companies race to restructure borrowings amid debt crisis fears

The coronavirus crisis is threatening to spill into corporate debt in Australia as leveraged companies feel the pinch.

Credit markets have shown signs of stress. Picture: AFP

The coronavirus crisis is threatening to spark a corporate debt crisis in Australia as leveraged companies in the hospitality, education, tourism, retail and aged-care industries rush to restructure borrowings in the face of an unprecedented cash-flow squeeze.

Debt restructuring investors, known as special situations funds and which offer distressed companies an opportunity to refinance debt when mainstream lenders withdraw access to covenants, are also circling the local market as a number of high-profile companies seek to calm investors over the state of their indebtedness.

The spread on credit default swaps for the major banks, an indication of investor fear of collapse, raced to their highest point in four years early on Friday as the steepest bear market on record continued to spiral out of control and as the major lenders were tipped to suffer a $2bn blowout in provisions for bad debts.

Grant Thornton corporate restructuring specialist Said Jahani said the professional services firm was “already seeing an uptick in inquiry levels” from businesses facing financial difficulties “centred on key industries that are at the front line of this crisis, being hospitality, education, tourism, retail and aged care”.

“Obviously, there is a lot of uncertainty around how deep and how long this crisis is going to run,” Mr Jahani told The Weekend Australian.

“The businesses at greatest risk of failure will be those without sufficient ‘headroom’ in their existing balance sheets to absorb the impact of this downturn. We are working with businesses to assist them through this process and hopefully avoid such a situation.”

The coronavirus pandemic has sparked a sharp reassessment of corporate credit risk as supply chains come under pressure and as customers evaporate from the tourism, hospitality and transport industry.

The fears of a crunch in cash flow has left bond markets reeling at the same time high-yield energy sector debt is dumped amid a 30 per cent crash in the oil price last week out of fear that risky ­borrowers will default on their liabilities.

“Buy now, pay later” stars Afterpay and Zip Co issued statements seeking to calm nerves over their funding position on Friday. Afterpay said its “warehouse facilities are committed facilities and are not subject to traditional debt facility covenants”, while Zip said it remained “well inside” all its debt covenants.

Mr Jahani said Grant Thornton was helping businesses survive the panic by splitting their workforce to continue operating, stockpiling cash by suspending investment programs and renegotiating contracts with suppliers and banks, and putting in a strategy to cope with the “impact of extended supply chain restrictions”.

Exchange-traded funds tracking US high-yield corporate bonds notched up their biggest fall since the global financial crisis last week following the slide in energy prices triggered by the Saudi Arabia-Russia oil price war.

Amid the market carnage, Sydney-based shadow bank and corporate lender Metrics Credit Partners became the second listed corporate debt manager in a fortnight to dump a capital raising, ­refunding investors $344m following a massive raising shortfall following wild churning on junk bond markets.

Australian fund manager Perpetual issued a statement to investors — for the second time in a fortnight — seeking to calm holders in its Credit Income Trust, which invests in high-yield corporate debt, after shares in the listed debt fund had fallen about 20 per cent since late last month.

Mike Gitlin, head of fixed income at Capital Group Investment Management, said given the “significant market volatility and the rapidly declining economic outlook, we are very cautious on the outlook for credit”.

“There are many scenarios where credit may continue to weaken before markets stabilise and prices improve,” Mr Gitlin said. “Over the past decade, corporations have tapped into the low interest rate environment and taken on a large amount of debt. Many companies are highly leveraged and will be vulnerable if credit spreads continue to widen. It is important to be very discriminating in the credit space, considering the increasing leverage we have seen over the past few years.”

One debt restructuring consultant told The Weekend Australian there was an increase in special situation funds and alternative credit providers approaching his firm, seeking to do deals with distressed clients.

“They’re proactively coming to debt advisers, and asking them to tell their clients that if existing financiers are showing a bit of concern, they’ll take a longer-term view on the debt. They believe volatile markets will not last forever,” the consultant said.

However, he said there was not yet an influx of companies seeking to refinance. “It really comes down to your level of urgency, what options you have and what flexibility you have,” he said. “We are seeing signs of increased pricing and increased due diligence on the effect COVID-19 is having on business operations for borrowers.”

Macquarie Bank on Friday killed off a $500m raising due to “significantly changed” market conditions and in a statement sought to calm investors, restating that the overall group’s “capital position is strong” with a $6bn capital surplus. Macquarie said it “took the decision to withdraw the offer in light of significantly changed market conditions in recent weeks” and that it would refund customers who had invested money “as soon as practicable”.

Listed equities manager Argo also said on Friday it would scrap a raising for its Global Listed Infrastructure fund and would refund customers, while Pengana Investment Management also dumped a $500m raising for its Pengana Private Equity Trust.

National Australia Bank on Thursday cancelled a $2bn raising through a hybrid capital notes offer, after the listed hybrid market suffered its worst day on record.