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One of Wall Street’s favorite ways to make money off corporate defaults is being tested — just as the economic crisis pushes more companies to the brink of bankruptcy, WSJ Pro Bankruptcy reported. Companies seeking bankruptcy protection often need a fresh injection of financing to keep their operations running while they search for buyers or renegotiate debts. Funding a company’s bankruptcy process has long been a safe and lucrative business for banks and asset managers, earning them high fees and interest rates with minimal risk. Known as debtor-in-possession loans (DIPs), these deals normally come with special protections and collateral rights to ensure they are repaid fully in cash ahead of other creditors. But some investors have gotten burned on DIPs since the coronavirus outbreak began wreaking havoc on the U.S. economy, turning what looked like sure bets into problem investments. In recent weeks, an oil driller, restaurant operator and movie-theater supplier have put their DIP lenders at risk of losses. The rash of mishaps has market participants worried DIPs will become both harder to find and more expensive just when American corporations need them most. Finding asset buyers or exit lenders is now a tall order with financial markets in turmoil, oil prices collapsing and unemployment soaring. Some DIP lenders have taken losses after the pandemic upended business projections, slashing enterprise values so severely that not even a company’s top-ranking debts could be paid off. Read more. 

Have you read "This DIP Loan Brought To You By Someone Who CARES! (Or “I’m From The Government And I’m Here To Help You”)" by Tom Salerno's and other bankruptcy professionals? 

The Commodity Futures Trading Commission (CFTC) said that fraudulent schemes that promise high returns from trading complex financial products — but force victims to pay excessive fees and taxes to collect earnings — increasingly target people working from home or who have lost jobs amid the coronavirus pandemic, the Wall Street Journal reported. The CFTC said that it has received hundreds of complaints about such fee frauds in recent months and warned individual investors should be particularly aware of the schemes, which promise easy ways to make money with no trading experience, the agency said in an advisory note. Victims usually are introduced to unregistered brokers online through social media and messaging apps, such as Telegram and WhatsApp, the CFTC said. Swindlers try to convince investors that they can earn high profits from home if they join the brokers’ program to trade in financial products, such as binary options, foreign exchange programs and cryptocurrencies, according to the advisory.

The coronavirus-driven stock-market rout is forcing private-equity firms to make tough calls about how much their investments are actually worth, the Wall Street Journal reported. Worldwide lockdowns and disruptions caused by the virus have hit public markets hard, erasing almost 20 percent of the value of the S&P 500 index in the first quarter of the year. Private-equity firms often boast that the value of their investments is protected from wild swings in stock prices because of their long-term investment horizon and the fact their companies aren’t traded publicly, which offers insulation from market panics and fire sales. But firms have to provide their investors with quarterly estimates of how much their holdings are worth. Most funds are required to report their value as of March 31, so firms are now struggling to assess how much the coronavirus pandemic has affected their portfolios. Although the valuation hit will vary by sector, firms need to consider the impact on the value of every one of their portfolio companies, said Daniel DiDomenico, a senior managing director with advisory firm Murray Devine & Co., which advises private-equity firms on investment valuations. One estimate suggests the value of private-equity investments has been hit even harder than the broader stock market because the deals typically involve high amounts of leverage. Index company MSCI Inc. estimated last week that the value of large U.S. buyouts had declined 35 percent from their high point in the first quarter, based on data from Burgiss Group LLC.

U.S. and European leveraged loan investors who committed to financing companies and are now looking for ways to get out of those agreements amid the pandemic may have limited options, according to credit research firm Covenant Review, Bloomberg News reported. Some lenders who have yet to fund deals have the option of pulling out of their obligations by invoking a rarely used clause known as the Material Adverse Change, or MAC. The problem is that it’s not clear what constitutes a material change. “There’s a lot of uncertainty at this point in time as to whether the Covid-19 pandemic will have an impact which is sufficiently long that lenders can invoke the MAC clause,” Jane Gray, an analyst at Covenant Review said. An investor has to prove that the virus has had such a significant impact on the business that it will hamper its ability to repay the loan, or that it would have affected the lender’s decision to lend at all. What’s more, the weakening of investor protections in recent years has resulted in many large deals in Europe missing a MAC clause altogether, Gray said. For those that do have it, deals will have to be examined on a case by case basis. In the U.S., lenders’ options are even narrower. Bill Brady, a lawyer in Paul Hastings LLP’s special situations group and the head of its alternative lender and private debt group, said that over the past five or six years, the language has become scarce in U.S. financing documents. “As the market has been hot, most deals that get done don’t have a general MAC clause,” Brady said. Where the relevant language does still show up, he said, it’s just one in a list of statements an issuer attests to in order to receive additional financing.

In less than two weeks, the amount of distressed debt in the U.S. alone has doubled to a half-trillion dollars as the collapse of oil prices and the fallout from the coronavirus shutters entire industries, Bloomberg News reported. In all, U.S. corporate bonds that yield at least 10 percentage points above Treasuries, as well as loans that trade for less than 80 cents on the dollar, have swelled to $533 billion, data compiled by Bloomberg show. On March 6, the total was $214 billion. If you count all company debt globally, including loans to small- and mid-sized companies that rarely if ever trade, the distressed pile could top $1 trillion, estimates from UBS Group show. Currently, much of it comes from U.S. energy companies that have been pummeled by the all-out price war between Saudi Arabia and Russia. The capital-intensive industry, which financed its shale production largely through debt, is suddenly faced with the prospect of deep losses after oil plunged as low as $20 a barrel. Last month, it traded above $50. The amount of the oil and gas sector’s distressed debt now stands at over $128 billion.

With the market for short-term corporate debt seizing up in the U.S., some of the world’s biggest companies, including Exxon Mobil Corp. and PepsiCo Inc., turned back to the bond market to raise cash yesterday, Bloomberg News reported. In a sign of just how badly financial markets have been thrown out of whack by the coronavirus outbreak, yields on normally ultra-safe corporate debt maturing in as little as 30 days — known as commercial paper — have been surging faster than yields on bonds maturing in 10 years or more. The Federal Reserve announced steps to try to unlock the commercial paper market, but some borrowers opted not to wait for that to happen. Exxon moved forward with a five-part bond sale, while Pepsi is looking to price a $6.5 billion offering. Many of the issuers yesterday were planning to use the debt proceeds to refinance their commercial paper, which companies rely on to cover short-term financing needs like payroll. Usually investors require more compensation when lending on a longer-term basis, but the nearer-term risk of recession and rising defaults have cast doubt on some companies’ ability to finance day-to-day operations. Companies have issued less commercial paper as a result and have often resorted to drawing down credit lines instead.

Hedge-fund manager Solus Alternative Asset Management LP, known for its investment in retail chain Toys “R” Us, told investors this week that it is shutting its flagship fund and will restrict redemptions as it works to sell off holdings, WSJ Pro Bankruptcy reported. Solus is a frequent lender to distressed borrowers, with large holdings in energy companies, and its troubles come as market participants grapple with volatility and forced selling driven by a collapse in oil prices. The firm in the letter told investors it has received unexpected withdrawal requests this year and that the turbulence caused by the coronavirus has made it difficult to raise cash as it normally would to fulfill those requests by selling holdings. Investors in Solus have the ability under normal circumstances to withdraw funds on a quarterly basis, but the firm suspended such withdrawals in its flagship fund. Solus gave investors in its flagship fund the option of moving their money into two other funds, which are locked up for two years or more, according to the letter. For those who choose not to move their money into those funds, they will get their money back as quickly as the fund is able to sell off holdings and raise cash. Late last year, investors were seeking to pull out at least $100 million from the firm’s funds after two years of losses.

Troubled oil and gas companies may have a hard time persuading their bankers to keep extending credit as the outlook darkens for energy, potentially leading to more bankruptcies in the already-beleaguered sector, Bloomberg News reported. Lenders evaluate the value of oil reserves used as collateral for bank loans twice a year, a process that’s not likely to go well amid weak commodity prices, falling demand, shuttered capital markets and fears of coronavirus dampening global growth. Banks may cut their lending to cash-starved energy companies by 10 percent to 20 percent this spring, according to investors and analysts. “Things are so bad right now,” Shaia Hosseinzadeh, founder of OnyxPoint Global Management LP, an energy-focused investment firm, said in an interview. “The banks can kick the can down the road and say ‘there’s no point of pushing everybody into bankruptcy, we’ll wait until October.’... But if it’s business as usual, it’s going to be a horror show,” Hosseinzadeh said. Banks could use spring borrowing base conversations to limit their exposure to some of their more troubled borrowers, according to a Bloomberg Intelligence note. More than one-third of high-yield energy debt is trading at distressed levels. Oil and gas producers with bonds trading with double-digit yields include California Resources Corp., Range Resources Corp., Southwestern Energy Co., Antero Resources Corp., Comstock Resources Inc., Extraction Oil & Gas Inc. and Oasis Petroleum Inc. Read more. 

In related news, the House passed a roughly $8.3 billion emergency spending package for combating the coronavirus outbreak, sending the legislation to the Senate as lawmakers raced to respond to the quickly spreading outbreak. The bill provides more than $3 billion for developing treatments for the virus and allocates $2.2 billion for the Centers for Disease Control and Prevention to contain the outbreak, among other measures. Under the legislation, which the Senate will also likely pass this week, more than $1 billion will go overseas, while $20 million will be made available to fund administrative expenses for loans to U.S. small businesses. Read more. (Subscription required.) 

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Disgruntled investors, including hedge fund Aurelius Capital Management, have ignited a fresh legal battle over Nine West Holdings Inc. — a year after the retailer exited bankruptcy with different owners, a new name and less debt, Bloomberg News reported. The lawsuit is the creditors’ second case involving the footwear chain after their investments suffered losses of more than 80 percent. They sued Sycamore Partners last year, a case that was settled after Sycamore paid them $120 million to drop claims that its 2014 buyout rendered Nine West insolvent while enriching shareholders by over $1 billion. The new lawsuit target: executives at Nine West and its then-parent, Jones Group Inc., who worked with Sycamore to complete the buyout and shared in the windfall. They aren’t covered by the settlement over previous claims. “These directors and officers closed their eyes to the fact that the 2014 transaction would leave NWHI insolvent, inadequately capitalized, and unable to pay its debts,” said the complaint, filed Feb. 13 in U.S. District Court in Los Angeles. Sycamore’s takeover “enriched everyone involved except the company and its creditors.” The suit was brought by the trustee for a group of unsecured Nine West creditors and demands the payments the defendants collected, plus interest. The creditor group held junior debt at Nine West at the time of its bankruptcy and recovered as little as 12 cents on the dollar. Meanwhile, Sycamore earned a 250 percent return on its equity investment of $108 million and more than doubled its money on the entire 2014 transaction, according to calculations included in the lawsuit.

Fannie Mae and Freddie Mac’s existing shareholders shouldn’t expect a huge payday after the mortgage giants raise capital from new investors as part of a plan to free them from U.S. control, the companies’ chief regulator said yesterday, according to Bloomberg News. “The shareholders will be heavily diluted when we raise capital,” Federal Housing Finance Agency Director Mark Calabria said. “So at the end of the day I am not focused on whether there’s a windfall, because I don’t think there’s really going to be that big of a windfall.” He noted that the shareholders haven’t had a dividend in more than a decade. Calabria reiterated his view that investors should have been wiped out after Fannie and Freddie were seized by regulators during the 2008 financial crisis, and said that current shareholders could be wiped out in the future “were we to find ourselves in the situation where they’re insolvent again.” He said that when the time comes for the companies to go to the public markets to raise capital, it could result in the “largest equity offering ever.” FHFA is working with investment bank Houlihan Lokey to figure out specifics such as whether Fannie and Freddie would go to market at the same time or sequentially, he said.