When a Bank Says No, Companies Will Look Here Instead

More financially strapped businesses are turning to nontraditional lenders. But that might not prevent a wave of defaults when the next recession strikes... [Stansberry Research Logo] Delivering World-Class Financial Research Since 1999 [DailyWealth] Editor's note: Many distressed companies are looking to nontraditional lenders for help. But according to Martin Fridson, "the dean of high-yield debt" and Porter & Co.'s director of Distressed Investing, only time will tell if these lenders can help stave off a wave of defaults. In this excerpt – adapted from a recent issue of Distressed Investing, published by Porter & Co. – Marty explains the current credit environment. And he warns that alternative lenders might not have all the answers... --------------------------------------------------------------- When a Bank Says No, Companies Will Look Here Instead By Martin Fridson, director of Distressed Investing, Porter & Co. --------------------------------------------------------------- A new buzzword is swirling around the market today. And it explains the low number of recent bond defaults... I'm talking about "liability management." This term essentially refers to the practices that explain why corporate bond defaults have remained low – so far – since the 2020 mini-recession. Now, a big question is whether liability management will continue to keep a lid on defaults when the U.S. economy eventually hits a rough patch. As I'll detail today, more distressed companies are turning to one alternative lending option. But it may not "fix" our current credit worries... --------------------------------------------------------------- Recommended Links: ['I Haven't Seen These Warning Signals Since 2007 – Watch Out']( Porter Stansberry correctly predicted the 1998 emerging-market crisis, the 2008 financial crash, the loss of America's AAA credit rating, and the recent banking collapses. Now, he's stepping forward with an urgent financial warning that goes directly against the establishment's narrative. If you have any money invested in the stock market, you could be blindsided. Until tomorrow, get Porter's exact game plan to prepare, [right here](. --------------------------------------------------------------- [Former Goldman Sachs Vice President Reveals Mysterious 'Gold Bank' With Huge Upside Potential]( One analyst says the gains in this trade should be far greater than with just bullion or mining stocks. Some folks had the chance to see 995% gains the last time we shared this exact "gold bank." But most people know nothing about it (except the rich and elite). [See his free reveal right here](. --------------------------------------------------------------- In the 12 months through March 2024, credit-rating agency Moody's reported a 3.51% speculative-grade bond-default rate. That's way down from the most recent peak of 8.94% in January 2021 and slightly lower than a 4.03% median over the past 40 years. That figure is unusually low today, despite the sharp rise in interest rates (beginning in 2022) that's currently squeezing corporate borrowers. Take a look... The Secured Overnight Financing Rate ("SOFR"), which is used as a benchmark on many floating-rate loans, soared from 0.01% in March 2021 to 5.34% in March 2024. Borrowers pay a premium yield over SOFR. And the higher their credit risk, the bigger the premium. When rates were at rock bottom following the great financial crisis, borrowers had a lot of power to set up loan agreements in their own favor. Financially sound corporate borrowers were able to dictate terms to banks, which were aggressively competing for their business. Now, the power to write the rules has shifted to lenders. With interest rates up sharply over the past two years, it's harder to know if some companies will make good on their obligations. So banks are getting pickier. When debts come due, borrowers won't get the favorable terms they got the last time around. Companies that can't meet the new, stricter standards will face defaulting. But there is an alternative... That's where liability management comes in. Financially strapped companies that have been turned down by the banks will go to a lender outside their existing bank group to push out the date they'll run out of money. The new lender agrees to infuse cash, subordinating the company's existing loan with a new loan of lesser face value. In exchange, the new lender gets a higher position in the company's capital stack than the existing bank lenders. This preferred position means the new lender's principal is better protected than the incumbent lenders' principal should the company default. To create agreeable terms for the new lender, the borrower's suppliers of goods and services may ease up on their payment terms. Of course, the existing lenders don't like having someone else getting paid before them. And so a new round of loan jockeying begins. The incumbent banks may agree to relax some restrictions on the existing loan, cutting the "third party" lender out of the picture... or not. Liability management has led to the dramatic rise of another important development in the past few years: private credit. Nonbank direct lenders, which traditionally concentrate on small-to-medium enterprises, are now playing in the big leagues. They provide credit to companies that are large enough to access the high-yield bond markets. Now, they don't always represent the best borrowing option... but they're able to act very quickly when a troubled borrower is more interested in timing than terms. So far, liability management has enabled companies in a crunch to sidestep trouble. It remains to be seen whether these new, nontraditional direct lenders will have the risk tolerance – and financial resources – to prevent companies from defaulting when a recession takes shape. At that point, the private-credit companies themselves may be strained under the weight of bad loans. If they can't provide a lifeline, many distressed companies will default, just as they have in past cyclical troughs. This time may not be so different after all. Regards, Martin Fridson --------------------------------------------------------------- Editor's note: Our founder Porter Stansberry sees a rare type of crisis looming – a financial split set in motion by years of near-zero interest rates. This goes directly against the establishment's narrative... But if you're positioned on the right side of what's coming, it could lead to a once-in-a-lifetime window of opportunity. That's why Porter is stepping forward to help you prepare for – and capitalize on – this coming crisis... thanks to a little-known strategy that can deliver equity-like returns with far less risk. [Click here to learn the details](. Further Reading No one is talking about a "ticking time bomb" in the corporate-bond market. But it's something all investors – especially retirees – should be aware of this year. Here's what you need to know to better protect your portfolio... [Read more here](. Recent inflation data caused a wave of fear in the markets. And some folks are already heading for the hills. But the recent panic-selling could lead to hidden buying opportunities... 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