Comment by: . Posted 14 years ago [2009-10-09 12:32:05]

I agree completely with the article's observation that senior lenders are not behaving as they have in past cycles. I disagree, however, with some of the conclusions reached as to why. As I recall there were "many lenders" to Macy's back in 1990 (1991?), so many in fact that they used to hold two bank meetings to accommodate them all. I recall other restructurings being equally crowded. Also managements & sponsors in denial about their prospects for recovery are certainly not new. (In fact, I believe the sponsors and managements are starting to realize the weakness in secured lender groups and are taking advantage). I think the main difference is that the CLO model is based on credit risk being actuarial not fundamental to individual credits. As such, the resource allocation is very different for CLOs and Mutual Funds than the banks of the 1980s and 1990s. Not many CLOs have true workout capability (some would credibly argue none do). The few that do are overextended. Worse, they are left to deal with the remaining lenders who haven't a clue what their secured rights are or how to enforce them. This cycle is also affected (for the better and worse) by the improvement in leveraged loan trading liquidity. Better in that investors can more easily trade their problem loans than in the 1980s, worse in that when there was much less liquidity lenders (and companies) were forced to workout their problems. I fear that the workout skills learned in the post Drexel correction are gone forever. Another difference this time around is that the banks are truly in moving not storage - once they distribute a loan they have no economic incentive to lead restructurings the way they were lead back in the day. Given the most recent bubble they clearly don't fear reputation risk anymore either (that is a shame and will certainly cost the industry as Washington determines regulation over the next decade). The solution (and I acknowledge it is far less than ideal) is to pay agents (even bring in new agents) and steering committees for successful outcomes (of course not by the hour!). BT used to charge restructuring fees back in the day. If steering committee members thought they helped with the work load they would negotiate for a share. If the lenders thought BT didn't earn their fee they voted it out of the plans. I wish the natural incentives filled the vacuum noted by the author, but at the moment they do not and I agree - the result is too many substandard restructuring outcomes for the secured lenders.

Comment by: Anonymous. Posted 14 years ago [2009-10-02 12:33:15]

1) Steering Committee members should not be paid. It gives them the incentive to make the process drag on indefinitely. 2) It is truly sad that people still care about the equity sponsors approval. It is like Stockholm syndrome. 3) Do your job. get your investors money back.