Tag: finance

Countries

US corporate default tally in 2023 was highest since pandemic, with more to come this year

AtlanticIS

United States, January 31, 2024

  • Elevated defaults point to rising tide in early 2024 before easing by year-end. Nonfinancial corporate family defaults nearly tripled to 92 in 2023 from 31 in 2022, the highest annual default tally since 2020. Our 12-month trailing issuer-weighted default rate wrapped the year at 5.6%, and is set to peak at 5.8% in early 2024, before slowly reverting to its historic average by June 2024 and then moderating further to around 4% by year-end. Although Q.o.Q. defaults were unchanged at 20 in Q4, levels remain elevated.
  • Private equity (PE) backed companies lead Q4 defaults. In contrast to public counterparts, defaulted PE-owned companies affected more loans than bonds, with about $7.8 billion versus $5.0 billion, respectively. Given the high incidence of senior secured loan-only LBOs among distressed issuers, leveraged loans will continue to experience higher defaults than high yield bonds. Majority of Q4 DEs involved amend-and-extend transactions, including loan maturity extensions, interest rate conversions to PIK.
  • Half of Q4 defaults were repeat defaulters, with 70% of these having a PE backer. Most re-defaulters were companies which completed at least one round of DEs in the past, followed by another out-of-court restructuring during the last three months of the year. Many were companies which had undergone one or two rounds of DEs previously and ultimately sought Chapter 11 protection or missed debt payments. We expect this trend to persist through most of next year, as the default rate is set to remain above average through the first half of the year.
  • Media sector stood out in Q4 with three defaults, completed as distressed exchanges (DEs) . However, the total defaulted debt for this group was small relative to the largest defaults in the telecommunications, retail, services, healthcare and packaging sectors. Looking ahead, the telecommunications and durable consumer goods sectors will face the highest default rates projected for 2024.
  • Credit risks remain high for lower-rated segment of spec-grade universe. The distressed subset of the B3N List, Caa2-PD and lower rated companies rose to 97, up from 87 in the previous quarter and 82 a year earlier. Many of these weaker private companies will succumb to default as liquidity conditions for those in the leveraged loan market deteriorates in the months ahead.

Credit Outlook: 1 February 2024. Pg. 35
Moody’s Investors Service

Corporates

Gol files for Chapter 11, a credit negative for Abra and certain ABS deals, neutral for Avianca

AtlanticIS

Brazil, January 25, 2024 – Gol Linhas Aereas Inteligentes S.A. (Ca negative) filed for voluntary protection under the US Chapter 11 financial reorganization process. Gol’s reorganization process increases liquidity risks for its parent company, Abra Group Limited (Caa3 negative), and the possibility of rental cash flow disruption for certain asset-backed securities (ABS) deals with significant exposure to aircraft leased to Gol.

As part of the filing for Chapter 11, Gol was granted an automatic stay for all debt obligations, including the secured notes due 2028, which are the main source of cash to Abra to cover its own interest payments. The uncertainties regarding the continuity of interest payments and management fees from Gol to Abra increase Abra’s credit risk and could lead to liquidity squeezes, which led us to downgrade Abra’s ratings to Caa3 from Caa1.

At the end of January 2024, Abra had $86 million in cash. Abra’s main source of cash relates to the cash payments from Gol’s secured notes due 2028, and management fees from Gol and Avianca Group International Limited (B2 stable), which provides coverage for the cash interest payment at Abra. We estimate that Abra’s sources of cash excluding the payments from Gol cover its cash interest expense by only 0.4x-0.5x, compared with 1.5x-2x with Gol’s interest payments and management fees. Abra’s main cash outflows relate to its notes interest payments ($60 million-$70 million per year) and annual expenses at the holding level of approximately $20 million per year. With this liquidity profile, Abra could absorb up to two years with no cash inflow from Gol before consuming all of its cash position and potentially entering into a debt restructure with its own creditors.

Gol secured $950 million in a debtor-in-possession (DIP) financing to continue operating during the reorganization process, granted by creditors of Abra. The DIP could lead to continued interest payments for Abra, however the final decision is subject to court hearings as part of Gol’s reorganization process. Before Gol filed for Chapter 11, Abra signed a forbearance agreement with its creditors to avoid the exercise of the rights and remedies with respect to specified defaults as a result of Gol’s filing.

Under Chapter 11, Gol will continue renewing its fleet, returning older aircraft that are grounded and receiving new-generation aircraft. The airline will maintain the timetable to receive new aircraft that were delayed in 2023 and ones that are scheduled for delivery in 2024.

Out of the eight aircraft lease ABS that we have rated since 2021, five have exposure to aircraft1 leased to Gol. These transactions benefit from lessee diversity, with exposure to Gol in these transactions ranging from approximately 2% to 22% of the most recently reported adjusted base value. Certain ABS deals may experience some fluctuations in rent cash flow collections in the coming months as Gol undergoes reorganization. However, liquidity facilities, performance triggers, and deleveraging among other structural features, will help shield senior bondholders from risk. In the event that lease negotiations fail2, deals will likely lose rent cash flow related to the Gol lease until lessors can repossess and re-lease or sell these aircraft. Given the current aircraft shortage in the market, lessors could potentially release these aircraft at favorable lease rates or sell for a premium with shorter downtime.

For Avianca, the potential contagion channels of Gol’s filing for Chapter 11 are contained. Avianca’s post-bankruptcy exit financing contains restrictive covenants, including, among others, debt incurrence limitations, limitations on restricted payments and investments and limitations on related party transactions. Pursuant to the covenants, Avianca’s ability to distribute cash or lend funds to Abra would be very limited. These restrictions serve to insulate Avianca from the financial distress of Gol or any contagion effect on Abra.

The Chapter 11 filing is a result of an accumulated cash burn and high financial leverage for Gol derived from high interest rates, the grounding of the Boeing MAX aircraft in 2019 and the pandemic, which led to weakening liquidity. We downgraded Gol’s ratings to Ca to reflect our view of some prospect for recovery for existing secured and unsecured creditors and will subsequently withdraw the rating. With the Chapter 11, Gol expects to strengthen its financial position, while maintaining the current size of its operations.

Credit Outlook: 1 February 2024. Pg. 6
Moody’s Investors Service