KKR’s Chilling Message about the “End of the Credit Cycle”

“Opportunities in Distressed Assets” as current investors get crushed

After seven years of “emergency” monetary policies that allowed companies to borrow cheaply even if they didn’t have the cash flow to service their debts, other than by borrowing even more, has created the beginnings of a tsunami of defaults.

The number of corporate defaults in the fourth quarter 2015 was the fifth highest on record. Three of the other four quarters were in 2009, during the Financial Crisis.

At stake? $8.2 trillion in corporate bonds outstanding, up 77% from ten years ago! On top of nearly $2 trillion in commercial and industrial loans outstanding, up over 100% from ten years ago. Debt everywhere!

Of these bonds, about $1.8 trillion are junk-rated, according to JP Morgan data. Standard & Poor’s warned that the average credit rating of US corporate borrowers, at “BB,” and thus in junk territory, hit a record low, even “below the average we recorded in the aftermath of the 2008-2009 credit crisis.”

The risks? A company with a credit rating of B- has a 1-in-10 chance of defaulting within 12 months!

In total, $4.1 trillion in bonds will mature over the next five years. If companies cannot get new funds at affordable rates, they might not be able to redeem their bonds. Even before then, some will run out of cash to make interest payments.

A bunch of these companies are outside the energy sector. They have viable businesses that throw off plenty of cash, but not enough cash to service their mountains of debts! Among them are brick-and-mortar retailers that have been bought out by private equity firms and have since been loaded up with debt. And they include over-indebted companies like iHeart Communications, Sprint, or Univsion.

The “end of the credit cycle” has dawned upon the markets. As credit tightens, companies that can’t service their debts from operating cash flows may be denied new credit with which to service existing debts. The recipe of new creditors’ bailing out existing creditors worked like a charm for the past seven years. But it isn’t working so well anymore.

What follows is a debt restructuring — either in bankruptcy court or otherwise.

Money is now piling up in funds run by private equity firms, to be deployed at the right moment to profit from this. But not by playing the entire market, or to bail out existing investors. No way. This money will be deployed at the expense of existing investors.

One of the biggest players is PE firm KKR, which just raised $3.35 billion to take advantage of opportunities in “distressed assets.” Existing investors, brace yourself!

Few PE firms have lost as much money in energy as KKR. It masterminded the largest LBO of all times, the $44-billion buyout in 2007 of TXU, which went bankrupt in April 2014 with $50 billion in debts. And its $7-billion buyout of natural gas driller Samson Resources ended up in bankruptcy last year. These two deals combined have cost KKR about $5 billion.

This may be why KKR  is still a little shy about energy.

Jamie Weinstein, member of KKR’s credit portfolio management committee, told Bloomberg in the interview below that he was not ready to dive into the massively distressed assets of the energy sector. It’s “too early,” he said. The crushed prices aren’t nearly crushed enough!

And yet, despite the soaring defaults in corporate America, it’s just the beginning in this “life cycle of increasing defaults,” he said.

A PE firm is not a humanitarian non-profit. It’s not trying to help out prior investors. Prior investors – bondholders and shareholders alike — are going to lose their shirts once KKR gets in on top of them in the capital structure of the company and lead it into, or out of, a debt restructuring in order to, as he puts it, “unlock” the company.

KKR isn’t the only PE firm lusting for these opportunities. A lot of wealth is going to get transferred at the end of this credit cycle.

A fascinating, chilling interview. Just 5 min. You might see an ad at the beginning, Bloomberg’s way of making a buck. But the interview is worth the wait.

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  25 comments for “KKR’s Chilling Message about the “End of the Credit Cycle”

  1. Petunia says:

    All the debts that were restructured were also increased to take advantage of the increased leverage possible with the lower interest rates. When they talk about all the debt that was restructured at lower interest, they always forget to mention they took more cash out too. All they did was keep the same payment and increase the debt load. Now that incomes are down for everybody they are sinking fast. I wonder if they will do a post mortem on where all the extra money went (buybacks, buyouts, bonuses) and whether it was worth it. A company by company look would be interesting.

    • OutLookingIn says:

      Yes. Very interesting!

      The priorities were buybacks – improving the balance sheets on paper, therefore improving C suite bonuses. All with the mindset of short term gain and forget about the long term all together!

      The “vultures” are circling. The so-called “smart” money crowd, are pooling up (KKR) into flocks of vultures, getting ready to swoop down and grab assets for pennies on the dollar.

      The first rule of economics is; All debt will be paid.
      Either with dollars worth pennies, or with pennies worth dollars.

  2. michael says:

    “It will spread into the broader economy over time..”

    A brilliant statement for a firm in the business of catching a falling knife.

  3. Islander says:

    A similar trend may unfold in biotech if the bubble doesn’t reinflate. Lots of interesting science out there that’s ripe for some consolidation. My favorite is DSCO, a thirty year old company with incredible potential to save costs for premie baby treatment (they have an inhaleable lung surfactant), but a just as long history of mismanagement. The point is, there are starting to be bargains out there again.

    • polecat says:

      These ALL sound like the rich mans’ version of a dogey home loan refi…on steroids !!

      Smart money eh…….as in “ouch..that smarts”

      • alexaisback says:

        Definition. Smart Money.
        Able to take a high risk fully backed by the taxpayers.
        And that is all we have here, the shock of my life I never
        understood I was so naive, that not only in 2008 would
        taxpayers bail out corporation after corporation,
        in 2016, not even 10 years later, they are on the hook again.

  4. ERG says:

    The ‘credit cycle’ ends the moment debits exceed credits. By that measure we’ve been circling the airport and dumping fuel for some time now…

    • CrazyCooter says:

      Then Yellen better start making a lot of “rights”!



  5. Merlin says:

    Barbarians at the Gate. ’nuff said.

    • walter map says:

      O ye of little faith. RJR Nabisco worked out, didn’t it? Like I said, so long as Jonathan Pryce is still running the show you have nothing to worry about, so long as he doesn’t run out of James Garners.

  6. Mark says:

    Why we should take KKR talk as merit of something to come.
    They lost so much money it is even shame to talk about.
    Just bunch of dumb asses wrapped in expensive suits.
    Invest in yourself and use your own head.

    • walter map says:

      “Invest in yourself and use your own head.”

      A recipe for disaster for most people. Hence investment markets.

  7. Spencer says:

    Thank you Jamie for confirming my sitting out, on the 50 yard line, on my shiny as being the play of the game.

  8. Bead says:

    Hedge burn off, over the cliff. So I wonder which chumps are waiting to be bowled over. Can they call the Fed for another splash of QE?

  9. Ptb says:

    They got caught on the wrong side and now recognize the trend. Replenished their war chest and are now waiting for the trend to get momentum. Cash in on defaults. Keep your powder dry, it’s coming. KKR has been around a long time and they usually are pretty good bargain shoppers. Hey , they make mistakes too, but are not too proud to reverse a direction.

  10. Tim says:

    C & I loans need to come down, and the commercial paper market will freeze up, then it will be really serious. When commercial paper freezes up, the Fed will step in, and people will find out that the Fed is never out of bullets.

    • walter map says:

      “people will find out that the Fed is never out of bullets.”

      When all you have is monetary policy everything looks like a liquidity problem. Even when it should be obvious to anybody that the problems with the economy have nothing to do with interest rates being too high or banksters not having enough money.

      • Tim says:

        Fed officials say directly that fiscal actions need to be taken. They don’t see everything as just a liquidity problem. Congress won’t step up to the plate.

        • walter map says:

          “Fed officials say directly that fiscal actions need to be taken.”

          Feeling the Bern a bit, are they? Just goes to show that even banksters can be Keynesians once their backs are to the wall and their policies under water.

          “Congress won’t step up to the plate.”

          Pubs insist Reaganomics just needs more time to work. And miilitary Keynesianims doesn’t count.

        • Tim says:

          The Fed has done a lot of things wrong over time in my opinion, and created a big mess, but supporting the commercial paper market in troubled times is not one of them. Fed speak about fiscal actions goes back a long way, not got much to with Sanders. Various components of fiscal policy predate Keynes. He didn’t single-handedly create fiscal policy. Their backs to the wall???

  11. TheDona says:

    The unloading to service debt is starting to happen at a pretty quick pace. Glencore is on a “Doomsday Scenario” to sell assets to stay alive. The Canadian Pension Investment just bought 40% of Glencore ag business. They are talking about unloading another 20%. Also on the block are a lot of mines and infrastructure.

    Macy’s is on a mission to unlock value of their real estate. Macy’s Inc. named Four Corners Property Trust Inc. chief executive officer Bill Lenehan to its board, enlisting a real estate expert to help the chain figure out what to do with its properties. Macy’s is looking to sell portions of its flagship stores in Manhattan, San Francisco, Chicago and Minneapolis, as well as mall-based properties.

    I believe it was Gengis Khan who originally coined the phrase “unlock value.” ;-)

    • walter map says:

      ‘I believe it was Gengis Khan who originally coined the phrase “unlock value.”’

      How does that compare to “asset stripping”?

      And just how many KKRs would it take to liquidate the U.S. economy? Progress seems slower than expected here.

  12. Chris says:

    I believe what we are seeing is not companies that simply took advantage of cheap money as a means to grow their business. I suspect that many of these companies borrowed this money as a substitute for true growth in their business. They were buying time waiting for the economy to rebound. The problem is that the economy never did rebound, did it? Now, they have run out of time and money. The vultures are circling.

  13. Professorlocknload says:

    The credit cycle ends when folks no longer accept dollars,,,the Federal Reserve Note being the ultimate security (bond?)

Comments are closed.