Wall Street faces a cruel winter as pandemic debt falls due – New York Post | Jewelry Dukan

One banker recently told me that CEOs “had to do something very special to go bankrupt” in recent years as the government pumped massive liquidity into the market on top of pandemic handouts.

That’s changing now, potentially quickly, as the Fed hikes interest rates and shrinks the size of its balance sheet.

A cruel winter is likely for Wall Street as markets remain choppy and its biggest customers dwindle. Traditional deals such as IPOs have declined significantly. At every major investment house, management is quietly planning layoffs (and some, like Goldman Sachs, not so quietly).

One area of ​​potential growth: Wall Street’s restructuring departments. They are looking to expand to advise companies that are so burdened with debt that they need to sell property or “restructure” in Chapter 11 bankruptcy.

recession is imminent

Sources tell me that investment bank Morgan Stanley is considering a major expansion of its restructuring team (Morgan Stanley wouldn’t deny the matter). Other banks are likely to follow, as none of this is really rocket science.

Other big companies are likely to follow Morgan Stanley's move.
James Gorman, CEO and chairman of Morgan Stanley, is reportedly considering a major expansion of his restructuring team.

If you think the Fed needs to hike rates sharply (which it is, given the latest inflation numbers), the economy will suffer. recession is imminent. The likelihood is that some segments of America’s businesses have taken on cheap debt and will need help to avoid bankruptcy — or find a way out. This is going to be big business for Wall Street.

The easing of the credit cycle toward tighter lending standards is always pretty tough on corporate balance sheets, but this time it could be particularly brutal given the past two years’ monetary experimentation — and corporate debt binge — bankers tell me.

Since the pandemic, even the hardest hit companies have had access to credit. So-called leveraged deal-making exploded. M&A often relied heavily on credit because the Fed provided so much easy money that banks were practically giving credit away.

What goes up ultimately comes down on Wall Street. The easy money of the early 2000s paved the way for the 2007-2008 financial crisis with mortgage debt at the center of deleveraging.

The easy money of the pandemic economy has prompted similar risk-taking among companies and investors. A relaxation is guaranteed, even if it is still unclear whether it will reach such catastrophic proportions.

Share prices have continued to fall in recent months.
In recent years, the government has pumped massive amounts of liquidity into the market.
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Consider the over $1.4 trillion leveraged loan market, which includes loans from the most leveraged companies. That debt has doubled in just seven years. Worse still, most of the market lends to the riskiest loans. “Junk” loans now make up more than 28% of those loans, according to Morningstar’s data trackers.

You see what I’m getting at: As interest rates continue to rise, it becomes more difficult — perhaps even impossible — for these borrowers to refinance debt. Profit margins (when companies are profitable) will be squeezed as the economy slows. This Gordian knot leads to lower stock prices, layoffs, etc. Companies dump assets and file for Chapter 11. Bondholders become owners of parts of the American company because they have a lien on deteriorating assets, which means losses for big money managers and annuities.

In the midst of this mess, the restructuring departments of the big banks will act in an advisory capacity and earn fees for their time.

The good news

Some caveats about the Doom and Gloom scenario. Restructuring is beginning to bounce back (see Revlon and Bad Bath & Beyond), but it’s not dominating the headlines as default rates remain low. The St. Louis Fed’s index of all commercial bank loan defaults is well below the highs reached shortly after the banking crisis.

But bankers say trouble looms as credit conditions run out and so-called balloon principal payments come due. Those big numbers start next year, when more than $200 billion in leveraged loans need to be refinanced, and will increase by multiples annually until around $1 trillion is due by 2028, one banker tells me.

That’s a lot of debt to refinance amid tightening credit conditions. It’s a recipe for a recession, but also for money to be made from restructuring Wall Street businesses.

inflationary spiral

As bad as inflation is, there’s a good chance it’s going to get a lot worse. A serious nightmare scenario is beginning to circulate among Wall Street’s top investors.

It began with BlackRock CEO Larry Fink’s somber assessment, detailed in this column last week, that the Biden administration had fueled significant inflation through reckless spending. It’s now almost impossible for the Fed to “soft-land” the economy with inflation at 8.3%.

But it could get worse. Global droughts and the ongoing war in Ukraine are leading to falling crop yields and higher food prices. Gas prices could fall, but the government seems determined to keep them high by canceling drilling permits. As workers demand higher wages (and the railroad workers got one last week by threatening to go on strike), Fed Chair Jerome Powell is raising rates until the economy crashes.

Dark stuff some pundits dispute, many of the same geniuses who said inflation was “temporary”.

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