Crises reveal the truth (about lawyers and handshakes)
It is already the end of March and we are deep into this unprecedented crisis and the lockdown. In this post I want to revisit when the high yield bond market in London shut down, when I realized there was a serious crisis, and briefly touch upon what market participants are worrying about right now.
When did the high yield bond market in London shut down?
The last issuer that went to market in European high yield was Fugro NV, a geo-data specialist, on February 21. The deal was pulled a couple of days later and the high yield market has shown no sign of life since then.
The market shutdown followed record issuances in January and February. Pricing at the time was acceptable, not extraordinary, yet people rushed to the markets since there seemed to be an unsatisfiable hunger for bonds issued by corporates of even relatively weak credit. For lawyers that meant to produce the relevant documentation to clients’ satisfaction, under high pressure and on very tight timelines.
I was working on one of those deals, hopeful to jump into a market window on Monday, February 24 and then shortly thereafter go off for a spring vacation to Portugal. Yet, on that Monday the news was that Japan and other Asian markets had opened weak, both in debt and equities. The next day the news was that the U.S. had closed very weak. Every morning that week we had a go/no-go call in the hopes that the previous weeks’ market window would re-open.
Already on Friday, February 21, the news was that the S&P 500 had fallen more than 10% from its record high in just that one week. That was its quickest plunge in absolute terms in history. I knew this meant balance sheets of all sorts of funds and other players in the economy were under enormous pressure. Yet I did not connect the dots right away.
When did I realize that there was a serious crisis?
In the evening of March 8 I was scrolling through Twitter to read what friends had written in celebration and in reminder of International Women’s Day, when I stumbled upon a Tweet from an admired Brazilian economist that gave me the wake-up call that this was a 2008-type of a crisis. The comment on the 30% oil price crash was, “Tighten your belts, the week is off to a difficult start for our economy.”
The next day the US Treasuries market went nuts and we saw two weeks in which markets barely functioned.
What did my week look like? Monday, March 9, was kind of a quiet day. Not much news from clients—especially not at the senior level, very few calls only. Office was unusually quiet. Tuesday, March 10, some Italian transactions were put on hold. Wednesday, March 11, it became clear that there would be at least a temporary business interruption as governments in Austria, France and Spain were about to impose serious measures given the rapid spread of C-19. Thursday, March 12, clients cancelled coffees, lunches, dinners and drinks openly citing C-19 as the reason for the cancellations. That day, it became collective awareness that the public markets would remain shut for a while.
What are market participants worrying about right now?
By way of anecdotal evidence, some face pressing liquidity needs as revenues are declining. They want to exercise drawing rights under existing credit facilities. Others are worried about no longer being able to comply with the terms of (some of) their outstanding financings, which could ultimately lead to them losing control over their business to creditors. Again others would like to understand how to take advantage of newly announced government loan/guarantee programs and whether that would allow them to still comply with the terms of their outstanding financings.
The answers to the above questions reveal at least two things.
First, lawyers can be quite slow in realizing market shifts although we are usually in a position to gather evidence from various transactions and jurisdictions in real time.
Second, a certain type of legal advice is in high demand during times of crisis. It now becomes evident that what used to be a deal struck with a handshake or two is actually a complex legal arrangement coded in (small-printed) law.
Maria C. Schweinberger