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Wall Street Caves to Companies’ Demands to Stave Off Defaults

April 16, 2020, 10:00 AM

Wall Street banks are lending billions of dollars to desperate companies these days, like hotelier Marriott International and concert producer Live Nation Entertainment.

Now, a host of those companies are turning around and asking the banks to waive or loosen financial markers that help ensure the debt will be paid back. And for the most part, the banks, from JPMorgan Chase & Co. to Wells Fargo & Co., are obliging them because they would otherwise risk triggering a wave of defaults that would swell their loan losses from the pandemic and eat into their capital.

“Borrowers are effectively asking lenders to forget 2020,” said Valerie Potenza, head of high yield research at Xtract Research. “If lenders don’t waive covenants, there are going to be defaults. And it’s not just one borrower, it’s many borrowers across many industries.”

The waivers involve borrowing lines called revolving credit facilities, which companies typically obtain from banks and then draw down as needed. As the virus shuttered a broad swath of the economy, companies have drawn about $216 billion from the credit lines, according to data compiled by Bloomberg.

These loans typically include so-called covenants that require borrowers to maintain certain metrics, such as the ratio of debt to earnings. They usually kick in when a company has drawn down some 30% of the revolving loan.

But with earnings and cash flow drying up, these companies are sometimes unable to get anywhere near the financial tests. So the benchmarks have been effectively thrown out, suspended or rewritten to make it easier for them to avoid a technical default. In some cases, banks are allowing companies to use questionable accounting numbers for the new metrics.

In return for the reprieves, the lending banks often extract higher interest rates, additional fees or other concessions. In an oddity of the situation, banks hold significant control over their borrowers’ destiny even though the revolving loans are often far smaller than the rest of the company’s total debt. That’s because the loans contain performance covenants while bonds and term loans typically do not.

Marriott Revenue

JPMorgan declined to comment while Wells Fargo said in a statement, “We continue to support the needs of our customers during these unprecedented times, however we cannot speak to specific customer relationships or deals.”

Marriott expects revenue per available room to fall 60% in March, which has already led to employee furloughs and closed hotels. Holding a fully drawn $4.5 billion revolving loan, it sought and won approval to waive a leverage requirement that had to be met each quarter.

In exchange for the waiver, which runs through the end of the first quarter next year, it will pay a higher interest rate and fees to banks including Bank of America Corp. and Deutsche Bank AG, Marriott said on Tuesday. The world’s largest hotel chain also raised a separate $1.5 billion revolver line and a $1.6 billion of bonds to help ride out cratering travel demand.

Gaming supplier Everi Holdings Inc. is in the process of seeking a waiver of its $35 million revolver following a drop in revenue to near zero with casinos shuttered, according to documents seen by Bloomberg News. Everi asked Jeffries Finance Group Inc. to suspend a leverage test through the period ending March 31, 2021. For the period through the end of March and the two following quarters, it would base the ratio calculation off of an amended version of Ebitda.

Phantom Earnings

Everi isn’t the only company that banks are allowing to effectively redefine how a key measure of earnings is determined. Live Nation, which had ceased all concert activity by mid-March, and Mednax Inc., a health-services provider, have struck similar agreements with lenders.

In some cases, according to Vince Pisano, a senior analyst at Xtract Research, borrowers are including phantom earnings that have been lost from the virus in their Ebitda calculations. The practice of inflating Ebitda with non-realized gains, known as “add-backs,” has been criticized for years for enabling businesses to pile on more debt than they should.

“Companies already have too much leeway to play games with Ebitda,” Pisano said. That makes a waiver of financial covenants for the next three quarters a preferred option, rather than tweaking them in dubious ways, he said.

Even if borrowers do breach covenants, the banks, which comprise the majority of revolver lenders, will probably be accommodating in the early stages of the virus crisis, said Todd Koretzky, a leveraged finance and private debt partner at Allen & Overy LLP in New York.

“There may be a reputational impact from being one of the first to pull the trigger,” he said. Instead, “we will likely see a wave of forbearance and restructuring negotiations in the coming months.”

To contact the reporters on this story:
Sally Bakewell in New York at;
Lisa Lee in New York at

To contact the editors responsible for this story:
Natalie Harrison at

Larry Reibstein, Michael B. Marois

© 2020 Bloomberg L.P. All rights reserved. Used with permission.

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