Debt Exchange Offers in the Current Market

There has recently been an unprecedented level of debt exchange offer activity in the United States: nearly $30 billion was exchanged in 2008, compared with $15 billion in the previous 24 years combined, according to professor Edward Altman of NYU's Stern School of Business. See Dena Aubin, More Debt Exchanges Loom As Buyout Loans Come Due, REUTERS, Apr. 17, 2009. Such activity accelerated in December 2008, when eight of the 12 exchanges in 2008 occurred. See Vyvyan Tenorio, Debt Exchange Offers Expected to Rise, THEDEAL.COM, Jan. 30, 2009. During the first four months of 2009, at least 28 companies engaged in debt exchange offers and/or made arrangements with lenders to extend payments, repurchase debt at a discount or reissue debt on more favorable terms, in most cases at less than 50 cents on the dollar and a few close to 10 cents. See Matthew Sheahan, Bondholders Push Back on Exchanges, LEVERAGED FIN., May 6, 2009. This surge in activity is expected to continue into 2010, as various underlying market conditions persist ' i.e., an abundance of over-levered companies, tight credit markets, increasing default rates, bleak near-term earnings and revenue prospects, and depressed trading prices for speculative-grade corporate debt.

This article provides a brief overview of debt exchange offers, together with some observations on how current market conditions are driving the recent surge in such offers and influencing their terms and prospects for success.