Credit Markets in Transition: The Evolution of Liability Management

You're listening to All the Credit, a monthly podcast series brought to you by PGIM Fixed Income, an active global fixed income investment manager. Welcome to the podcast. I'm Brian Barnhurst, global head of credit research. Today's episode continues our look at the evolution of credit markets with a deep dive into liability management. I'm fortunate to be joined by two of our most seasoned investors focused on special situations and opportunistic credit, Brian Kelly and Rishib Khoury. Guys, welcome to the podcast. Good to be with you, Brian. Good to be here, Brian. In recent years, liability management has developed into a structural feature of global credit markets, particularly in The United States. Frequently pitting creditor asset classes against one another, the term LME itself is generally loosely applied as a sort of catchall for company and creditor activity in the stressed credit space. To kick us off, Ryan, help us level set about how we think about and define LME. So this is a phenomenon that's mostly occurring in the leveraged finance markets across US and Europe. So think of high yield in the broadly syndicated loan market. It's been around for quite some time. It's gotten a lot of attention over the last several years given the severity and sort of headline grabbing transactions that hit the media and the investor community. It can take many forms, but it essentially encompasses a transaction between borrowers and lenders, which is largely driven by the borrowers themselves who initiate conversations with their lenders and effectively try to incentivize them to change the terms of an already agreed upon credit document or a bond indenture. And, really, at the core of it, the borrowers are trying to get the lenders to sort of bend to their will and address a series of issues or complexities that they have within their capital structure. So really at the core of it, the goal is to deal with certain problems and complexities such as liquidity constraints, nearing maturities, especially when refinancing costs are high like they are today in a number of industries and capital structures, or to opportunistically reduce debt in a way that can help extend the life of the capital structure and really put the credit onto a better footing. I'll just add to that a bit, a little bit more context. Liability management is an action. It's a proactive action taken by a company. And why I say proactive is that company. And why I say proactive is that they don't have to do anything, but they choose to. And they're taking action that are, hopefully, gonna benefit their debt capital structure. And the goal of that is to either extend maturity, that liquidity, or reduce leverage, as Ryan said. They start with either the borrower where the borrower is coming to a group of lenders or a multiple group of lenders and creating competitive tension. These lenders could be in the capital structure, or they could be outside …