LAS VEGAS -- Private-equity-backed companies with strong credit profiles are generally on the sidelines of the financing markets, hoping that the continuing stabilization of the credit markets will save them money on refinancing transactions.

But that could turn out to be a mistake if a coming tsunami of maturing revolvers and other loans sparks an even deeper liquidity crisis in 2011, 2012, and 2013, said panelists on a State of the Senior Debt Markets panel at the ACG Intergrowth conference here Wednesday.

Exacerbating these liquidity problems, capital from the “shadow banking” system is unlikely to return in volume in the near future.

New CDO and CLO issuance has ground to a halt, and while existing CLOs and CDOs have some liquidity from repayments and buybacks, those funds have generally been deployed on heavily-discounted deals in the secondary market, rather than new-issues sold close to par.
“It makes more sense for us to buy in the secondary, rather than entertain new issues, unless they’re bulletproof,” said CLO manager Alexander Wright, a managing director at GSC Group.

And even that source of liquidity could be fleeting, the panelists said, as CDO reinvestment periods expire, requiring managers to apply excess cash to paying down the triple-A tranches in their deals.

For those companies that are unable to qualify for credit in the current market, the lenders are looking to the private-equity sponsors for equity infusions and strongly value transparency and open communications from the sponsors and management teams.

However, Allied Capital's Kevin Braddish, a managing director at the firm, noted a disconnect between the interests of lenders and rating agencies in the case of debt buybacks.

He cited that buybacks can trigger automatic downgrades that are particularly harmful to CLO managers, even if they represent a “quasi-equity infusion” that can reduce the company’s leverage.

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