Chicago -- Despite the federal government’s unprecedented priming of the lending pump, most turnaround professionals see scant evidence that troubled businesses are getting the financial flow needed to survive the recession.
Only 2 percent of 395 respondents to the Turnaround Management Association’s Annual Trend Watch Credit Poll think business credit is more available this year compared to a year ago, and of those, 45 percent cited refinancings with existing lenders as evidence. The 12 percent jump in that category over last year’s 33 percent of responses hardly reflects a change in tide, however.
“Some banks are a little more patient with some of their troubled credits than they would be normally because no other sources of financing are available,” said William Hass, CEO and chairman of TeamWork Technologies Inc. in Northbrook, Illinois.
Almost half the respondents (46 percent) expect high-yield default rates to reach the 12 to 15 percent range this year. Those results coincide with last year’s TMA poll findings in which nearly seven in 10 said high-yield default rates would spike above 10 percent in three years. Corporate finance expert and TMA Academic Advisory Council Co-Chair Edward Altman Ph.D., who teaches at the New York University Stern School of Business, forecasts a rate above 13 percent by the end of 2009.
“The credit crunch is being exacerbated not only by the lack of availability of credit but also by the lack of borrowing capacity of companies needing credit,” said TMA Chairman Arthur Perkins, co-head of the West Region Restructuring Practice of Deloitte Financial Advisory Services LLP in San Francisco. “Companies levered up so much, including their junior secured [debt], that there’s not much left to leverage with declining asset values and revenues.”
Similar to last year’s findings, three quarters of those polled said lenders are imposing more restrictive loan covenants, and about 70 percent said lenders require greater conditions to be met before closing. Nearly 60 percent said lenders require lower ratios of loan to EBITDA or collateral, measures used to gauge a company’s ability to repay loans.
“The leverage ratios have gone down pretty substantially, and that sort of drives everything else,” said Ray Anderson, CTP, an executive with Crowe Horwath LLP in Chicago.
As the recession buffets various sectors from the U.S. auto industry to retail, casualties are piling up and weighing down benchmarks of company value, including inventory. Retailers adhering to new Bankruptcy Code provisions are running up against a shorter deadline -- 210 days -- to assume or reject leases.
“Every single appraiser and liquidator is lowering its numbers and has been for some time, which makes your block on an asset-based loan facility that much higher. [That, in turn] produces less liquidity for the borrower that is already troubled,” said J. Scott Victor, managing director of SSG Capital Advisors LLC in West Conshohocken, Pennsylvania.
With the exception of asset-based lenders, at least seven in 10 respondents noted less activity this year by a broad range of lenders that provide financing to distressed borrowers. Just over half the respondents (54 percent) indicated that asset-based lenders are less active, but that’s nearly double last year’s 28 percent. About 90 percent said the same of traditional senior lenders.
“Many banks don’t know their capital base until they know the extent of their write-offs,” said James Shein, chair of the TMA Trend Watch Committee and professor of strategy and management at the Kellogg School of Management at Northwestern University in Evanston, Illinois. “Until they know their capital base, they don’t know how much they are allowed to lend because it is a multiple of the capital base. So they are in a bit of a quandary between trying to get liquid and trying to sell at the wrong time in the market.”
Poll results indicate constriction across various loan types and a few respondents remarked on a frozen syndication market and nonexistent cash flow lending. More than four in 10 cited debtor-in-possession (DIP) financing as more difficult to obtain, two times last year’s 21 percent.
“Lenders are extremely reluctant to finance bankruptcy cases, especially when the prepetition lender is undersecured or potentially undersecured in a true liquidation sense,” said Scott Opincar, an attorney with McDonald Hopkins LLC in Cleveland.
“Poll results accurately reflect the overall state of the market; not one type of lender is more actively extending credit this year compared to last year,” said Thomas Pabst, chief operating officer with the Great American Group in Deerfield, Illinois. “Asset-based lending showed the most positive results in the survey, but even that activity is dramatically reduced from last year’s 51 percent.”
Even though poll findings show less lending activity by hedge funds and private-equity firms, the majority of respondents (70 percent) said both are permanent fixtures as sources of capital in the economy. Roughly a third said those entities are aiding companies in decline, down from last year’s average of 44 percent. However, 41 percent said they are lending to healthy companies traditionally financed by banks, up from 32 percent.
“There’s plenty of capital on the sidelines. Those with funds have been buying paper on the secondary market, where yields are greater than they can ever get by a principal investment [in a troubled company],” Victor said.
Half the respondents said distressed debt trading in bankruptcy or in out-of-court restructurings is stalling negotiations and 40 percent said quicker liquidations and sales result. Just under a third (31 percent) said debt trading is raising risk premiums.
“Buyers of secured distressed debt may be more interested in obtaining the assets of the borrower and turning a quick profit,” Opincar said. “On the other hand, a traditional secured lender may be interested in a more conventional workout that leads to a greater recovery over a longer period of time.”
The Chicago-based Turnaround Management Association has nearly 9,000 members in 45 regional chapters who comprise a professional community of turnaround practitioners, attorneys, accountants, investors, lenders, venture capitalists, appraisers, liquidators, executive recruiters and consultants. ###
Click here to see charts from TMA’s 2009 credit poll.
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