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Look For Bankruptcy Boom in 2009

Monday, 12 Jan 2009 03:35 PM

A rush of bankruptcies and restructurings is in store for Corporate America this year, as dwindling revenues and tight lending markets force companies ranging from retailers to casinos and home builders to make tough changes or shut their doors.

"I think there's going to be a tsunami of restructurings," said Bryan Marsal, co-chief executive officer of turnaround advisory firm Alvarez & Marsal.

Companies that are closely tied to economic growth may suffer first, but a ripple effect could spread throughout the economy in the largest restructuring wave in nearly 20 years.

"This is the first time since the early 1990s that we've seen a broad economic downturn that is going to affect industries across the economy," said Mark Cohen, global head of restructuring and workout at Deutsche Bank.

Since the subprime mortgage market collapsed last year, financing has tightened, making loans for businesses and homeowners more difficult to obtain. Joblessness has risen and consumers worried about bad times are pinching pennies.

Companies piled on cheap debt during the last 20 months but as revenues decline, they can no longer afford debt payments.

"The whole issue here is that in the economic expansion, everybody built their capital structure for a level of business that is not sustainable in an economic recession," said Barry Ridings, vice chairman of U.S. investment banking at Lazard.

That has created a high-pressure situation for companies seeking to refinance loans, as lenders have little capital to spare and fret about investing in companies doomed to fail.

"There's a level of uncertainty hanging over the entire capital markets and until that starts to change, it's going to be a difficult period for many companies, particularly those in industries that are more severely challenged, like retail and automotives," said David Resnick, co-head of investment banking at Rothschild, a specialist in turnaround situations.

Resnick said he would expect the first quarter of 2009 to be a particularly challenging time as companies that need to restructure may have little access to financing.

TROUBLE ALL AROUND

The current recession is being driven by consumer spending cutbacks and a widespread credit crunch, unlike some downturns that were sparked by the collapse of the Internet and telecom bubble in the early 2000s.

"I think the next three months will determine the fates of a lot of the major retailers," said Robert McMahon, managing director for restructuring at General Electric Co's GE Corporate Lending. "Casino and gaming will continue to feel stress, as will casual dining and newspapers," he added.

Home builders and developers are also restructuring now, which may lead to problems with home building suppliers and consumer durable companies, Lazard's Ridings said.

Even the once-buoyant raw materials sector has been hit hard, as energy trader SemGroup, chemical makers Lyondell Chemical Co and others operate in bankruptcy.

"It would seem that they got a bit of reprieve when the price of oil came down, but many of those companies had also purchased large quantities of raw materials when their prices were very high," said GE's McMahon, who added the auto sector will take center stage in the restructuring space this year.

Troubles are not over for the financial services industry, which saw the biggest bankruptcy ever in 2008 with Lehman Brothers Holdings Inc.

Banks' loan portfolios will continue to erode, according to Randall Eisenberg, senior managing director for restructuring adviser FTI Consulting.

"I don't think we've seen the last of the consolidations in the financial services industry," he said.

BANKRUPTCIES TO INCREASE

With credit markets locked, companies began heading to bankruptcy court in growing numbers in 2008 -- an increase of 74 percent, according to Bankruptcydata.com. Experts expect that to accelerate in 2009, and liquidations or fire sales could also rise as companies wrestle to secure bankruptcy financing.

"We will be busier than presumably we ever have," in terms of liquidations, said William Weinstein, chief investment officer at liquidation specialist Gordon Brothers.

There have been waves of restructurings before, but this time around, more players in the process are facing troubles of their own, said James Sprayregen, a bankruptcy attorney and partner at Kirkland & Ellis.

"I think what's unprecedented is the confluence of so many (companies) starting to have their issues, while at the same time, their creditors have their own significant challenges," he said.

As struggling companies find themselves with few options, that could spell an uptick in mergers and acquisitions, said Corinne Ball, co-head of the Jones Day restructuring and reorganization practice in New York.

"We'll see a lot of opportunity for those (firms) that are rescue-oriented to figure out how to rescue companies. Our job is to entice those people (with money to invest) on the sidelines," Ball said.

Fred Crawford, chief executive officer of AlixPartners, agreed.

"We do see the private equity industry really building up a very large war chest to do distressed investing," he said. "It's just getting people confident enough to call the bottom and begin to lend."

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A rush of bankruptcies and restructurings is in store for Corporate America this year, as dwindling revenues and tight lending markets force companies ranging from retailers to casinos and home builders to make tough changes or shut their doors."I think there's going to be...
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Monday, 12 Jan 2009 03:35 PM
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