How Bankruptcy Advisors Can Save A Sinking Auction

When I asked Lorie Beers, a restructuring advisor at KPMG, what her firm is doing to prepare for an onslaught of business in coming months, I wasn’t surprised to hear the group is hiring and retraining some of its M&A advisers on the ways of bankruptcies.

I didn’t expect her to say “In our spare time, we we’re also moonlighting as investment bankers.”

Now that’s a hyperbolic paraphrase, but its true that Beers’ Special Situations group is helping out KPMG’s M&A advisers.

See, companies on the block are watching their financial health deteriorate before their very eyes. As performance slides south, investment bankers trying to sell those companies are seeing buyers slide right out the door. Rather than pull the company from the market, KPMG has tapped its Special Situations group to bring distressed sellers to the table.

“In some instances,” Beers said, “we’re bringing special situation buyers to the sale process to keep the competitive dynamic high and stop valuations from dropping too low,” she said. Beers offered an example of one highly seasonal luxury company up for sale, which has missed its sales targets during the M&A process. “We introduced three new buyers to the situation, and together with new strategic buyers, created a competitive dynamic,” she said.

In other cases, her group will simply recommend the company hire a turnaround adviser to stabilize the situation (Beers’ group does not offer such services).

It’s not a bad way to keep bankruptcy experts busy as they wait for the biggest ugliest, “leveragiest” deals to come tumbling down. It won’t be long though, Beers said. Even though the alarm bells (i.e. covenants), won’t go off until the very last minute, she expects mega-buyouts to start filing in Q1 of 2009. “We’re going to see those kinds of upticks in the very near future because of the severe credit dislocation. When they can’t get the lending, they’ll have no choice,” she said. “The 12 to 18 months after that will be a very bumpy ride.”

And default rates? Will they really go to 8%, as some people are predicting?, I asked.

Beers expects the rate to jump a few points, but not double the current rate. “Current macro economic policy doesn’t seem to be working,” she said, referring to the Dow’s negative performance on news of another potential rate cut. “Until there’s something that could make a change, we’ll continue to see escalating default rates,” she said. “We could go back to a situation similar to the late 80s, with a sluggish economy, tremendous defaults and a not robust lending market.”