Investment pros disagree on the level of restructuring activity we should expect in the next quarter and year. At least this time around, half of ‘em will be right.
Because we were wrong about 2009. Around this time last year, investment pros boldly predicted a giant tsunami of bankruptcies in Q1 of 2009, with LBO-backed companies taking the brunt of the storm. It’s true that the speculative default rate has skyrocketed. A year ago trailing twelve month speculative grade default rate in the U.S. was 2.68%; right now it’s at 10.37%. And it’s true that the number of LBO-backed bankruptcies has increased this year over last. Compare the 59 bankruptcies in the first three quarters to last year’s total of 49.
Yet it seems the bankruptcies have occurred as more of a trickle than a tsunami, and in the past quarter, they’ve actually even slowed down. There were NO new LBO-backed bankruptcies to report for the entire month of September (we included Blackstone’s Freedom Communications, which happened on September 1, in August’s list.) In the third quarter, there were only ten. If Q4 looks like Q3, then we may not double last year’s total, as previously thought.
Yesterday we outlined the year’s largest LBO-backed busts to date. They’re mega-busts, certainly larger than last year’s biggest failures, which topped out at around $5 billion in deal values. But they aren’t the names everyone expected to go down this year. The biggest ticking timebombs-overpriced deals in sectors hit by the recession with ridiculous debt ratios (think Harrah’s, Realogy, Hilton Hotels)-were able to skirt disaster by renegotiating their debt in various forms of “amend-and-extend” transactions.
Is pushing back debt maturities going to save private equity from crashing and burning? Restructuring experts were mixed on predictions for the next year of bankruptcies.
Martin Fridson, CEOof Fridson Investment Advisors, said the rallying high yield market is holding back the wave of restructurings. Defaults are not going up as you keep reading; they’re going down,” Fridson said earlier this week at the Reuters Restructuring Summit.
Others weren’t so sure. Jim Connor, managing director at BBK, a restructuring advisory firm, predicts a stable level of restructuring activity with a possible uptick. “There’s an awful lot out there to be refinanced,” he said. There are a lot of strategic corporate buyers that are coming back from the sidelines of M&A and see the bankruptcy courts as a good source of deal flow. They can cheaply acquire market share, and the bankruptcy process helps clear the target of its troubled loan situations.
Taking an even more pessimistic approach, Rob McMahon, head of General Electric Corp’s Restructuring Finance Group, predicted an “avalanche” of large U.S. restructuring situations in the next 18 months. “The only thing keeping more companies from filing right now is all the convenant-lite deals,” he said at the Reuters restructuring summit. From Reuters:
He said the current rate of bankruptcy filings for companies with assets of $100 million were running at about 20 per month, up from three per month two years ago. He said he expected a rate of about 15 to 20 per month next year.
Duran Curtis, managing director at Drum Capital, said the peak of restructuring is not is not behind us. “The volume of restructuring will increase dramatically…The number of maturities the buyout shops are looking to extend is a big number. Not everything will be able to be extended and M&A won’t pick up enough for buyout firms to exit or refinance the debt. The best businesses will get refinancing, but it won’t be cheap.”