Credit conditions improve slightly for troubled companies, survey finds

By Carlise Newman

Chicago, June 2 - Credit situation for underperforming companies may be improving slightly, according to a Trend Watch poll of members in the Turnaround Management Association - although it also found that lenders are still cautious.

"The results from this poll reflect the fact that banks are becoming more eager to lend to under-performing companies with reasonable turnaround plans and de-leveraged balanced sheets," said Turnaround Management Association chairman Randall Eisenberg, a senior managing director at FTI Consulting in New York. "However, even with the economy beginning to signal a rebound, lenders continue to be cautious when considering loans to underperforming companies that TMA members serve."

For Chapter 11 exit financing and DIP financing, with 80% of respondents to the poll indicated the same or greater availability of credit as compared to 2002.

In general, 53% of respondents said credit is tighter now than at this time last year, with the other 47% saying that the credit situation was either about the same or more available. Last year, 70% of respondents indicated an increasingly restrictive lending environment as compared to the year prior.

The 2003 poll results pointed out that the types of loans for which credit continues to tighten remain the same as the past two years' polls, with 74% of respondents indicating that obtaining replacement financing and 69% saying refinancing with the existing lenders continues to be more difficult.

As in the 2002 and 2001 polls, more restrictive conditions to be met prior to close and more restrictive loan covenants were noted in the 2003 poll by about 70% of the respondents. Almost one-half of the 2003 respondents indicated "a greater reluctance by a potential lender to enter into a term sheet or commitment letter."

"The poll results demonstrate that lenders are performing a greater level of due diligence and are more eager to understand why a company is not achieving its business plan once in the loan," Eisenberg said. "Lenders also want to have more confidence that a loan will not be derailed because of unexpected surprises during the completion of due diligence after issuing term sheets and commitment letters."

Respondents were split 50/50 on the question of whether the cost of borrowing had increased over the past year. Of those who did see an increase, the key driver was the lower overall quality of the borrower's credit. Also nearly one-half cited there was less competition to meet the borrower's financing needs.

"About 30% of the loans we make are to struggling companies," said Ward Mooney, president of Fleet Retail Group in Boston and Turnaround Management Association board member. "The key is to structure the loan to provide the company a way to recover."

The Chicago-based Turnaround Management Association an international non-profit association concentrated on corporate renewal and turnaround management.

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