TMA poll says rising interest rates could prompt restructuring woes

By Caroline Salls

Pittsburgh, June 15 - Turnaround Management Association members who answered the TMA Trend Watch poll of professionals noted a marked difference over last year on the effects of rising interest rates on credit availability, according to a TMA report.

Nearly half in the 2004 poll said they believed expected interest rate increases would have "no affect" on financings of restructurings.

However, in light of the Federal Reserve's eighth increase of the federal funds rate since June 2004, those answering the latest poll - when the prime lending rate stood at 5.75% - set a low threshold for problems ahead.

Respondents set the tipping point for "some tightening" of loans at 7%, with a "significant" effect at 9%.

"Assuming the Fed continues to raise the fed funds target by a quarter point every six weeks, a 7% prime lending rate could be reached by the fourth quarter of 2005," said James B. Matthews, TMA vice president of public affairs and president of Prime Locations LLC in Dallas, in the report.

Other poll results show movement toward general credit tightening despite the unprecedented growth of sources of cash available to troubled companies.

While 58% of respondents still find plenty of lenders and equity sources eager to finance restructurings, they also point out that lenders are monitoring results more closely.

Mentions of stricter loan covenants and greater conditions to be met before close rose sharply in this year's results.

"We are closely watching the activity in the high-yield market since the credit downgrades of GM and Ford," said Ward Mooney, chairman of the Turnaround Management Association and president of Bank of America Retail Finance Group in Boston.

"This market has suddenly become choppy and volatile, which could be a harbinger of more concern in the bank loan market."

Nontraditional lending and capital sources have become a significant factor in restructuring companies in various stages of decline, according to Trend Watch respondents.

About one-third mentioned that tranche B/C loans were being accessed by companies in early and mid-term decline, while hedge and private equity funds were named by 43% and high-yield debt sources mentioned by 19% as significant sources for companies in late decline.

The Turnaround Management Association is a Chicago-based international non-profit association dedicated to corporate renewal and turnaround management.

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