TMA Panel: Restructurings to stabilize as new funding sources emerge

By Stephanie N. Rotondo

Portland, Ore., Nov. 17 - Since the implosion of the economy, restructurings have been on the rise. And according to a group of experts put together by Turnaround Management Association, the restructurings will stabilize but are likely far from over.

In a webinar entitled "The 2010 Credit Market: Will the Squeeze Continue?" held Tuesday, TMA's experts attempted to shed some light on that topic and how it will affect those companies needing to reorganize their balance sheets.

One expert, David Resnick of Rothschild Inc., said that 2009 has been "fairly frenetic" as far as the number of defaults seen. While he believes that "the pace of restructurings will stabilize going forward," there is one more hurdle yet to overcome: the so-called "maturity wall" and the potential restructurings and refinancings that come with it.

Tear down the wall

"A large number of companies have a significant number of refinancings" coming in 2011 through 2013, particularly those that participated in the LBO and CLO booms of yore," Resnick said. And, while there has been some loosening of credit in the last half of 2009, some companies might not be able to get the capital they need to survive.

"Many companies that need to refinance will not be able to get capital they need and will need to restructure," he opined.

This could come in the form of a traditional restructuring, such as a bankruptcy filing, or could be done through indenture amendments or possibly even more dilutive means, such as IPOs.

Alternative funding sources

Part of the problem, the experts alleged, is the "void" left as leveraged loan players stepped away from the marketplace. With companies no longer able to access those channels, they are in need of some other form of capital.

As such, the high-yield market has been stepping up, the experts said.

"High-yield bond issuance is dramatically exceeding leveraged loan issuance," Resnick explained.

"There has been no lending capital to fill the void," said Jason Perri of Apollo Management LLP, adding that there are now "much more interesting opportunities in the secondary market.

"High-yield issuance has exploded," Perri noted. That is due largely to the fact that "banks are not willing to do LBO-type deals and high yield is coming in to fill that void.

"The leveraged loan vacuum has been replaced by actual capital."

But there is another avenue that has opened up to some companies: junior creditors.

Over the last year, the market has seen a number of pre-packaged bankruptcy filings in which junior creditors agreed to convert their debt to equity. Many times, junior holders get left with little to nothing after a bankruptcy or liquidation, but by agreeing to debt conversions or even by putting up additional capital, those creditors "create a better recovery," Perri said, as in the case of Pliant Corp.

"Both on a strategic and financial side, as the outlook becomes better on the macroeconomic side, I think that we have started to see junior creditors and equity in some cases putting up the money" to insure their holdings are worth something in the end.

"There is improvement for junior holders in the capital structure," added Gary Holtzer of Weil Gotshal & Manges LLP.

Where the hammer stroke falls

Despite the availability of these alternative capital sources, some companies might still not "make it through the financing window," as Resnick put it.

For example, the commercial real estate sector is a powder keg waiting to go off, Holtzer said. In 2010, those companies focused on that arena "will be tested" regarding their ability to refinance.

"A lot of lenders have not really owned up to what is on their balance sheets, and I think we'll see that in 2010," Resnick added.

Holtzer also speculated that "a lot of media restructurings" are on the horizon, as ad sales continue to fall and valuations become harder and harder to project.

"The hardest thing right now from a valuation perspective is that projections are very hard right now in this landscape," Holtzer said.

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