Restructurings Poised to Take Off as Economy Slows
These days Wall Street has to be creative in where it looks for new revenue streams. Now as M&A and private equity go south or constrict, banks (looking for ways to bump up fees) are even hungrier. And facing a gloomy economic outlook, giving financial advice to companies in distress can generate fees. Many large firms have been… and continue to carve out advisory roles that focus on providing capital solutions to distressed companies before they file for bankruptcy. Mark Shapiro, Head of Restructuring and Finance at Barclays Capital, is quoted by IDDmagazine.com as saying recently, “There is likely to be a deluge of restructuring opportunities in the next 12 to 24 months. You have seen the economy’s continued deterioration led by the consumer downturn which hurts companies across a broad range of industries that are dependent on consumers.”
It’s not just about bankruptcy. Many companies are seeking out of court restructurings, including bank covenant relief. Looking ahead, bankers likely will have their hands full when it comes to advising troubled companies. The trend is resulting in a scramble for talent. Executive search firm, A.E. Feldman, says restructuring specialists are poised to gain from the trend. Candidates with expertise in distressed advisory work, in particular, may see growing demand. One industry veteran recruiting for A.E. Feldman notes however that experience is essential. Restructurings, bankruptcy and debtor in possession (DIP) financings are very expertise-driven.
The focus on restructurings is not new. Back in July of 2008, Wall Street firms already had begun beefing up their restructuring teams. As the economy slowed, a number of experts anticipated a virtual flood of bankruptcies and restructurings. A number of investment banks started building their restructuring departments in a bid to provide financial advice and financing to companies in distress… and to earn fat fees along the way. In fact, back then The Deal.com quoted Steve Smith, Head of Restructuring at UBS as saying, “Everybody is gearing up.” (”Everybody” included big investment banks as well as boutiques, such as Lazard, Blackstone Group, Rothschild and Miller Buckfire.)
Today, the firms that added restructuring teams in anticipation of an economic downturn are now putting them to use…and restructuring specialists remain hot commodities.
Through mid-October of last year, 75 companies defaulted affecting $226 billion worth of debt, according to Standard & Poor’s. That is more than three times the total number of defaults in 2007 and more than two times the number of defaults in 2006, according to IDDmagazine. The report adds that defaults of debt for riskier corporations, the speculative or high-yield market, are expected to jump to 7.6% by September 2009 - a level not seen in six years.
Moreover, a recent Fitch report predicts the economic slowdown will have an impact on a wide range of industries, according to IDDmagazine. It states, “The coming default wave will resemble the early 1990s recession, with more industry sectors affected by defaults than in the 2001-2002 downturn due to the broader negative implications of depressed consumer spending, compounded by the leveraged buyout boom of 2004-2007.”
Today, the economic downturn has made restructuring the primary concern of global executives, with the issue climbing the agenda faster than any other corporate strategy, according to a new survey of 1,820 executives from all regions and industries conducted by McKinsey & Co. The number of executives who say their companies had already taken action to restructure to cope with the economic turmoil, or have a plan in place to do so, jumped to 37% last month – up from 28% in November.
Boom in Restructuring Advisory Work
Already, Steven Strom, Managing Director and Co-Head of the Restructuring Group at Jefferies, says he has seen an increase in advisory work from gaming, building products, retail and restaurants, according to IDDmagazine. (The report adds that Jefferies has roughly 30 professionals dedicated to restructuring. This team is supported by 30 other investment bankers who specialize in a particular industry and can help guide the restructuring process.) IDDmagazine also notes that Jim Millstein, Co-Head of Restructuring at Lazard, says his firm has been engaged to advise auto parts suppliers, newspaper companies, printing companies, real estate developers and homebuilders.
Phil Jacob, Head of Restructuring at Credit Suisse, is also quoted by IDDmagazine as saying the restructuring business is “counter cyclical” and offers a “natural hedge” to downturns in the leveraged finance business. He says his team is busy helping businesses amend loans out of court or finding lenders for debtor-in-possession loans and exit financings.
Meanwhile, Perella Weinberg Partners, a boutique merger advisory firm, is getting a flood of calls from companies seeking help with financial restructuring, according to Reuters. The report quotes Chief Executive Joseph Perella as saying, “The level of activity is intensifying as we speak. We were always busy in that area, but it seems the incoming flow of inquiries, from companies that have not yet appeared in the radar screen, is going up.” Perella attributes this to the fact that more companies are starting to feel the “bite” of a recession. He adds that it’s not going to get better anytime soon.
Law Firms Also Eyeing Restructuring, Bankruptcy Work
A number of top law firms are also betting that bankruptcy and restructuring work will be their most promising avenue of growth.
Most recently, Paul, Hastings, Janofsky & Walker, announced seven new appointments to its London office that include specialists in restructuring and insolvency, litigation, structured finance, investment funds and real estate finance.
International law firm, Mayer Brown, also announced it has launched an international Asset Based Lending (ABL) Workout Group in response to the economic slowdown. The firm says it combines the expertise of its Asset Based Lending and Receivables Financing Group with its Restructuring Bankruptcy and Insolvency Team.
“In the current market, we are seeing an increasing number of workouts and insolvencies where ABL lenders have exposure. Clients require a streamlined process for instructing ABL lawyers and experienced workout specialists yet this combination is rare to find in the market,” said Marshall Stoddard, Co-Chair of Mayer Brown’s Global Banking and Finance practice.
Are you working in restructurings, DIP financings or bankruptcy? If you want to grow your career or discuss your firm’s talent needs, contact A.E. Feldman’s President, Mitch Feldman today.
