AlixPartners 2011 U.S. Restructuring Experts Survey

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The past year has been déjà vu all over again inside the world of restructuring, as the "amend-and-extend" debt-maturity practices prevalent before the financial crisis—covenant-lite, PIK-toggle, dividend recap, etc.—came back with a vengeance. Meanwhile, when bankruptcies have occurred, the "pre's" have become ubiquitous—as in pre-arranged, pre-negotiated, prepackaged and other forms of accelerated bankruptcies. In fact, according to AlixPartners research 52% of large and middle-market companies filing for Ch. 11 last year sought accelerated bankruptcies, up significantly from the 21% that chose that route a year earlier.

Many, of course, attribute this to the changing makeup of capital structures, as hedge funds and other private owners have taken on new ownership roles, including controlling positions, in corporate debt. Whatever the reason, an overwhelming majority—97%—of experts in our survey said they believe accelerated bankruptcies are now a permanent part of the restructuring landscape (figure 1). In addition, 67% said they think at least half of all bankruptcy filings in the U.S. over the next 12 months will be of this variety (figure 2).

So, quick bankruptcies are very much with us today. However, in many cases, companies are in and out of bankruptcy so fast that only their balance sheets but nottheir operations (nor, in many cases, their ongoing liquidity needs) are being addressed, meaning that while the day of reckoning for many companies may have been postponed for a while it certainly hasn’t been altogether avoided.

One thing accelerated bankruptcies have shined a spotlight on, though, is the importance of better up-front planning and good coordination among one’s team of advisors in the restructuring. When asked what’s the single-most important element of a successful restructuring in today’s brave new world, “good coordination on the part of the company’s legal and financial advisors” ranked only three percentage points behind the company’s capital structure, and garnered double the percentage points of those who said the company’s new business plan was the most important ingredient(figure 3).

Industries Most Likely to Face Distress

In our survey, respondents also identified industries most likely to face distress in the coming year (figure 4). Retail led the areas of concern, with 24% choosing that sector as one of three top areas of potential trouble. Restaurants/food service was next, picked by 18%; followed by commercial real estate, chosen by 13%. Packaging, health care, energy, consumer products and financial services also received votes.

Obviously, the desultory recovery of the economy, coupled with high unemployment and high gasoline prices, is not good news for retail, restaurants or most other industries relying on consumer spending, including companies upstream or downstream from the final consumer touch-point, such as packaging and transportation companies. Also, excess capacity issues in many of these industries have yet to be fully addressed.

Notably absent from this year’s list was automotive, the top vote-getter in past surveys. Of course, the front-page-news restructurings of General Motors and Chrysler in the past two years are probably a big reason why. But still we find it surprising that automotive fell totally off the list, given that it’s not at all clear that all auto suppliers have done as much restructuring as they need to, especially to survive what seems to be a very bumpy economy and auto market for that highly complex industry.

Private Equity: Proceed with Caution

Of course, it seems like everyone these days is talking about the half-trillion dollars in “dry powder” that private-equity firms have at their disposal, and how at least some of that money will have to be put to use fairly soon. But, as our survey (of those who have seen many a deal go bad) suggests, private-equity investor  would be well-served to complement the discipline they typically deploy in their investment analyses with an equal discipline in the monitoring of those investments once they’ve become portfolio companies. Clearly, that’s the way to get the most “bang” out of any dry powder deployed.

In fact, some 74% of the restructuring professionals polled said they expect that private equity-backed companies will face the same or higher default rates than will publically-traded companies in the year ahead, with 61% seeing higher default rates (figure 5).

Higher leverage rates typical of PE-backed companies vs. public companies could have something to do with those numbers—particularly given that many of the experts foresee a spike in interest rates coming (see next section).
 
Corporate Debt Experts on Federal/Foreign Debt Issues

Our survey was taken when the debate on raising the federal debt ceiling was raging on Capitol Hill, a debate whose underlying concern—a possible downgrade mof U.S. Treasury debt—remains not totally out of the realm of possibility at some point in the future. A decisive majority (76% of those surveyed) said such a debt downgrade would have a negative impact on the economy (figure 6).

At the same time, 99% of those polled said they expect interest rates would rise at the conclusion of the U.S. Federal Reserve’s second round of quantitative easing, or “QE 2,” with 88% saying at least by 1 to 2 percentage points—certainly enough to have an impact on the economy, not to mention putting additional pressure on highly-leveraged private-equity deals (figure 7).

The survey also asked these debt experts in the U.S., many of whom also work globally, about debt and distressed-debt issues elsewhere in the world. Perhaps not surprisingly in light of the very challenging recent economic crises in Greece, Portugal and Ireland, a majority (51%) said Western Europe would be the global region most likely to see business restructurings in the year ahead (figure 8). Fourteen percent said the United States—which we take to mean not so much a “clean bill of health” as just a matter of arithmetic and proportions. In addition, 61% of those polled said that Western Europe is most likely to house the best opportunities for distressed investing over the next year, with the U.S. again at 14% (figure 9).

Municipal Defaults: Just Dodging the Bullet?

Interestingly, despite the widespread and highly publicized discussion over the past year about municipaldebt defaults, only 45% of the experts said they expect a “major” (e.g., a large city) municipal default in the U.S. in the coming year (figure 10). In our similar survey a year ago, 90% said they thought they would be at least one big default in the public sector in the coming 12 months.

Why the difference? Well, we certainly don’t think that the municipal situation in America has drastically improved or that there won’t be major municipal debt problems in the future. More likely, it’s probably simply that since we were able to eke through the past 12 months without a major default, many took that as a sign that the country might make it for another 12, too. That doesn’t change the fact, of course, that cities and other municipalities all over the country are facing heavy debt loads, high legacy costs and declining tax revenues, and as a result, many are running out of options. If there’s one thing they can learn from the corporate world, it’s that such situation can be turned around—but it is going to take some serious restructuring. And also that waiting to act usually makes the situation even worse.

Restructuring Experts on How to Restructure America

Finally, our poll asked these experts if they were given the daunting job of restructuring the U.S. economy, what’s the number-one thing they’d focus on (figure 11). A plurality, 37%, said they would focus first on restructuring U.S. health care—beyond last year’s reforms of Medicare and Medicaid. Thirty-two percent said they’d reform taxes, which, per the survey question, could include cutting, raising, rearranging and/or simplifying taxes. Meanwhile, 20% said they’d restructure Social Security, and only 11% said they’d restructure defense spending. These responses, if not conclusive, we find nonetheless to be quite interesting. Who knows, maybe Washington could even pick up a few tips from these experts and others like them.

Conclusion

As always, we’d like to thank the esteemed experts who participated in our survey this year. Their insights tell us that it’s going to be a fascinating, but also challenging, period ahead. For corporations, the days of living on borrowed time courtesy of all the money pumped into the economy by the U.S. government in recent years is gone. For private-equity firms and their portfolio companies, getting ahead of operational issues is key, making sure that portfolio companies are nimble and flexible, and that investments made are maximized to their fullest. And for many public entities, it may well be a period when traditional politics and stark reality find a middle ground on which to finally begin fixing their own very serious problems. All in all, there will indeed be a lot to look for. 

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