AlixPartners 2012 U.S. Restructuring Experts Survey 

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For the last several years, AlixPartners has conducted an annual survey of restructuring professionals in the U.S. around the middle of each year. However, given that 2012 is shaping up to be such a “big” year on many levels (from the U.S. Presidential election, to the ongoing economic problems in America, to the possible meltdown of the euro zone), we wondered what business professionals are thinking about business today and in the coming year.

So, from January 17 to 24, we surveyed 126 highlevel corporate-restructuring experts, including attorneys, investment bankers, distressed debt experts, hedge-fund managers, etc. We asked about the evolving state of the restructuring industry, what they’re watching for in the year ahead, and the impact of government policies on both restructuring and corporate well-being.

Here’s what they had to say.

INDUSTRIES MOST LIKELY TO FACE DISTRESS THIS YEAR

In our survey, participants identified three main sectors as the most likely to face distress in 2012: retail, restaurants, and commercial real estate (figure 1). These three sectors were also named, in the same order, in our mid-year 2011 survey. But, the concentration of “votes” for these three sectors more than doubled from our last survey.

Retail led all sectors, with 49% of respondents identifying that sector as the one facing the most challenges in the upcoming year (respondents were allowed to choose up to three industries). In our last survey (in which respondents were also allowed to choose up to three industries), retail garnered just 24%. The restaurant segment this time was second-highest, with 41% saying it faced potential difficulty. Last summer, 18% of respondents picked restaurants. And commercial real estate was chosen by 35% in this survey, up from 13% last time. Financial institutions, media, and healthcare followed in the survey, each receiving more than 20% of responses. Interestingly, automotive received zero responses as a sector likely to face distress in 2012—a big change from recent years.

What are we to make of these industry predictions? Even with the positive trends in unemployment and GDP measures of late, consumer confidence in the U.S. continues to be stuck in neutral. In a country where consumer spending accounts for 70% of total economic activity, it’s probably no surprise that two consumer-driven industries have been identified as the most likely to face challenges this year.

BANKRUPTCIES EXPECTED TO RISE, ESPECIALLY AMONG SMALLER COMPANIES

After several years of the famous “amend-and-extend” philosophy from lenders, our survey suggests that 2012 will see more corporate bankruptcies than did 2011. Fifty-six percent of the restructuring professionals surveyed expect to see more bankruptcies in 2012. An additional 31% expect to see about the same number as last year. Six large-cap companies filed for Chapter 11 in the fourth quarter of 2011, including MF Global Holdings, American Airlines’ parent AMR, Dynegy Holdings, PMI Group, General Maritime and Lee Enterprises. And two additional big companies, Eastman Kodak and Hostess Brands, filed in January of 2012. Nonetheless, only 42% of those polled expect to see more large-cap bankruptcies in 2012 than in 2011.

The growth in filings of small- to mid-cap companies as compared to the relatively flat number of larger-cap filings is probably due to several factors, but we’d suggest that smaller companies’ reduced access to credit markets (vs. bigger companies’) is one of the most significant. For several years now, credit markets and lending institutions have had a significantly stronger appetite for large-cap business credit. This appetite certainly has not allowed all large-cap businesses to avoid bankruptcy, yet it seems to be a continuing advantage vs. their smaller brethren. Of note, the survey participants clearly expect private companies – such as portfolio companies of private-equity firms – to face greater headwinds this year than public companies. Eighty-eight percent of respondents believe privately owned companies will be forced into bankruptcy at a higher or equal rate as public companies. Fifty-nine percent believe that private companies will see a higher default rate than public ones (figure 2).

Why do they feel this way? It’s probably related, again, to access to capital markets: Private companies tend to be smaller than public corporations and often lack the liquidity to stave-off stagnant or declining sales. Private companies often finance operations utilizing asset-backed financing based on receivables, inventory, and equipment. Under this type of debt structure, of course, availability under a working-capital revolver is limited, and access to additional funds to support operations may be inadequate.

DISTRESSED INVESTING OPPORTUNITIES TO ABOUND

With an abundant supply of capital today, distressed-debt investors should see an increasing number of opportunities in 2012, according to the professionals participating in our survey. Eighty-nine percent of respondents believe there will be as many or more investing opportunities in the distressed spectrum this year vs. last, with 58% saying they are optimistic there will be more. Why? In this kind of economy, there is often increased competition to “own” the upper strata of the capital structure, where debt investors increase their odds of being repaid by maintaining a senior position in the hierarchy.

One thing to watch this year: whether the appetite for the mid and lower tiers increases. If it does, look for considerably more distressed investing.

ACCELERATED BANKRUPTCIES: EXPECTED TO CONTINUE

According to AlixPartners’ research, in 2011 43% of corporate bankruptcies with assets or liabilities of $100 million or more were pre-packaged or prearranged. In our recent survey, 91% said they believe this percentage of pre-packaged or pre-arranged bankruptcies in 2012 will continue or increase (figure 3). In other words, it appears the practice of accelerated bankruptcies is here to stay.

In a “pre” deal, of course, a company filing for Chapter 11 can emerge from bankruptcy in a matter of just months, even when dealing with a multitude of issues. But many pre-arranged/ pre-packaged bankruptcies only restructure the balance sheet and don’t address the underlying operational issues. Therefore, look for some, perhaps many, of 2012’s filings to be the result of failed accelerated-bankruptcy deals from the past few years.

MUNICIPALS: LOTS OF STRESS, BUT NOT MANY BANKRUPTCIES PREDICTED

In late 2010, the issue of potential municipal defaults became highly publicized. However, while local municipalities throughout the country remain highly leveraged, largely due to dwindling property tax revenues in a weak housing market, a string of bankruptcies has not materialized – with the one notable exception of Jefferson County, Alabama, the largest municipal bankruptcy in U.S. history. In addition, U.S. states have faced problems with unfunded pensions and increased borrowing for unemployment insurance – meaning that they haven’t been able to be of much help to the cities within their borders.

Yet, when asked if they expect to see a municipal bankruptcy in 2012 larger than Jefferson County, 66% of our survey participants said no. Why? Our guess: The simple fact that a municipal bankruptcy process is such a political minefield means parties are searching for every other method possible to work out their problems—or at least “get by for now.” Will this trend really continue throughout 2012? We’ll see.

POLITICS: A MIXED BAG OF RESPONSES

With an upcoming November election and what seem to be countless Republican primary debates, a variety of policy proposals have been presented lately to deal with what most agree is America’s No. 1 concern right now: the still-ailing economy. When asked which party they expect to win the U.S. presidential election, 60% of our respondents said the Democratic Party—i.e., Barack Obama. Interestingly though, 68% of these same respondents said the candidate who wins the White House would have no impact on the number of corporate bankruptcies and restructuring activity in 2013—which seems to mean that the vagaries of the business cycle still trump politics.

However, just as interestingly, when asked which party’s presidential win would be best for “the restructuring of America,” 61% said “a Republican” (while 9% responded a third party). Perhaps this proves that restructuring pros are as divided today politically as the country at large.

CONCLUSION

As always, we’d like to thank the esteemed restructuring professionals who participated in this survey. Their opinions and insight indicate that it should be a challenging but rewarding year ahead for the restructuring industry. For financially distressed companies, the days of amend-and-extend may indeed be coming to an end. For private-equity professionals and their portfolio companies, the need to address operational performance to achieve decent returns on their investments will become even more essential. And in an election year in which both parties are already predicting that gridlock will be the norm in Washington, it will indeed be more necessary than ever for all in the private sector to focus on “self-help” in 2012.