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In a panel moderated by The Deal's Shanon D. Murray, experts discussed the opportunities and potential pitfalls for distressed debt acquirers. Panelists included Deirdre Martini, a managing director and senior restructuring adviser with CIT Group Inc.; Salvatore A. Barbatano, a partner with Foley & Lardner LLP; Tanja Aalto, a director in financial restructuring at Houlihan Lokey; and Anders Maxwell, a managing director with Peter J. Solomon Co. Where are we in the cycle? No respite on the horizon, Martini said, before year's end. She said that for the megacompanies to emerge from Chapter 11, market conditions will pose significant hurdles with an aversion to underwriting a substantial quotient of risk.
On how we got where we are, Maxwell offered several observations:
WHAT LIES AHEADProblems lie in anything related to real estate, Maxwell said. Housing equities are all down. The real action is going to be with building products, commercial equipment manufacturers and on the financial side, not just brokers, but other financial services businesses that feed off lending obligations. There isn't going to be a rosy Christmas for retailers, either. "The Grinch is going to take Christmas." Expect a dramatic ramp-up in the number of corporate defaults by the second quarter, he said. It's not limited to sectors. In the last six to eight weeks, there's been a ramping up in the number of companies that debt markets are saying will be in trouble. From a bankruptcy perspective, given the changes to the bankruptcy code in 2005, there will be significant advantages to hedge funds and distressed debt acquirers, Barbatano said. "What we're seeing is aggressive attempts on both sides to gain leverage," what we're seeing is basically a reluctance on the courts to issue rulings that may materially disadvantage one side or another. Courts are taking a conservative approach and allowing the two sides to duke it out themselves. Costs have expanded, making it much more difficult to emerge. So what to do? Aalto said: Exit financings are going to be difficult. A lot of speculation if people should have locked in before Labor Day. "Can you continue to operate in Chapter 11 without further deterioration of your business," she posed. For those who can't, they'll need to recut existing deals on a dollar basis easier to raise, or in another way. On upcoming debt due for refinancing, Aalto said there isn't a lot of tolerance for large dollar loans especially for companies undergoing a turnaround. Given the credit crunch, that financing will take six to nine months to mature. Middle-market deals still squeaking through are likely going to run into a refinancing situation. To get around some issues, companies may divest assets, which are not necessarily distressed operationally to better their position. For hedge funds, they'll look at hung bridges, sponsor deals and control buys, she said. On the control side, there will be a lot more deals on the middle-market side. A perfect storm coming of tightening corporate credit, consumer credit, high housing prices and high oil prices, first decline in consumer spending will reverberate across many sectors and create opportunities. There's been an inflation of pricing in the distressed market, so a correction is coming. OPPORTUNITIES"If you're buying distressed debt now, you're buying too early," Maxwell said. Aalto said pricing is still high in distressed credit, but in looking for opportunities, she offered suggestions for investors:
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Counterparty default is the next negative development in distressed debt markets. We will buy such debt and have assembled an expert team to assist. We want to talk to others who share our enthusiasm fdor this contrarian strategy.