It literally took a tsunami, an earthquake and nuclear devastation in Japan, in the wake of Col. Muammer Gaddafi bombing both his own people and his oil pipelines into submission, to take some of the steam out of the rosy business press of the past 12 months. Although statistics support some fundamental improvement in the U.S. economy, and while the equity markets rebounded nicely from the nadir of March 2009, it sure does not feel like "happy days are here again."
Last year, that grim community known as "corporate recovery" was generally busy, but those professionals -- the bankruptcy attorneys, turnaround consultants, investment bankers and financial advisers who ply their trade working with troubled companies -- were not as busy as they had imagined back in the last quarter of 2009, especially considering that over 3,500 acquisitions by financial sponsors had closed between 2005 and September 2007, most using gobs of leverage to complete those transactions.
Of course, we suspect that corporate recovery professionals overlooked the incentives that U.S. lenders had during the Troubled Asset Relief Program age to "amend, extend and pretend" that loans were indeed performing, covenants and maturities be damned, allowing the passage of time to improve the troubled banking system by allowing a liberal and cooperative approach on loan terms and accommodations.
Credit markets have improved. For better-quality credits with solid financial sponsors, new lenders have been increasingly interested in delivering very competitive proposals. New deals also seem to have nice momentum.
However, for the storied, hairy or troubled situation, senior debt markets continue to be uninviting and daunting. Now that banks have materially stronger balance sheets, many of these "permanent debt" situations are getting abruptly kicked out of the amend-and-extend club.
Looking at U.S. business cycles over the past 30 years, GDP growth has followed a U-shaped recovery that has thus far been absent from the Great Recession. While the business press has been emphasizing the positive (for example, improvements in consumer confidence and purchasing managers indexes), the broad U.S. economy has been slow to respond, and it seems well behind the rebound in public equity markets. Beginning with the subprime contagion in August 2007, the roots of the Great Recession undermined confidence in the U.S. financial system. Wall Street was vilified by politicians, the media and Main Street, and the U.S. government dumped unprecedented resources to prop up a number of rogue financial institutions within the international economy.
While Federal Reserve Chairman Ben Bernanke recently assured us that the economy indeed is statistically growing, the recession is over and that the employment situation will improve over the next five years, it certainly looks like we are not out of the woods quite yet, and it looks like another tough and rough year, especially for the middle market.
The middle market, defined as companies with sales below $1 billion, is a consistent driver of economic and employment growth, and serious hurdles remain for these companies, including a general lack of business confidence, reflecting the uncertainty in the political environment and tax policies until the next general election.
So, too, many U.S. consumers remain challenged, with high unemployment or underemployment, high household debt levels and the stubborn uncertainty in the housing market that after three years has still not stabilized in many markets. Similarly, some $1.8 trillion of commercial real estate loans are maturing, yet because valuation has materially declined, two-thirds of these loans cannot be underwritten.
Finally, as the scenes in Wisconsin starkly remind us, nearly all local and state governments face serious budget shortfalls, exacerbated by the unfunded public pension mess.
So what shape is your recovery? Although a few pundits have argued for the longer, "bathtub-shaped" recovery, the W-shaped or double-dip remains a real possibility with each increase in the price of oil. Perhaps we are facing what Edward Altman, professor of finance at the Stern School of Business of New York University, calls the "inverted square-root-shaped" recovery, aka the Japanese economic cycle of the past two decades, before we witness material improvement in the U.S. business climate.
So those of us in the corporate recovery community look to be quite productive for another 12 to 18 months, as the "woods are lovely, dark, and deep," while middle-market management teams have "miles to go" before U.S. business climate improves.
Jeffrey R. Manning is managing director at BDO Capital Advisors LLC and is the group head of the special-situations practice.