November 3, 2013 12:01 a.m Crain’s Business
When the economy collapsed five years ago, the brigades of bankers and lawyers who specialize in rescuing ailing companies or winding down those beyond salvation prepared for a tsunami of work. Sure enough, corporate bankruptcies doubled, led by names like General Motors and American Airlines, while countless other companies submitted to painful belt-tightening.
But in the past year, the tide of misery has receded with startling speed. With business drying up, Wall Street’s legions of restructuring experts are now bracing for a taste of their own medicine and enduring some downsizing of their own.
“Business just isn’t as robust as people thought it would be,” said Thomas Kim, president of the Turnaround Management Association. “Restructuring firms did a lot of staffing up a few years ago and now are in the process of dealing with that.”
Completed restructuring activity is down a whopping 74% so far this year, according to Thomson Reuters data, and the pipeline of pending work has shrunk in half. Weil Gotshal & Manges, the leading law firm for steering corporate clients through bankruptcy, earlier this year announced its first layoffs ever, pushing out 7% of its junior lawyers while cutting pay for senior partners. Other firms in the restructuring field are also said to be shrinking their workforces.
“Folks are scrambling to get work,” lamented David Bannister, North American chairman at restructuring firm FTI Consulting, during a conference call this past summer.
Of course, what’s bad news in the restructuring world is good for most everyone else. One reason these pros are hurting is the economy has gotten better and corporate bankruptcy filings have dropped by 40% since 2010, according to the Administrative Office of the U.S. Courts.
But the most important factor behind the restructuring blues is ultra-low interest rates, which have allowed struggling companies to refinance their debts and win time to work out their problems without resorting to bankruptcy.
The least-favorite statistic among the restructuring crowd is that junk-bond default rates are at an extraordinarily low 2.3%, according to Standard & Poor’s, or about a quarter their level in 2009. Meanwhile, companies are leveraging up, with corporate borrowings growing at twice the rate of corporate profits during the year ended June 30, Moody’s reported last week.
“It’s hard to go broke if money is free,” said Bill Brandt, chief executive of restructuring firm Development Specialists, referring to interest rates in the 3% range for the best customers and 6% for the riskiest.
The poster child for this state of affairs is J.C. Penney. By traditional measures, the retailer would appear to be a prime candidate for bankruptcy because sales are declining, losses widening and liabilities rising, and cash flow is negative. Yet in May the company persuaded a group of banks led by Goldman Sachs to extend it a $2.25 billion loan. That, along with $850 million drawn from another credit facility, should cover Penney’s cash needs in the coming year, S&P said when the loan was made.
Plenty of other struggling companies have landed the same sort of financial lifelines—especially retailers, which often have real estate and inventory that lenders can grab in a default.
“If you had asked me a few years ago whether Zales or RadioShack would go bankrupt, I would have said absolutely,” said Peter Schaeffer, a principal at GlassRatner Advisory & Capital Group. “Now I think it’s more likely a restructuring firm goes bankrupt before they do.”
Most of the leading restructuring specialists, including Houlihan Lokey, Alvarez & Marsal and AlixPartners, are privately held, so it’s hard to get a sense of how badly they are hurting. But publicly traded FTI Consulting offers a glimpse.
Decline in hiring
At that firm’s corporate finance and restructuring division, which worked on the GM, Lehman Brothers and MF Global bankruptcy cases, operating earnings in the first half of the year were only half as much as in 2009. Yet “revenue-generating head count” has slipped by only 2% since then, to 718. A spokeswoman didn’t respond to a request for comment.
Experts insist the restructuring of restructuring firms has begun. “They are doing it by attrition,” said Harvey Miller, a Weil Gotshal partner and dean of the bankruptcy bar. “And hiring is way down.”
Still, many restructuring specialists bet their bad stretch can’t last much longer. Sooner or later, the economy will weaken again, and overly indebted companies will stumble. Moreover, they figure big banks are better positioned than a year ago to withstand the losses that come from cutting off lines of credit and forcing ailing borrowers into bankruptcy.
“You’re going to see banks start punching out a lot of loans,” Mr. Brandt said. “And when that happens, things are going to pick up.”
A version of this article appears in the November 4, 2013, print issue of Crain’s New York Business.