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AlixPartners Survey: Look for Greater Distress in Privately-Owned Companies

January 13, 2014, 07:32 AM
Filed Under: Turnaround Management

The new year could well see more distress in privately-owned companies (such as those controlled by private equity), "significant" moves to pare back the government bond-buying program known as quantitative easing and more municipal bankruptcies following on the heels of Detroit's Ch. 9 filing. That's according to a survey of 104 senior attorneys, investment bankers, fund managers and other restructuring professionals across North America released today by AlixPartners, the global business-advisory firm.  The restructuring pros also pointed to retail, energy & resources, healthcare and maritime as the industries most likely to face distress in the year ahead.

According to the survey, 58% of the experts say they expect to see more distress in privately-owned companies than in public companies in 2014.  That's up from 55% who said that in a similar AlixPartners survey a year ago.

"Privately-owned companies, including those owned by private equity, could well be in danger of greater distress this coming year, given their higher leverage levels and the continued low growth in the economy," said Lisa Donahue, global leader of the Turnaround & Restructuring Services group at AlixPartners.  "Hedge funds as well, we believe, need to focus on operational improvement in 2014, as the companies they invest in continue to face a challenging economy."

At the same time that the economy continues to be less than stellar, however, more than half of the restructuring experts, 56%, said they think the Federal Reserve will make "significant" moves to taper the Fed's quantitative easing program this coming year.  Given that an easing of any kind is seen by many as the first step toward eventual rising interest rates, such a sentiment is noteworthy.

Which gives rise to the question:  How much would interest rates have to lead to an also-significant increase in the rate of corporate restructurings?  Half of those surveyed (50%) said they think a two-point or less increase in interest rates would do the trick.  Meanwhile, only 13% said an increase in rates of three points was needed.Overall, 36% of those surveyed said they expect to see more business bankruptcies (middle-market and large companies) in 2014 than in 2013, with 54% saying the opposite.  Of those expecting more bankruptcies in the year ahead, 68% said they expect to see 11% to 30% more, while 32% said 1% to 10% more.

One thing that could lead to more bankruptcies would be an easing-off on so-called "amend-and-extend" refinancings of companies' loans by their lenders.  While 63% of those surveyed don't see a significant change in such policies in the year ahead, a good-sized minority, 30%, said they believe there will be a significant pull-back in amend-and-extend this coming year.

"If there is either a significant increase in interest rates or a significant a pull-back on the lending policies of the last few years, restructurings could rise dramatically," said Donahue. "While neither may happen in the near term, those betting on the status quo remaining that way indefinitely are taking a big risk – which is why we're advising many clients these days to make financial and operational improvements in their companies before the external environment changes dramatically."

When asked to pick the top three industries most likely to face the most distress in 2014, 57% chose the retail industry, up from 36% in the AlixPartners survey of a year ago; 49% said energy & resources, up from 35%; 43% said healthcare, up from 41%; 26% said maritime, up from 24%; and 18% said restaurants & foodservice, up from 17%.  The aerospace & defense industry also garnered 18%, down from 31% a year ago.

One area where the experts expect there will quite likely be more restructuring activity in the year ahead is in the public sector – a topic very much in the news in 2013 given the City of Detroit's Ch. 9 filing.  Almost three-quarters of those surveyed, 73%, said they think municipal bankruptcies and restructurings will increase in 2014, with 29% saying they will increase "moderately" or "dramatically." Of those who think municipal restructurings will increase, 70% said they think that, on the heels of Detroit's filing, at least two to four major cities or municipalities will file for bankruptcy in the year ahead.

When asked, outside the U.S., which regions of the world they are most looking for restructuring opportunities today, 39% said Western Europe, followed by Latin America at 28%.

"Though the economies in Western Europe are generally in better shape than they were at this time a year ago, many industries and companies in Europe are still struggling," said Donahue.  "There could well be a lot more activity there in the year ahead."

The AlixPartners survey also asked respondents, as turnaround experts, to point to the single-most important thing that could be done right now to turn around the American economy.  Of six choices offered -- reform the tax code, cut federal spending, increase stimulus spending, reform immigration law, repeal the Affordable Care Act and "other" – 38% said reform the tax code, 28%, said cut federal spending and 17% said increase stimulus spending.  Reforming immigration law and repealing the Affordable Care Act received just 3% each.

This marks the eighth year of the annual AlixPartners North American Restructuring Experts Outlook Survey, which polls senior attorneys, investment bankers, fund managers and other restructuring professionals across North America about their outlook for the year ahead, their views on industry and economic topics, and their views on other vital issues of the day.  This year's online survey was of 104 senior professional restructuring experts, and was conducted in December 2013.

AlixPartners is a leading global business advisory firm of results-oriented professionals who specialize in creating value and restoring performance at every stage of the business lifecycle.

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