Ascent of Trump and Rates Herald a Boom for RestructurersBy and
End of cheap rates may cut off lifeline for struggling debtors
Distressed lending loses appeal when healthier companies grow
The simultaneous rise of Donald Trump and interest rates may not be great news for troubled companies, but it’s likely to be a boon for advisers who specialize in fixing them.
“Bankruptcies follow interest rates,” said Susheel Kirpalani, a partner at Quinn Emanuel Urquhart & Sullivan in New York and head of the law firm’s bankruptcy and restructuring group. “If they do creep up, I would expect a lot more activity next year.”
Struggling U.S. companies may run out of financing options and be forced to file for bankruptcy as investors find returns in less risky places, restructuring lawyers and financiers say. Trump’s campaign to boost infrastructure spending while loosening regulations and fiscal policy could push rates up faster than expected, making rescue deals more expensive. What’s more, the president-elect’s plan could stimulate more growth at healthy companies, making it easier for investors to get a decent return without taking on the risk of a distressed company.
“People will be less inclined to reach for yield,” said Al Koch, vice chairman and turnaround specialist at AlixPartners in New York, who foresees the start of a new restructuring cycle. “There are a number of credits here getting refinanced that are pretty shaky, so they’re the first ones to drop off.”
Restructuring advisers are preparing for the likely uptick in business by bolstering their turnaround staff. Banks are assembling or expanding teams, with AlixPartners, Lazard Ltd., Guggenheim Partners, Perella Weinberg Partners and B. Riley & Co. all hiring. Distressed-debt investors, who’ve raised billions of dollars without anywhere to put the money, are also adding to their ranks.
Rates will go up quicker than expected because of borrowing needed to fuel the president-elect’s programs, Kirpalani said. Trump vowed on his transition website to invest $550 billion to rebuild roads, bridges, hospitals and airports and put millions of Americans to work. Funding would include tax incentives and private financing to take advantage of the current low-rate environment.
“We know that Trump wants to build infrastructure, which I think is a good thing for the country,” Kirpalani said. “But the way he’s going to do it by essentially borrowing more money, issuing more treasuries, I think is going to wind up pushing the interest rates high in a very short period of time, and I think that could have a tremendous impact, to use his word.”
The impact is already being felt, with 10-year treasury yields posting their biggest weekly jump in three years following the election. Markets priced in a 100 percent chance that the Fed will raise rates at its Dec. 14 meeting, according to data compiled by Bloomberg.
The S&P Global Ratings list of “Weakest Links” includes 254 companies around the world with $347 billion in debt teetering near default, the highest since 2009, and defaults are on the rise, too. Still, the U.S. distress ratio, which measures the amount of high-yield credits that trade at distressed levels, has decreased for seven straight months as troubled issuers found lifelines at rock-bottom rates.
Struggling retailers may be hit especially hard if investors flee to safer credits, leaving them to juggle billions of dollars of debt as the shopping slump deepens. Claire’s Stores Inc. and Nine West Holdings Inc. were among merchants that caught a break this year because lenders found they could earn more by propping up weak companies than by lending at historically skimpy rates to strong ones. More than a dozen retailers are on S&P’s Weakest Links list as of October.
Survival of some retailers has been prolonged by the “loosest money the world has ever seen,” Steven Gunby, chief executive officer at global business advisory firm FTI Consulting Inc., told analysts last month. When that tightens, restructurings will be a growth business, he said.
Kirpalani said companies with leveraged loans may be in more immediate trouble than those with just bonds, because bank borrowing is almost always pegged to a base rate and thus more sensitive to changes in interest rates.
‘Doom and Gloom’
A rate hike “is going to spell a little bit of doom and gloom for businesses that really haven’t fixed their fundamentals,” Kirpalani said. “If they’ve got any ticking time bombs in there with respect to interest rates moving, they will really be suffering.”
John Rapisardi, a partner at O’Melveny & Myers in New York who represented the U.S. in the Chrysler Corp., General Motors Corp. and Delphi Corp. restructurings, says a backlog of companies that have managed to “kick the can down the road” by refinancing their debts may be forced to a reckoning.
Since the economic crisis in 2008, the effort to pump money into the system and keep interest rates low has allowed unhealthy companies to “mask over their symptoms” with the luxury of cheap borrowings, he said. If Trump holds true to his proposed free-market policies, it could lead to “a good spike in Chapter 11 filings,” he said.
Municipals also are likely to face more pressure, according to Kirpalani, especially if the Trump administration’s projects start competing for capital and drive up rates. Cities, states and school districts have been grappling with heavy debt loads for years.
Greater federal borrowing “will only have even more of a detrimental impact on states and cities who are already suffering,” Kirpalani said. “Somebody’s going to have to repay that debt someday, and there’s no Chapter 11 for the United States of America.”