Disaster Drought Leaves Turnaround Gurus Scrounging for JobsBy
They’re pitching less-than-distressed companies to stay busy
Stable economy and ‘loose money’ trims supply of prospects
Restructuring advisers are short on work and long on time, thanks to a dearth of troubled companies.
A partner at one of the biggest turnaround firms is loath to admit it publicly, but he’s been filling his days just schmoozing his industry contacts at long lunches -- so many that he’s gone from eating steaks to salads to keep his waistline from expanding.
Another said he’s resorted to pitching companies even if they aren’t on the brink of disaster, because there aren’t enough dire situations to go around. The few companies that are genuinely distressed are getting dozens of pitches, a reversal from recent years when top advisers could pick and choose their clients, said people with knowledge of the situation.
The problem, if you’re a turnaround consultant, is that the economy is too good and money is too cheap. The U.S. economy is in its eighth year of expansion following the global financial crisis, the beat-up energy industry has mostly stopped hemorrhaging cash, and credit markets, in the words of FTI Consulting Inc. head Steven H. Gunby, are awash with “loose money.” Investors are so hungry for yield that they’re helping finance companies at cheap rates even if they have weak fundamentals.
“There’s an unbelievable amount of froth in equity and credit markets, so people are getting deals done to bail themselves out through more traditional routes without having to go to some kind of out-of-court or in-court restructuring,” said Eric Mendelsohn, a New York-based restructuring banker at Greenhill & Co. “That’s definitely pushing things out, and that’s in many ways the worst thing for restructuring advisers.”
Turnaround gurus such as FTI, AlixPartners and Alvarez & Marsal Inc. have been staffing up over the past year, sometimes raiding each other for talent, in anticipation that the unprecedented credit boom would turn into a bust for over-indebted companies. Instead, the default rate for U.S. speculative-grade debt has been falling, and could drop as low as 3 percent a year from now, according to Moody’s Investors Service. That’s less than half of the long-term average of 6.8 percent. The firm’s watch list of the most troubled junk-rated companies has been shrinking for 13 months.
They’re also facing competition from investment bankers. Turnaround advisers typically restructure operations or management, while investment banks like Evercore Partners Inc., Houlihan Lokey Inc. or Lazard Ltd. are better known for addressing capital structures and balance sheets. But with little work to go around, the line is getting more blurry, said Durc Savini, a restructuring banker at Guggenheim Securities.
At FTI, which has listed RadioShack, Peabody Energy and Hostess as clients, the restructuring unit in the first quarter earned less than a third of what it produced in the same period last year. Still, Washington-based FTI has been building its roster of experts -- the unit’s staff rose to 900 in the first quarter from 857 a year earlier -- and Gunby said he won’t give them up.
“If I’ve got really good people, I’ve got to go bust my tail and get them busy, because I want these people here for the next boom” in restructurings, Gunby said on an April call with investors.
AlixPartners is also expanding its restructuring practice in anticipation of more distress, according to Lisa Donahue, who leads the group from New York. In the meantime, they’re staying busy with more preemptive mandates for companies looking to address problems before they’re teetering on the edge of bankruptcy, Donahue said.
Other restructuring firms are similarly turning their attention to what the industry calls liability management -- helping to de-lever companies that have more debt than their comparable peers, or simplifying overly complex balance sheets. It’s something companies do even if their credit is investment-grade.
“That’s got to be in your toolbox, because there aren’t a lot of default-driven, debt-for-equity exchanges going on right now,” Guggenheim’s Savini said.
Steve Zelin, a partner in the restructuring and special situations group at PJT Partners in New York, echoed that sentiment. “Our mandates are a bit broader than the classic Chapter 11,” Zelin said, referring to a formal bankruptcy filing. PJT told investors its backlog increased in the first quarter, and that while energy is “less frenzied,” activity is picking up in power, retail, healthcare, shipping and the technology-media-telecommunications sectors.
Retail has already seen more bankruptcies in the first few months of this year than in all of 2016, and more are likely to come, according to AlixPartners. Specialty stores including Payless Inc., Rue21 Inc., and BCBG Max Azria Group Inc. have filed this year. The retail sector has picked up some of the slack from the slowdown, Greenhill’s Mendelsohn said. The defining difference is in their size, according to FTI’s Michael Eisenband.
“Many Chapter 11 filings have been small, middle-market cases,” Eisenband said. “That’s what’s happening -- the average case size is smaller.”
In the sparse deal environment, bankers and advisers have been forced to compete for assignments that they may not have considered in a busier cycle, and the more enticing roles are attracting large numbers of pitches.
To Donahue, it resembles the previous credit boom more than a decade ago, when she worked on power producer Calpine Corp.’s restructuring from about 2004 to 2005. At the formation meeting for the unsecured creditors committee, they received “something like 25 or 30 pitches,” she said.
That may bode well for the advisers who are lunching and schmoozing their way through today’s distressed drought; the financial crisis followed just a few years later.