No longer the least desirable option, bankruptcies are happening faster and utilizing different structures

NEW YORK, Nov. 19 /PRNewswire/ -- Nearly two years of constrained economic and credit conditions have significantly impacted how struggling companies restructure their operations and finances, according to Ernst & Young LLP's Transaction Advisory Services (TAS). Across industries, many companies are now exploring options to restructure their balance sheets.

The new restructuring landscape is defined by an absence of traditional rescue financing. Continued market uncertainty has left banks hesitant to lend. Hedge funds and private equity firms, which have expertise in turning around failing companies, are cautiously evaluating deals. Investor appetite for yield has somewhat thawed the high yield market for certain larger companies. In fact, 2009 is on pace to be a record year for the high yield issuances.

"More middle market companies are discovering that the financing landscape has become increasingly difficult to navigate," said David Williams, Principal and US Restructuring Services Leader, Ernst & Young TAS. "As a result, an increasing number of these struggling companies are finding themselves facing a court supervised formal restructuring when senior lenders are reluctant to amend or modify credit agreements."

Historically, the bankruptcy process could be lengthy and expensive, and it was perceived by many as the least desirable option. However, in an effort to expedite the pace of restructuring transactions, companies have turned to Section 363 - a provision of the US Bankruptcy Code. Section 363 sales allow distressed companies to shop their assets to likely buyers, find stalking horse bidders, and dispose of their unwieldy assets in an expedited manner. The result has been more and faster bankruptcies.

"Perhaps the biggest change is the speed at which restructurings can take place," said Williams. "In the restructuring arena of old, any significant transaction might take upwards of a year, perhaps two or three or even up to 10 years to satisfy all creditors and reorganize the corporation. Today, restructurings can happen much more quickly, and as a result, they're a much more appealing option."

Creditors generally dislike the concept of the stalking horse or favored bidder for assets citing inadequate efforts to identify the highest bidder, and the courts are increasingly questioning whether the relationship between the seller and the stalking horse represents a conflict of interest. Still, the number of Section 363 sales has increased. According to The Deal Pipeline, so far in 2009, the stalking horse has been the winning bidder in 90.7% of cases.

"More and more firms are attempting these high-speed restructurings," Williams said. "Speed is generally welcomed by lenders who prefer quick resolutions of their positions in the distressed company. However, resistance is growing among creditors with misgivings related to the process."

Pervasive caution, along with new players, more government involvement, tight credit and faster timelines, have changed the restructuring game. For now, corporate and investor expectations are evolving in fundamental ways.

Transaction Advisory Services (TAS)

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Ernst & Young offers integrated, objective advisory services that are designed to help you evaluate opportunities, make your transactions more efficient and achieve your strategic goals. Ernst & Young has an extensive global reach, with 8,700 transaction professionals worldwide, and the experience of thousands of transactions across all markets and industry sectors. We can bring together the people you need, wherever you need them, to focus on helping you achieve success throughout the transaction lifecycle -- and beyond. Whether it's a merger, acquisition, strategic alliance, divestment, equity offering or restructuring, we offer you the advice you need to help you make the right deal at the right price at the right time. It's how Ernst & Young makes a difference.

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Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

This news release has been issued by Ernst & Young LLP, a client-serving member firm of Ernst & Young Global Limited located in the U.S.

SOURCE Ernst & Young LLP

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