Survey: Europe's Sovereign Debt, U.S. Presidential Election Shape Outlook for Distressed Industries

CHICAGO, Dec. 30, 2011 /PRNewswire-USNewswire/ -- Corporate restructuring specialists expect technology and energy industries will improve in 2012 while the real estate and retail sectors lag, but a worsening European sovereign debt crisis could be the wrench that squeezes them all.

Six out of 10 respondents to the annual Turnaround Management Association (TMA) Trend Watch survey of more than 200 members said money center banks with exposure to Europe's debt are most vulnerable to the crisis, and problems they experience could lead to tighter credit lines for businesses.

Investment banks ranked second based on 34 percent of responses identifying industries most likely to suffer from Europe's pain, followed by hedge funds and manufacturing, which each had 20 percent. Respondents noted various scenarios arising from interdependent global financial markets in which problems that beset one scatter and multiply, such as a declining euro leading to lower demand both domestically and abroad for products from U.S. manufacturers.

"There is likely to be a direct impact on financial institutions, and the trickle-down effect is the fact that liquidity may not be available because banks are going to have problems," said William  Lenhart, CTP, a national director in the business restructuring services arm of BDO Consulting in New York. "All these events are likely to feed into an overall lack of consumer confidence, which will also impact the market." 

While Europe's troubles cloud prospects for financial institutions, other industries remain suspended in a post-recession malaise felt since late 2007. The top three industries most likely to be distressed in 2012 were identical to last year's results:

• Commercial real estate -- 41 percent of responses, down from 64 percent
• Residential real estate -- 38 percent, about the same as last year
• Retail -- 33 percent, up from 26 percent last year

The commercial real estate industry's improved standing could reflect financial institutions being more flexible in approving structures for renegotiated loans — for a price. "They are willing to extend the loan in return for kickers so when the upside comes they get additional cash flow as well as capital gains," said James B. Shein, Ph.D., professor of management and strategy at Northwestern University's Kellogg School of Management. "To avoid taking commercial properties back into their inventory, financial institutions are taking on more of the concept of a mezzanine loan on commercial real estate properties — a transaction TMA members work on routinely for companies that need to renegotiate debt." 

The pressure to offload underperforming assets could translate to greater opportunities for corporate restructuring professionals involved in mergers and acquisitions of distressed assets. However, respondents see little evidence that companies will engage in M&A or take other definitive steps to grow. 

Four out of 10 respondents said companies would avoid spending cash reserves in 2012, up from 31 percent last year, and only 18 percent of respondents thought companies would pursue M&A deals. In contrast, 35 percent of respondents surveyed last year ranked M&A as their top choice for ways companies would spend the bulk of cash reserves.  

"The economy remains flat with no clear impetus on the horizon to jump-start it," said Mark S. Indelicato, TMA president and managing partner with Hahn & Hessen LLP in New York. "Although liquidity may be improving slightly, there still is reluctance by funders of M&A transactions to jump back in the market."

Despite the U.S. jobless rate dipping to 8.6 percent in November, respondents downgraded an already dim outlook for business hiring: Only 1 percent of respondents thought companies would rev up hiring, down from 2 percent in last year's survey. Bolstering that point were three out of 10 respondents who thought companies would increase productivity without increasing personnel, up from 26 percent last year. 

"Whether or not Europe's troubles are taken into account, business owners seem to be acting on the belief that the problems in this economy are going to take a long time to work through," said Thomas Pabst, president of HYPERAMS, LLC, a Chicago-area asset disposition and distressed investing firm.

In August, when unemployment reached 9.2 percent, 60 percent of TMA respondents surveyed said a recession was likely in six to 18 months. However, the mixed signals in the U.S economy elicited varied opinions in the latest survey about whether a double-dip recession is likely in 2012.

"The wild card in all of this is Europe," said Thomas Henderson, a bankruptcy attorney based in Houston. "If Europe can solve its problems, a double-dip is not going to happen. The economy, at least nationally, is slowly creeping forward, but it can all be brought down in a single stroke."

Roughly all respondents, 91 percent, think economic conditions are the chief external cause of company troubles, up from 84 percent, and just over a third placed government and regulatory changes at a distant second place. Nearly 60 percent of respondents cited too much debt as the main internal cause of business trouble, down from 70 percent last year.

Technology and energy ranked as top business sectors most likely to improve in 2012 based on roughly a third of responses in each case, and a majority attributed those improved profiles to increased demand for products and services. 

The 2012 U.S. presidential election is yet another factor likely to affect the ability of troubled companies to become healthier, though opinions ran the gamut. Most respondents said a new occupant in the White House would ease government regulations and improve business prospects. Others expressed doubt the course for distressed industries can change absent an economic boost that restores jobs and increases consumer spending. With political gridlock and partisanship likely to intensify in an election year, others worried that the condition of distressed industries — and the broader economy — will likewise remain stagnant.

Chicago-based Turnaround Management Association, turnaround.org, has more than 9,000 members in 49 regional chapters.

SOURCE Turnaround Management Association