TMA Survey: Delay Tactics on Business Credits Rule

Jun 23, 2011, 13:06 ET from Turnaround Management Association

CHICAGO, June 23, 2011 /PRNewswire-USNewswire/ -- A new Turnaround Management Association survey shows that most restructuring professionals expect troubled companies to skate a while longer as lenders continue to modify loans.

About 60 percent of TMA members expect so-called "amend and extend" arrangements to continue at the same pace as 2010, while nearly 20 percent foresee a swifter pace for those transactions in 2011.

"There is little incentive for financial institutions to be tough on companies that continue to underperform," said James Shein, a business professor at the Kellogg School of Management. "The regulators have backed off if the bank is deemed sound … and bonuses are still based on deals closed."

Such extensions grant companies reprieve from refinancing worries and keep the U.S. high-yield corporate default rate from spiraling as in 2009, when the published rate topped 13 percent. About six out of 10 respondents predicted that the default rate would range from 2 to 10 percent at most this year.

Companies still eventually will have to settle up with lenders, and most respondents expect that day of reckoning to occur in 2013.

"With interest rates at such historically low levels, companies can extend maturities and only have to deal with the annual interest coverage," said William Lenhart, a partner with BDO Consulting in New York. "If the economy does not improve or the company does not restructure operations to become profitable …what will happen then?" 

Nearly 60 percent of respondents see greater availability of credit this year compared to last year, a sharp contrast from 2009 when moribund capital flow led only 2 percent to think so.

About 70 percent of respondents said healthy companies traditionally financed by banks are most likely to secure financing. Companies being acquired by strategic buyers or those sought by financial buyers rank next, based on roughly 50 percent and 40 percent of responses, respectively. Only 17 percent thought companies either in mid-decline or worse could access financing.

Asset-based lending ranked highest among prevalent forms of available financing, based on nearly 80 percent of responses. Refinancing with existing lenders and replacement financing received nearly equal responses, 55 percent.  Debtor-in-possession (DIP) and exit financing, produced the smallest proportion of responses: less than 10 percent each.

"The markets for bankruptcy financing remain tight and debtor companies are entering a restructuring with unique capital structures after attempting to squeeze every drop of value from assets prior to filing," said TMA President Mark Indelicato, a partner with Hahn & Hessen LLP in New York. "DIPs are smaller and more creative, and tend to be driven by people who are going to take over the company."

Almost half the respondents said large financial institutions are primary sources of business capital, while nearly 30 percent said the same of small financial institutions. Private equity firms and hedge firms received only 14 percent and 5 percent of responses, respectively.

Turnaround Management Association,, represents the corporate restructuring industry, with more than 9,000 members in 47 regional chapters.

SOURCE Turnaround Management Association