Daily News: June 12, 2012

MJTA Restructuring Investment Banking Group Starts Sizing Up 2013


The Restructuring Investment Banking Group of Morgan Joseph TriArtisan LLC (MJTA), even with the summer still ahead and with more than six months yet to go this year, is already starting to focus on 2013.

As detailed in the group’s latest Restructuring Quarterly Newsletter, it observes:

  • The slower than expected pace of private equity acquisition activity, if the trend remains prolonged, could have a “material impact” on middle-market companies. The newsletter noted, “A pullback in private equity M&A activity would signal potentially hidden issues in capital flows, but on a temporal basis has served to fuel competition in the financing markets given the lack of M&A supply.” Anecdotally however, the group observes that private equity funds have witnessed increased deal flow from earlier this year, suggesting the lull in the first quarter will reverse course, and M&A activity, presuming stable capital markets, will increase in advance of the year end expiration of the 2003 tax cuts.
  • On the same note, with relatively modest fund raising inflows to private equity, partially due to record sums of cash still tied up in funds and investments, and pre-crisis vintage capital beginning to return to investors, the group looks at the private equity reinvestment ratio as a key signal of investor confidence in the sector.
  • An exception to the now three-year rebuilding of leverage levels to pre-bubble conditions has been cash flow lending to the lower end of the middle market. The MJTA Group finds that smaller asset light companies, or those requiring leverage beyond tangible collateral, have struggled to find single digit pricing unless they have the scale and proper fundamentals to attract syndicated loan capital. Bank and finance company lenders have yet to return to this space, which they once dominated, leaving the market to more yield hungry lending funds. The silver lining for borrowers is lending funds’ increasing access to inexpensive capital, which has allowed for contraction in pricing and increased competition for smaller debt issuers.
  • With the deadline for implementation of the first phase of Basel III, scheduled for the end of 2012, looming large, expectations are that asset-based loans will fare well in the new models, which are designed to shore up risk/return and capital requirements, and that the shortening tenors of loans could have a larger impact in lowering risk ratings than in prior iterations. Although, it adds, this could spell contraction in pricing for asset-based borrowers, it’s likely to come at a cost to other lending products given the overall increased requirements to liquidity and capital reserves.
  • With loans made by CLOs, which represent half the institutional leveraged loan market, being rapidly repaid and their investment windows essentially closed, it remains uncertain where the capital will flow to once returned to CLO investors. “As long term committed funds with a specific investment mandate, CLOs (or similar vehicles) will serve to stabilize the loan market if capital round trips back into such vehicles. However, should capital flow from CLOs to retail and hedge fund vehicles, volatility will increase given their shorter investment windows and broader investment mandates,” the newsletter said.

    Among other issues covered in the newsletter, are recent financing and restructuring trends, including how the lack of private equity is spurring the credit market amidst decreasing new loan supply due to a cool first quarter M&A market.

    In addition, the group is seeing an increase, though still a small percentage of cases, where equity holders remain potentially “in the money” in a Chapter 11 proceeding.

    “In these cases, which are often precipitated by an unexpected event (such as judgment, fraud or earnings restatement) rather than significant overleverage, investors have at times been able to generate outsize returns investing in Chapter 11 debtors that reorganize in a manner to drive value to equity holders,” observed James D. Decker, a MJTA managing director who heads the Restructuring Group. “But when value extends to equity – in other words, equity is the fulcrum security – equity holders cannot expect to solely drive an outcome and must organize and actively engage with other classes in order to effectively drive their desired form of recovery.”

    Morgan Joseph TriArtisan LLC is an investment bank engaged in providing financial advice, capital raising and private equity investing.