Turnaround professionals are reportedly less busy with traditional activities, such as turning businesses around, serving as chief restructuring officers (CRO) and ushering companies through bankruptcy reorganization, than they were during the economic downturn. Some firms have shifted focus to profit and growth improvement,
transational support and other activities, just as many bankruptcy attorneys have repurposed their practices on commercial litigation and other areas.
A company’s lender typically drives the turnaround process. A common saying in our industry is: “The next company that calls for help from turnaround professionals without being prompted to do so by their lenders will be the first one!” For their part, lenders these days seem less inclined to utilize — or fund — the turnaround process to rehabilitate borrowers. In an era of abundant and cheap credit, it’s so easy for the
lender to have a company refinanced, sold or ultimately sell its debt. Among lenders, bankruptcy reorganization has become generally disfavored as too expensive and time-consuming.
What do turnaround professionals have to say about these developments? Is this state of affairs temporary or permanent? The current financing market has been described as “2007 revisited, but without the derivatives,” and it’s difficult to imagine another downturn. On the other hand, one has only to peruse newspaper headlines to see stories about the economic meltdown in Greece with its possible spillover to the overall EU, the apparent end of China’s decades-long economic growth and the various political hotspots around the globe caused by terrorist activity.
I head an active turnaround firm with an international practice spanning a wide range of industries. In my role as contributing editor of ABF Journal, I called on leading members of the turnaround profession to see how their thoughts compared with my own, and I am pleased to share their observations, which were gathered by asking a series of questions.
How Would You Describe Current Conditions In The Turnaround Profession?
Holly Etlin, managing director in the New York City office of AlixPartners, echoes the views of many turnaround professionals: “While conditions in the industry have generally been slower the past few years, there has generally been an increase in activity beginning late in 2014. Most workouts are still being done out of court, so there is less Chapter 11 activity, and most in-court situations are resolving more quickly than was historically the case.”
Dan Dooley, principal and CEO of MorrisAnderson in Chicago, shares a view that is consistent with what I’ve been hearing around the country: “Our deal flow is stable but weak, consisting of mostly out-of-court cases.” He adds that interim management cases have picked up during the last year, but there have been very few sales of distressed businesses.
Allen D. Wilen, partner in charge of EisnerAmper’s Bankruptcy and Restructuring Services in Edison, NJ, says, “The market is starting to get busier, however it appears certain firms are getting busy while others are still very slow.”
William H. Henrich, co-chairman of Getzler Henrich & Associates in New York, says, “The pipeline of engagement opportunities remains strong for Getzler Henrich, albeit I’m routinely informed that may not be the case across the profession.”
William Snyder, principal at Deloitte CRG and market leader for its U.S. Corporate Restructuring practice, says market conditions are choppy, with pockets of growth in energy, shipping, retail and healthcare, but that default rates are at a low point, with easy money available and no “mountain” of refinancing looming.
How Has Your Firm Responded To Current Market Conditions, And What Has Been Keeping You And Your Firm Busy?
Snyder differentiates his firm. “Deloitte is more global,” he says. “So we have been busy with many international deals which may include two to five countries in a single engagement, so there’s lots of workflow from Asia.”
“We are lucky,” says Wilen. “We have been busy, primarily driven by large matters in healthcare and real estate niches.”
“We service clients across the continuum of distress, from profitable but underperforming to ‘they don’t know how to make payroll next week,’” Henrich says. “Traditional operational performance improvement, financial restructuring and interim crisis management engagements have kept us busy. Middle market companies continue to underperform or trip lender covenants, causing concern for stakeholders and, as a result, opportunity for turnaround practitioners.”
“Our firm has been lucky to have kept consistently busy throughout this period, both with traditional restructuring assignments as well as more operationally focused turnarounds,” says Etlin.
“MorrisAnderson remains solely focused on distressed work,” says Dooley. Like others in the turnaround profession, his firm has expanded into adjacent areas of distress. The firm did this 10 years ago and believes that it was “ahead of the pack.” He believes that most firms that are focused on services related to distressed businesses have expanded their lines of service, which he believes always occurs when an industry is slow.
Has your firm expanded or contracted over the past year, and what are your plans for the future?
Etlin says AlixPartners has expanded its restructuring practice by acquiring the former Zolfo Cooper practice in the UK, which added approximately 200 senior professionals, and the firm’s consulting business has also continued to expand both in the U.S. and globally.
“MorrisAnderson is relatively small, with about 15 people,” says Dooley. “We added two people late in 2014, and will add one this year. Firms have started to gradually add consultants in 2015 after four years of constant downsizing in distressed consulting.”
Snyder reports no big changes for Deloitte, having added two partners in New York City who are dedicated to growing the firm’s creditor advisory practice.
“We continue to expand, adding new professionals and staff,” says an optimistic Wilen. “We believe the market will start to percolate.”
Henrich concurs. “We have strategically expanded this past year, and will continue to selectively look for experienced talent to grow and fill needs.”
Is your firm currently providing any services that are different than in the past, or does it plan to do so?
Wilen says EisnerAmper’s turnaround-related group is not offering any services that are different from the past, and isn’t planning to do so. Similarly, MorrisAnderson does not plan to expand beyond services related to distressed businesses, according to Dooley.
For its part, Getzler Henrich provides its “LeanSigma” process improvement services that enhance the processes needed to achieve the aggressive growth targets of healthy businesses, says Henrich, who added that the firm has added professionals focused on the healthcare, oil and gas industries.
Etlin says AlixPartners has made a number of strategic investments in complementary businesses which build additional capability into the firm’s core service offerings, such as Evidence Exchange, an e-discovery and investigation firm.
What are you anticipating in terms of turnaround activity level over the next 12 to 24 months?
Henrich anticipates the turnaround activity level to minimally remain at the current active level and likely increase over the next 12 to 24 months.
“Whether economic times are soft or robust, companies are run by people, who misstep at times and find themselves facing challenges requiring assistance,” says Henrich. “Domestic and foreign monetary policies and the world political climate certainly impact the peaks and valleys, but as long as the competitive credit market and significant regulatory oversight continue, opportunities for the turnaround profession remain optimistic.”
“We anticipate a continuing modest increase in activity as [lenders’] ability to ‘amend and extend’ in certain situations reaches its end,” says Etlin.
Dooley reports that MorrisAnderson’s expansion has been very slow, about 10% per year. He sees the market for turnaround services as historically “boom or bust” and doesn’t expect that to change. Henotes that, historically, the booms in the market for turnaround services have been triggered by sudden and severe changes, like the residential real estate downturn, the tech bubble or the S&L crisis, which have had the impact of “spooking” commercial lenders and the bank regulators, resulting in a credit contraction.
What are your views regarding the current attractiveness of bankruptcy as a restructuring method to banks? What do you believe the bankruptcy activity will be over the next 12 to 24 months?
Etlin believes that Chapter 11 continues to be a less favored form of restructuring due to a growing aversion to large litigation and professional fees. Dooley agrees, adding, “Chapter 11 is too costly and slow for the middle market where our firm is active, and has become primarily a vehicle to sell companies or liquidate them (especially retailers).” Dooley further believes that Chapter 11 is insufficiently focused on cost/benefit efficiency. He contrasts the bankruptcy process to federal receivership where few creditors other than secured parties get involved, because parties must pay for their own attorneys and advisors. He expects bankruptcy activity to be low in the coming period, except for a few sectors.
“Bankruptcy activity is likely to remain at current low levels, since banks desire speed to reduce their incremental cost and relative certainty of process and outcome to control the timing and anticipated level of recovery, however the cost of a bankruptcy has become high, with the certainty of outcome declining,” says Henrich.
Finally, Snyder says it’s either “kick the can or kick the bucket,” with companies that file bankruptcy in very bad shape.
In what industry sectors are you seeing turnaround activity, and how do you believe this will change over the next 12 to 24 months?
There appears to be a consensus that turnaround activity is most expected in the energy, retail and healthcare industries, with Snyder adding shipping to the list.
Wilen is expecting to see continued restructuring activity in regulated industries, particularly healthcare, oil and gas, secondary education, and leveraged real estate (multi-unit housing), including an uptick in the use of bankruptcy reorganization in these industries.
Henrich agrees that oil and gas and the healthcare industry are most often cited to be challenged, but adds that his firm’s client base also originates from a wide array of traditional industries such as manufacturing, distribution, retail and service businesses. Henrich is also seeing greater opportunity from the education sector, as enrollments decline and cost structures become unsustainable.
Dooley similarly expects the oil and gas industry to remain active due to low oil prices. He also cites the education industry as overbuilt, with out-of-control costs and the rapid technological change brought by internet education. Additionally, he expects the retail industry to remain active, since it shares underlying causes of distress with education, including competition from the internet, overbuilt capacity and excessive costs.
Etlin largely agrees with her fellow respondents: “The energy sector continues to be quite active, not just oil and gas, but related areas like equipment, services and coal. Retail and consumer products will also continue to be active in distressed M&A and operational turnarounds. Transportation and logistics also continue to be busy.”
The consensus seems to be that turnaround activity will ebb and flow, and that certain industries will attract more need for restructuring help than others, following overall economic trends and cycles. Leading turnaround firms will continue to adapt to changing circumstances, while remaining true to their core competences and the idea that businesses will always be in need of turnaround help, to a greater or lesser degree.