ing stable and above historical levels.
Conservative effective advance rates
and moderate loan covenants will also
help create a strong and resilient ABL
product. Large, mid-size and small banks
will participate in the Great Renewal of
the ABL business in 2010.
Also in 2010, we will witness the bifurcation and the stratification of the ABL
market by loan size and debt provider.
Banks will continue to finance the larger
transactions and the better underlying
credits at aggressive rates. They will
compete for these credits but also club
them among themselves to provide
seamless market execution. However, an
opportunity will arise for smaller, new
finance companies to form and become
a factor in this business due to the system’s overall lack of capacity. This same
phenomenon occurred after the market
meltdown in 2000.
Available pricing and relative security
in the collateral of good companies that
have been shut out of the financing markets for no good reason will attract new,
yield-seeking investors into this space.
Private equity funds and others seeing a
need for this product in the market (and
coincidentally sitting on large amounts
of uninvested capital) will be the likely
source of the underlying capital needed
to jump-start this new business segment. Banks will come to provide the
discount leverage necessary at reasonable multiples and rates because this
type of warehouse lending is highly
accretive with strong individual borrower diversity and low overall portfolio
risk. Expect to see new C corporations
formed in this space, hoping to grab
market share in 2010 and 2011 with the
intention of creating a capital markets
exit in 3–5 years. Yes, we have seen this
movie before….
Given the foregoing, ABL will again
become a hot area in 2010.
Will second-lien and mezzanine debt be
a factor?
Both second-lien and mezzanine financing should make strong comebacks in
2010 and 2011. For the same reasons that
these products were rock stars in 2000–
2005, they will sing again. Fueled by the
lack of available leveraged-finance debt
capital and ABL’s increasing market
share, a financing gap will probably reappear on the balance sheets of many
companies. Just as in the last cycle,
when our firm was fortunate enough
to play a role in this asset class,
again there will be opportunities for
intelligent providers of private debt
capital to create a layer in the capital
structure between the ABL (on top)
and the private equity sponsor below.
This layer should offer an excellent
risk-adjusted return for fixed-income
investors seeking yield. Expect to see
pension funds, insurance companies,
sovereign wealth funds and other foreign investors that search for low risk,
higher-yielding securities to enter this
market in 2010 and drive demand for
this product for the next several years.
There are many reasons for borrowers to embrace this type of private debt
capital as well. Among them and most
important is certainty of close. In these
types of transactions, borrowers negotiate directly with investors who are
committed to funding. Unlike most high-yield and public transactions, a material
change in the credit markets will not
release an investor from its contractual
commitment or allow the investor to increase the agreed-upon yield or spread.
This provides issuers and financial sponsors seeking capital for their LBO transactions certainty on pricing, terms and
structure. The lack of public disclosure is
also a significant advantage. In private
negotiated transactions, companies are
not required to file disclosure documents with the Securities and Exchange
Commission, which allows them to keep
financial performance, executive compensation and competitive information private. Borrowers also save the
substantial disclosure expenses associated with being a public reporting
company. Finally, flexibility is another
key attribute. Private negotiated
transactions can offer borrowers far
more flexibility in prepayment terms,
coupon composition, amortization,
maturity and covenants.
What are the prospects for turnaround
consultants, bankruptcy specialists and
attorneys?
Unfortunately, 2010 will be a disappointing year for many turnaround
consultants, bankruptcy specialists and
lawyers. This will be a direct result of the
epidemic that swept through lenders
in the U.S. and Europe that I refer to
as “AEP Syndrome.” AEP Syndrome is
closely akin to the H1N1 flu virus in that
it affects all who come in contact with
underperforming leveraged loan credits
and borrowers. AEP Syndrome is brought
about by lenders who Amend, Extend
and Pretend. There are no signs of abatement in 2010 for AEP Syndrome.
The bright spot for turnaround
consultants and law firms in 2010 will be
the emergence of private equity firms
as the holy grail. As more PE firms try to
salvage and recapitalize underperforming companies in an attempt to posture
themselves for new fund-raising in 2011
and 2012, they will need to place window
dressing on some ugly abodes as they go
back to market. They will need to weave
a tale of hands-on management and
debt-to-equity conversion in many of
their portfolio companies. Those standing to gain the most from this display of
creative writing will be the turnaround
professionals who will be best able to
articulate this story and the attorneys
participating in debt-to-equity conversions both in and outside of bankruptcy.
A double whammy will also affect
attorneys and bankruptcy specialists,
however, in 2010 because bankruptcy
will just not be the same going forward.
The new bankruptcy landscape will be a
much shorter process. Reorganizations
under Chapter 11 will be increasingly
difficult to accomplish. Section 363 asset
sales and debt conversions to equity will
rule the day, otherwise liquidations will
occur. In addition to the effect that the
new bankruptcy rules have had on the
process (among them, 120 days to either
accept or reject leases for properties,
adequate assurance of future payments
to utilities companies, less time for the
debtor to exercise the exclusive right
to propose a plan of reorganization), in
