A New Year Brings New Challenges
A new year always brings new and unexpected challenges. Turnaround professionals make careers out of expecting the unexpected and helping their clients turn challenges into opportunities.
We asked several turnaround professionals to let us know, in a few words, what they see coming in 2014, and here are their comments:
For 2014, I see a continued emphasis on out-of-court restructurings and refinancings when company management and ownership commit early on to obtaining appropriate professional restructuring consulting and insolvency legal advice. I’m expecting that lenders in these instances will provide a reasonable length of time for credible turnaround or other exit strategies to play out, provided there are specific action plans and timelines in place.”
—Robert Riiska, Senior Managing Director and Head of Western US Practice, Focus Management Group USA, Inc.
2013 ended as being one of the slowest years for ‘Traditional Restructuring Work.’ This was a direct result of two primary factors: first, the continuation of a historically low-interest-rate environment allowed companies that are barely making loan covenants to continue to be compliant, and, secondly, large amounts of new capital was available in the market. As a result, as companies became distressed, lenders simply sold off their positions to other lenders or stakeholders instead of going through a traditional work-out or loan restructuring. This, of course, does not address underlying business issues or operating problems – it merely defers the issue to a later date.
As far as 2014 looks, we expect more of the same to be in place at least through the first half of the year. When interest rates begin to tick up – and they will have to sometime soon as the Federal Reserve cuts back on its stimulus – companies and lenders will have to ‘face the music’ for the first time in a long time. A return to more normal levels of restructuring activity appears to finally be on the horizon, with the exact timing the only remaining question.”
—John F. Hedge, Principal, Scouler & Company, Los Angeles, CA
“The focus of my work is on lower middle-market businesses (revenues less than $100 million) which are underperforming or financially distressed. Many of these businesses tend to have operational and financial issues, regardless of macro-economic issues. For 2014, industries which will continue to experience challenges include those that have been or will be directly or indirectly impacted by federal government budget cuts. Retail chains and their suppliers will continue to face pressure on margins as the new normal for consumers is to be more frugal and to price shop more extensively on-line before committing to larger purchases. Some stakeholders in this marketplace are now becoming more proactive with their clients and referring in turnaround professionals earlier than in the past, which allows more time for a successful turnaround of a client. With the top line of clients’ income statements gradually increasing, there are more opportunities to be creative to restructure a business. For 2014, I am cautiously optimistic that the trend for turnaround and restructuring work will continue to improve.”
—Bette Hiramatsu, MBA, CIRA, President, Hiramatsu & Associates, Inc.
“The decision by the Fed during its final meeting of 2013 to begin winding down the stimulus purchasing program signals that the Fed has confidence that the economy will continue to grow, although the pace of growth is expected to remain sluggish. While the turnaround industry is generally thought to be counter-cyclical, meaning there are more opportunities for turnaround professionals when the economy is in trouble, we expect that as interest rates begin to rise amidst a slowly improving economy, there will be opportunities for turnaround professionals to improve the performance of struggling businesses and keep them out of bankruptcy. However, we also expect continuing challenges for businesses in the consumer products industry, particularly those distributing through ‘brick and mortar’ stores, as consumers are impacted by a weak labor market, lower wage levels, government regulation, and economic uncertainty.”
—Ellen K. Gordon, Senior Director, Avant Advisory Group
“2013 saw a large amount of equity capital chasing a limited number of available transactions, resulting in many highly competitive transaction processes often financed by highly leveraged, low interest rate, covenant-lite loans. Additionally, default rates remained near historic lows. Further, the restructurings that did take place were often pre-arranged (or pre-packaged) and/or transactional in nature. As we begin 2014, there is little that causes me to believe that we’ll see a huge turnaround in this trend in the near term. Due to the covenant-lite nature of the recent lending market and continued low interest rates, absent true liquidity crises, there will be few triggers to bring companies and their lenders to the table this year. I would expect to see this trend start to turn in late 2014, but more likely in 2015 and beyond.”
—Nathan J. Cook, Managing Director, AlixPartners
“Companies will want to continue and/or improve their financial, analytical, cash, credit, and business management as the macro-economic factors unleashed by the Federal Reserve’s ‘quantitative easing’ play out. Those looking to exit their business must ensure that they provide sufficient time to create a marketable company, that they have structured a sound tax plan, and that they monitor the number of businesses moving to market. Banks and investors will continue to scour for deals to purchase/fund on an extremely selective basis. Companies and government agencies with strong balance sheets and an ability to react quickly to changing environments will weather potential storms better and/or improve their positions regardless of the economic environment, placing them in a position to avoid having others dictate their futures, or, even better, to acquire market share strategically.”
—Terry Shope, Principal, MPL Consulting, Inc.
“The overall marketplace remains slow in terms of chapter 11 filings and distressed transactions. There appear to be some actions being taken by secured lenders and creditors in terms of exploring resolutions to ‘tired’ credits, including distressed transactions. While there is some activity in this segment, again, the number of new matters is relatively low.
On the other side of the equation, distressed (private equity) funds are flush with capital and aggressively looking for transactions. This creates a great transaction marketplace opportunity for distressed or bankrupt companies exploring sale options. Distressed funds move through the transaction process relatively quickly, which means reduced administrative costs in bankruptcy or reduction of ongoing losses and risk for distressed companies through out-of-court restructurings.”
—Gregg Yorkison, Managing Director, C.Y.G.