With the current economic slowdown, bankruptcies are on the rise and along with that comes an increase in demand for accounting firms that provide bankruptcy services.
“We’re a counter-cyclical business,” said Marc Bilbao, managing director of the LA office of Ernst & Young’s restructuring advisory group. “As the economy slows down,which it has over the past six to nine months,we have picked up quite a bit of work in bankruptcy and restructuring.”
Dean Samsvick, managing partner of the Costa Mesa office of New York-based KPMG, echoed Bilbao’s observations.
“This is a pretty active marketplace right now,” Samsvick said.
Samsvick said he is seeing a fair amount of bankruptcy work in the traditional manufacturing side as well as in the high technology sector,paradoxically excluding failed dot-com businesses.
“I can’t say we got a lot of work out of the dot-com sector,” Samsvick said. “The businesses that failed there just came and went and in most instances it was purely due to a lack of funding.”
M. Freddie Reiss, managing partner of the LA office of PricewaterhouseCoopers and founder of the company’s corporate restructuring practice, said that he doesn’t expect Orange County to get hit that hard by the nation’s economic doldrums, but that the high-tech sector obviously is struggling.
“OC is having a bit of a slowdown in the technology sector, including dot-coms,” said Reiss.
But apart from that and the retail sector, Reiss doesn’t think OC is going to get hit that much harder by the slowdown.
“I expect we’ll see more retail bankruptcies over the next several months and that in turn affects the malls and other real estate interests so the slowdown comes full circle,” Reiss said. “That’s what we’re seeing in San Francisco with the collapse of the dot-com sector.”
Reiss said the company’s restructuring practice is its fastest-growing business. Since he founded the practice 12 years ago with a staff of eight, it has grown to 49 partners and 400 other staff nationwide. The PricewaterhouseCooper restructuring group’s retail clients include Frederick’s of Hollywood. The practice also is representing the official creditors’ committee for bankrupt San Francisco utility PG & E.;
“We hired about 80 people for our bankruptcy business over the past several months,” Reiss said.
Reiss also negotiated a deal with the investors of Newport Beach-based motion picture theater chain Edwards Theatres Circuit Inc., which he expects will be finalized next month.
Accounting-speak for these types of cases typically leans towards using terms like “restructuring services” or “corporate recovery” since Big Five accounting firms prefer providing consulting to firms that look like they are in trouble before they reach the extreme stage of bankruptcy.
“Our target market in this sector comprises of companies starting to show signs of financial distress,companies with things like operating losses and cash-flow deficits,” Samsvick said. “Ideally, you get in when you can still provide some input for restructuring.”
Firms like PricewaterhouseCoopers may install temporary executives to assist with restructuring.
Companies that foresee trouble in making interest payments on debt often will seek out restructuring help from accountants before reaching bankruptcy.
Reiss said that about eight months ago he saw a very significant increase in volume tied to high-yield debt financing. Many of those financing arrangements don’t require interest for the first 12 months.
“If a company doesn’t have the cash from revenues it needs to begin making interest payments when the interest is due then the company could be in trouble,” he said, adding that his client list includes many firms that made high-yield debt financing arrangements.
The Costa Mesa office of Deloitte & Touche LLP does a lot of work with companies from a tax and restructuring perspective.
“We help clients develop a plan of reorganization and help them plan for bankruptcy court if things get that far,” said Jannie Herchuk, a partner in Deloitte’s Costa Mesa office. “We’re not seeing a significant pickup of that work in OC as yet, since it’s not a large area of work for us.”
When things do get to bankruptcy, then the Big Five also provide consultancy for negotiations with creditors and preparing for bankruptcy court.
Samsvick said KPMG began targeting the bankruptcy sector several years ago.
“But we have seen it take off since last year,” he said.
Steve Varner, a Los Angeles-based managing director of Arthur Andersen’s corporate restructuring group said his company’s clients in healthcare, leasing companies, telecom firms, agriculture and the utilities sector have mirrored overall economic trends over the past two years.
“We’ve seen a proliferation of companies within these industries having to go through some type of operational and financial restructuring,” Varner said, adding that this part of Arthur Andersen’s business has seen a 25% to 50% revenue jump over the past year.
“Managed-care and assisted-living healthcare bankruptcy trends are older, because we saw some regulation changes there 24 months ago,” he said. “Plus the e-business phenomenon did not take hold as quickly as anticipated.”
Arthur Andersen has 45 partners and professionals of the Western region and about 175 nationally completely focused on corporate restructuring.
The telecom sector also has provided a lot of work for accounting firms providing bankruptcy and restructuring services.
PricewaterhouseCoopers’ Reiss said that many companies in the telecom sector are in dire straits.
“Telecom is under extreme duress right now,” he said.
Ernst & Young’s Bilbao echoed Reiss’ observation.
“Now that the capital markets have dried up for the telecom sector, we’re seeing quite a few bankruptcies in that area,” Bilbao said.
Bilbao said in some cases the capital telecom companies raised in advance of revenues was not enough and the companies aren’t yet generating enough revenues to fund any further telecom network build-out, and they are having trouble raising additional capital.
“There was a flow of capital from equity and sub-debt markets into telecom that has since dried up,” said Andersen’s Varner.
Bilbao also said a lot of telecoms no longer have access to funds to build out their wired and wireless networks.
“So they wind up losing money hand-over-fist,” he said. n
