NEW BANKER’S HAT – Investment Firms Form Restructuring Units
By RAJIV VYAS
Investment banks are known to morph themselves according to changing times.
When technology was hot, investment bankers hired tech analysts and deemed themselves tech bankers. After that came biotech bankers.
Now with the slowing economy and the prospect of more bankruptcies, investment banks in Orange County and elsewhere are building up their expertise in restructuring and reorganizing companies. Their goal: to help faltering companies with advice on how to keep going in tough times.
Los Angeles-based Barrington Associates formed a restructuring group six months ago. The firm now has seven investment bankers in the group, out of a total of 30 professionals.
“Traditional aspects of mergers and acquisition advisory work is down significantly,” said Andy Graham, senior vice president in charge of Barrington Associates’ Newport Beach office.
The restructuring practice is offsetting some of the decline in Barrington’s traditional mergers and acquisition work, Graham said. The group is headed by Mike Rosenberg from Los Angeles with one person working out of San Francisco.
Restructuring work “has been good, unfortunately,” Graham said. “There has been a growing need. It has been coming from private equity firms, debtors and bankruptcy lawyers.”
Houlihan Lokey Howard & Zukin, also based in Los Angeles, has a restructuring group with 79 investment bankers nationwide, including 30 in the Los Angeles office alone.
The increase in demand for restructuring help comes on the back of the slowing economy. When times were good, fast growing companies who had easier access to the debt market borrowed funds to fuel growth.
With the slowdown, companies are unable to grow as fast as they did a couple of years ago and also are facing difficulties servicing their debt. Bankruptcy lawyers, bankers and other lenders are asking companies to restructure their balance sheet and operations.
“At the outset of this year, many companies developed internal budgets assuming revenue would continue to grow at the same rates they had experienced during the prior 18-to-24-month period,” said Kimberly Valentine, a partner with Deloitte & Touche Corporate Finance LLC in Costa Mesa.
“Unfortunately, this rapid growth rate did not materialize,” she said. “As such, many companies are burdened with overbuilt infrastructure and overhead expenses without the revenue and profitability to support the aggressive growth plans established at the beginning of the year.”
Deloitte’s investment banking arm set up a restructuring practice eight months ago when it spotted demand for such services. The firm now has three investment bankers, who help companies make their debt service more manageable.
“Unfortunately, a lot of people got in over their heads and a lot of companies are extremely leveraged, beyond what they can support,” Valentine said.
One way a company can restructure finances is to rework debt by negotiating with lenders. Debt with higher interest rates is converted at lower rates. Sometimes companies ask for deferral in interest and principal payments.
“For whatever reason, companies may have overleveraged themselves and their notes are coming due and they are not generating the profitability to meet those interest burdens,” said Christopher Halloran, managing director of Irvine-based L.H. Friend, Weinress, Frankson & Presson. “Companies are therefore in need of help and are trying to figure out a way to change the capital structure on their balance sheet.” Halloran said that he is working with a Southern California company that wants to restructure its debt. The company is a midsize manufacturer with $75 million in yearly revenue.
The other way to restructure debt is though bankruptcy court.
“What you can do is arrange for a bankruptcy filing, which allows you to settle with all the creditors under the protection of the court,” said Charles Ruck, an attorney in the Costa Mesa office of law firm Latham & Watkins.
Ruck said he has been involved in many pre-packaged bankruptcy proceedings recently.
“You basically recapitalize the company through a bankruptcy proceeding and you enter the process with the exit already planned out,” he said. “It is different from what most people think of in bankruptcy where you are running from your creditors. You are just using the powers of the bankruptcy court to clean up the balance sheet and the capital structure of the company.”
Ruck said that the number of companies restructuring their balance sheets with the help of bankruptcy court is up some 50% in the past year.
“I have been involved with pre-packaged bankruptcies several times over the years but many more times recently,” he said.
Besides a sharp drop in sales, growth companies also are encountering reluctant lenders and a dry capital market.
“Many companies are turning to mezzanine or pure equity capital because they can’t support all the debt,” Valentine said. “Even tough equity is more expensive, the alternatives for debt-laden companies are limited.”
Also, banks rarely lend these days on expected cash flows of a company. Most of the lending is asset-backed, which means companies need to have inventory, equipment or a plant to borrow money from banks.
This makes borrowing by technology companies more difficult.
“There are no IPOs, very little secondary offering, and restricted cash-flow lending occurring in today’s market,” Valentine said. “Technology companies don’t have many assets so they are downsizing or rightsizing. The financing options have really deteriorated for companies and I don’t see that changing for at least another couple of quarters.”
Companies are seeking advice on restructuring their payrolls too, Valentine said. Deloitte has a separate restructuring group that deals with companies that want to restructure and reduce their headcount.
“We have a restructuring group and a human capital group that can help restructure in terms of people (head count) and then we also have a group that can help restructure in terms of both balance sheet and headcount issues,” Valentine said.
