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FTI Shares Market Predictions, Observations
Baltimore-based turnaround firm doesn't expect credit markets to open up until at least second half of 2008.
March 9, 2008
Tightened credit markets have turned the tables on borrowers and lenders, and more companies in sectors such as retail, housing, autos and ethanol will seek restructuring services this year, according to FTI Consulting.
On Jan. 31, the Baltimore-based turnaround firm distributed a list of market drivers it believes will affect corporate borrowers and restructurings the most in 2008: credit markets remaining restricted, lenders calling for more covenants, a downturn in US consumer spending, continued rough patches for the housing and automotive sectors, and ethanol industry difficulties.
Randall Eisenberg, an FTI senior managing director, explains to IDD that lenders are adding more covenants (which can be triggered earlier) to facilities than in previous years to protect themselves.
Randall Eisenberg
"Lenders are more rigid in evaluating new loans and assessing a company's creditworthiness," says Eisenberg. "One challenge many of these institutions have now is that they want to feel comfortable that a loan is going to trade at par once it's booked. In today's market, the worst thing is to close a deal and find it's trading at 90 cents."
Eisenberg, who co-heads the corporate restructuring practice within the FTI Corporate Finance division, says FTI has been serving companies in the subprime and retail spaces since the second half of 2007. "Up until early to mid-2007, the game was very simple. If companies had issues, they'd go raise more money. The credit markets had been so robust for so long that there was an abundance of liquidity available to solve companies' problems, and now that liquidity has dried up."
Consumer product companies have also been coming to FTI of late, as well as a few ethanol firms. Some of FTI's recent high-profile restructuring engagements include representing the companies and/or creditors' committees in situations such as Delphi, Dana, Northwest Airlines and US Airways.
Eisenberg predicts more corporate bankruptcies and out-of-court restructurings this year. Indeed, FTI generated $1 billion in revenue in 2007, compared to $708 million in 2006. FTI earned $92.1 million in net income for 2007, versus 2006 income of $42 million.
FTI Corporate Finance, meanwhile, generated $261.6 million in revenue in 2007, versus $212.6 million in 2006. "The mere fact that there is not as easily-obtainable financing is forcing companies to fix their business and restructure their operations rather than refinance their way out of difficulties," says Eisenberg.
In FTI's Feb. 28 announcement regarding its full-year and fourth-quarter 2007 financial results, Jack Dunn, the firm's chief executive and president (who spoke to IDD in January), stated, "We are seeing broadly based demand in every one of our segments from credit-related engagements -- and that demand appears to be accelerating."
Eisenberg predicts the credit markets will not start to ease up until at least the second half of 2008. "Banks and financial institutions are trying to shore up their own balance sheets and trying to deal with a number of credits that are trading below par," he says. "The credit issues in some major industries, such as subprime or housing, are going to need to settle down before we see the credit markets open up."
Eisenberg says the automotive sector will see more restructurings as domestic OEMs continue to lose market share to foreign competitors.
He agrees with Weil, Gotshal & Manges' Harvey Miller, who said in an interview with IDD, "Lenders were so anxious to get the business in the past few years that they were willing to excise from standard loan and credit agreements covenants that gave the lender a certain level of control and oversight."
Eisenberg says the situation Miller described existed for the past few years and ended in mid-2007.
"When the credit markets were highly robust, borrowers had the upper hand and would insist upon fewer and looser covenants and lower fees," he explains. "Lenders were willing to give them more favorable loan agreements because of the abundance of liquidity available. The lenders were forced to reduce their restrictions and covenants in order to win business. Now, you see the opposite extreme, where it has become much more difficult -- absent being an investment-grade company -- to obtain a loan."
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Randall Eisenberg
Jack Dunn
Harvey Miller
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