Okay.. sorry.. the title had a nifty ring.
NEW YORK (Reuters) - Corporate restructuring is poised to surge in the coming year as today's flood of junk bonds fuels a sharp increase in defaults, bankers say.
Companies have issued record volumes of junk bonds in recent years, spurred by low interest rates and a wave of leveraged buyouts. And yield-hungry investors were snapping up the riskier debt.
If history is any indication, though, some companies will default on the debts.
"If you look at the issuance level in the high-yield debt markets over the last three years, you can say with a high degree of confidence that, during the next five years, there will be huge volume of restructurings," said Jeffrey Werbalowsky, co-chief executive of Houlihan Lokey Howard & Zukin, a top investment bank in the restructuring field.
Default for most investors means big losses, a function of industry problems or economic downturn. But among Wall Street's restructuring advisors, bad times mean good business.
Bankruptcy rules bar creditors from acting as advisors, so the restructuring business is dominated by smaller, independent firms such as Blackstone Group and Rothschild.
Three publicly traded investment banks -- Lazard Ltd. (Research), Greenhill & Co. Inc. (Research) and Jefferies & Co. Inc. (Research) have restructuring practices that provide balance, thriving when their primary merger businesses slide.
So while M&A shows no signs of slowing, these firms are likely headed for a pick-up in restructuring.
Poised to rise
A strong economy and the lowest interest rates in decades pushed default rates for non-investment grade, or junk bonds down to 1.25 percent last year -- a seven-year low and below the historic 5 percent average.
Looking ahead, Professor Edward Altman, who tracks credit markets at New York University's Stern School of Business, sees defaults this year doubling to 3 percent.
"The outlook is very clear, the only question is the timing," said Altman.
Previous restructuring booms trailed bullish junk bond markets. High-yield issuance last year reached $123 billion in 2003 and $110 billion last year, according to Thomson Financial Securities.
Junk bond volumes only approached those levels once before and those were the record years of 1997 and 1998. Not surprisingly, there was record default and bankruptcy activity from 2000 through 2002.
But banks noted that the latest vintages of debt are also riskier. More bonds have been issued at lower, more speculative grades that imply a greater chance of default
Issuers also have taken on bigger debt loads relative to their ability to repay, a reflection of the recent wave of leveraged buyouts.
"In 2006, 2007, you're going to see a big increase in defaults," said Barry Riding, co-head of restructuring worldwide at Lazard, a leader in the business.
Even now, when overall default rates are low, advisors are busy dealing with some struggling industries.
High energy, pension and other costs may push Northwest Airlines Corp. (Research) and Delta Air Lines Inc. (Research) into bankruptcy. Auto parts suppliers, such as Collins & Aikman Corp. and Meridian Automotive Systems likewise were squeezed by rising costs and an inability to raise prices.
Still, low rates and cash-rich hedge funds are helping weak companies refinance debts and postpone the day of reckoning. Defaults have remained low, but bankers say struggling companies cannot forever avoid their problems.
"The availability and receptivity of the high-yield markets have reduced the number of restructurings," said Greenhill restructuring co-head Bradley Robins. "For a lot of those companies, you're going to see two to three years from now that their problems weren't resolved."
http://money.cnn.com/2005/08/23/markets/bondcenter/junkbonds_defaults.reut/index.htm
Topic: Junk Bonds for Jack Morris (Read 1264 times)