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Friday, February 19, 2010

Next wave of bankruptcies coming - Grant Thornton

Courtesy - Moneycontrol

Distressed investors should brace for another wave of bankruptcies as early as this year as more corporate debt payments come due, a senior partner at Grant Thornton said on Thursday.

Debt extensions have helped put off various crises and postponed some distressed situations or even bankruptcies. As the economic recovery stretches, however, more corporate pain can be expected, said Harris Smith, a managing partner with Grant Thornton's private equity group based in Los Angeles.

"I think it's a matter of time before the bankruptcies start increasing again," Smith told Reuters. "People thought everything was getting better, but it perhaps it isn't."

Companies defaulted on a record USD 329 billion of corporate debt worldwide in 2009 as the protracted global recession sapped companies' ability to pay their debt, Moody's Investors Service said earlier this month.

Defaults were up 17% from 2008, when they totalled USD 281 billion, the previous record high, Moody's said.

By comparison, during the 2001 to 2002 bankruptcy wave, which included the massive failures of WorldCom and Enron, there were USD 342 billion of defaults, versus USD 610 billion during 2008 to 2009, according to Moody's.

In a paper released earlier this month, Grant Thornton said the difficult environment for banks and other lending institutions is changing the way private equity does business.

"With very little leverage available to complete deals, private equity deal-making came close to a standstill last year," the report said.

In 2009, U.S. deal value hit its lowest total since 2001, with only 474 private equity deals completed for a total of USD 31 billion. In 2008 there were 724 deals completed for a total of USD 62 billion, the report said, noting the tightening standards for deal-making.

"There will be more due diligence," said Marti Kopacz, Grant Thornton's national managing principal of its Corporate Advisory and Restructuring Services.

"The error in the hyperliquidity market was that there was so much capital in the market that no one did due diligence," she said. "No one worried because there was always someone out there that would buy the loan.

"When the hyperliquidity started to deteriorate and there wasn't a market for every loan, trouble began."

According to an ACG-Thomson Reuters DealMakers Survey, 72% of respondents expect mergers and acquisitions volume to increase moderately over the next six months, the report said.

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