After 2009, expect U.S. bankruptcies to be quicker, cleaner and smaller.
Restructuring professionals logged plenty of long nights in a year that began with the Lehman Brothers collapse still reverberating and saw the largest industrial bankruptcies ever in General Motors and Chrysler.
But now, many troubled companies have moved out of the immediate danger zone, and mega-bankruptcies will be few and far between.
Distress will still provide fodder for dealmaking, though, as investors look for ways to get out of assets they didn't expect to own.
Bankruptcy experts say they are more likely to use a "quick cleanse" approach to get assets out of bankruptcy.
"Part of the dynamic in this massive restructuring wave was that debtors are impatient with a two- to four-year bankruptcy," said Lisa Donahue, co-lead of the turnaround and restructuring practice at AlixPartners.
"Good things don't happen to companies that stay in too long."
Restructuring advisers and bankers expect to be busier than their bankruptcy lawyer counterparts next year.
Turnarounds in 2010 "will take place in the conference room, not in the courtroom," said Todd Snyder, a managing director at Rothschild who advised the U.S. government on the auto industry.
Still, in some areas like commercial real estate, struggling local banks, and debt-laden private equity portfolio companies, restructuring experts say they will be just as busy as 2009, or more.
"This year is just the beginning," said Phil Rosen, a real estate attorney at restructuring powerhouse Weil, Gotshal & Manges.
He said casinos, hotels and office landlords will continue to feel the pain. "Next year there are an astronomical number of loans coming due."
In commercial real estate, Rosen said, lenders are under pressure not to renegotiate, refinancings are slim, and some of the industry will finally start to feel the effects of a pullback in rents.
Retail and gaming will also still be at risk as the U.S. economy continues to struggle with high unemployment and a lack of consumer spending, restructuring experts said.
"We will see a lot of wall hitting," said Lawrence Adelman, a principal for AEG Partners, which advises underperforming and distressed companies. "We will see a pickup of middle-market bankruptcies. They've kicked the can down the road a little bit but they are also paying higher lending fees and interest rates."
Companies with revenues of $1 billion or less are expected to be hit the hardest, as mid-market companies are still having a hard time getting loans even though credit markets have opened up somewhat for larger companies.
The latter half of 2009 saw a slowdown in bankruptcy filings as companies renegotiated loan terms. The so-called "amend and extend" agreements are sometimes criticized for only pushing problems into the future, but restructuring experts say that trend is likely to limit the amount of corporate defaults next year.
"The default rate will drop from this year, but it doesn't mean that nothing is going on," said Kenneth Buckfire, managing director of Miller Buckfire & Co, an investment banking specializing in financial restructuring. "I call them 'soft-defaults,' which are not visible to the marketplace."
In 2010, few companies are likely to run into sudden cash crunches that forced companies like Lyondell Chemical Co. to tumble into bankruptcy this year. Rather, companies will try to follow in the speedy footsteps of Chrysler, GM, and lender CIT Group Inc., who proved bankruptcy can take just about a month.
"The cycle got much faster — no one would have predicted this," said Mark Cohen, head of restructuring and workout at Deutsche Bank. Companies flew through the default cycle in this recession compared with victims of the dot-com bust, he said.
Companies that do end up in bankruptcy will be strategic, and the prepackaged bankruptcy or prearranged sale will continue to be popular, experts said
"Companies might need to sell an asset ... and if it's a very troubled company, (a buyer) will tell the company we'll close on this sale, but we want to do it in a Chapter 11," said Jan Baker, a bankruptcy attorney at Latham & Watkins.
Still, some $700 billion to $1 trillion in corporate debt will come due from late 2010 through 2012, giving companies only a couple of years to work out their issues before the debt markets are overrun again with requests for refinancing.
"'09 was the busiest period I've ever seen in my career," said Rick Cieri, a bankruptcy partner at Kirkland & Ellis. "People in the industry feel that the amend and extend deals have pushed problems out at least two years."
Distressed investors say they still expect to be busy in 2010. Exit financing deals for companies trying to emerge from court protection will continue and some investors who ended up in control of new assets will look for a way out.
"There are a lot of unnatural holders of equity. They will want to monetize that equity," said Deutsche's Cohen.
Such investors say they are still focused on long-term returns and expect to keep doing deals in bankruptcy, because the recession has given them an opportunity to buy brand name companies at bargain prices.
Also, while some distress investors have made huge returns in the high-yield debt market this year, that won't be around next year. They'll have to find other ways to put their money to work.
"We've been extremely active this year," said Lynn Tilton, chief executive of private equity investor Patriarch Partners. "It's probably the best buying opportunity we've known and we expect in 2010 that will continue."
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