- Investment banks that specialize in distressed companies and recession tactics are in high demand.
- Top restructuring bankers told Business Insider they were overwhelmed with work when customers tried to get the economic consequences of the coronavirus pandemic.
- This crisis is different from anyone who has seen it before. They advised companies on how best to obtain liquidity and how to deal with tough inquiries to lenders.
- The ongoing restructuring has been turned upside down, and many transactions that are already underway have been torn apart due to massive price fluctuations in the capital markets.
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As the coronavirus crisis destroys the US economy, business leaders are choosing investment bankers who specialize in recession tactics, defaults and hardship.
When companies find their balance sheets in ruins – whether due to a gradual deterioration or a sudden, unpredictable shock – restructuring bankers are used to clear up the mess and clear the way for sustainable future business.
Even if they're not on the sidelines, companies that are concerned with how to stay afloat turn to restructuring consultants for help coping with a storm that leaves few unscathed. Some bankers may work with companies on creative finance, liability management, or other measures.
But bankers told us that the current financial challenge is different from the one they saw before.
"It is not surprising that the activities are high. The talks are high," said Andrew Yearley, Senior Restructuring Banker at Lazard, one of the industry's leading practices.
The story was the same as that of other restructuring specialists Business Insider spoke to: there have been many consecutive calls in the past two weeks (face-to-face meetings are understandably off the table). It is a bright spot in investment banking with colleagues focused on M&A and IPOs where work is slow to creep.
BI interviewed a handful of the industry's most experienced restructuring bankers, veterans who have solved several economic problems, to find out what advice they give to company executives, board members, and creditors.
Restructuring agreements that were in progress a few weeks ago are being torn apart and reassessed. In the short term, it is a race for liquidity for most companies.
Companies that were in debt before the crisis have worse prospects. Many turn to lenders with unprecedented requests for breaks – and receive them.
The projections of the depth of the economic impact are breathtaking. A recession is now a foregone conclusion as some banks have ball parking a GDP loss of almost 25% in the second quarter. Economists expect unemployment benefits could explode over 2 million, three times the previous record high.
"I think there is no sector that will remain intact," said Soren Reynertson, founder of GLC Advisors.
Why this crisis is different
What started as an outbreak that primarily struck China has spread worldwide and quickly crippled entire regions and businesses as governments struggle to contain the death toll.
Entire cities and states in the United States have been effectively closed, except for key companies. That means billions of dollars in industries like retail, travel, hospitality, and hospitality, among other things, are in a frozen state.
"Unlike other market slumps, concern is not only felt among the most heavily indebted issuers. All Fortune 100 companies are currently reviewing their liquidity options and considering any contingency plan," said Roopesh Shah, senior managing director at Evercore's restructuring business Insider. "The scale and breadth of this crisis – and the underlying social fear that has its roots – differentiates the current situation from previous downturns."
What could be contributing to the disaster this time is a tinderbox of $ 10 trillion in debt that US companies have amassed, due in part to low interest rates and lax covenants and standards in the years since the last financial crisis is.
"Many companies that were restructuring, rethinking business plans and rethinking capital structures weren't," Todd Snyder, founder of TRS Advisors, told Business Insider.
"Companies that have spent a lot of money raised through debt to fund acquisitions, dividend payments, and share buybacks are people who will run out of rope in this type of market," said Snyder, a three-decade-old restructuring veteran who led him Rothschild’s business for more than 15 years before starting his own company in 2017.
Look no further than the airlines gutted by travel bans. American Airlines, whose market cap has now dropped from more than $ 13 billion in February to just over $ 6 billion Criticism drawn for billions of dollars in government support after simultaneously incurring more than $ 20 billion in net debt Spending over $ 12 billion on share buybacks since 2014.
One of the most difficult components for companies is the market hit that is hit so quickly and that unprecedented volatility passed and gave little information about what the economic reality will look like in a few days.
"I went through some of these cycles. This is unlike any other, just in terms of speed, the sheer volatility of the market, and probably most importantly, just the uncertainty of the outlook," said Yearley, who has been with Lazard since 1998.
This makes project planning of revenues and other essential measures for business planning almost impossible. Public companies have shortened the forecasts and suspended the guidelines for 2020.
"The reactions from companies and customers were similar in recognizing that there is now a new normal – and no one knows what that is," said Yearley. "What they do know is that their business prospects have changed suddenly and fundamentally."
Money makes the world go round
Companies are seeing their sources of income evaporate overnight. The main concern for most companies right now is liquidity: do they have enough money to boost operations until the pandemic is over?
"Customers of all sizes are asking for liquidity. The most important factor that restricts a company's freedom and options is a liquidity squeeze," said Shah, who spent a decade at Goldman Sachs and previously performed global debt advice and restructuring at 2017 Evercore.
"Businesses need to protect themselves by cutting costs and minimizing operating costs. They have to draw bank lines," said Reynertson.
For this reason, we saw early on how company giants took measures to save money.
Global banks Share buybacks suspended. Boeing is reportedly starting to lower Credit facilities of nearly $ 14 billion on March 11. Best Buy this weekend was full $ 1.25 billion credit facility in addition to suspending buybacks.
Many companies, from hotel and flex space companies to conglomerates like General Electric, are already resorting to layoffs.
"Cash will be king here for a while until things settle down," added Reynertson, who co-founded GLC in 2009 after leaving a senior position in UBS's restructuring business.
Some industries are saved. Legislators early Wednesday morning signed a $ 2 trillion aid package agreement to mitigate the economic impact. The bailout, the largest in American history, includes hundreds of billions in corporate grants.
"Tough asks" to lenders
Even after taking drastic steps to keep cash, many companies run the risk of violating covenants or missing interest payments.
The restructuring bankers Business Insider spoke to said they advise companies to talk to creditors to get reparation and save more time. This was in line with what some top restructuring lawyers said to Business Insider – they expected some transportation and hospitality talks with lenders and landlords to be settled out of court.
"In a normal environment, these are tough questions. In this environment, every business does," said Yearley. "The banks and the credit community have lines that form at their doorstep with these requests, and they are overwhelmed in and of themselves."
"If you have these exogenous effects on the economy and suddenly you have a rapid contraction that businesses cannot adjust to in real time, it doesn't matter how cheap your debt is if you don't have cash flow to work with. " Service it, "said Snyder.
Yearley said he hoped companies "taking a break" from their credit burdens would have "fairly accommodating talks" given the mitigating circumstances.
Snyder said he had already seen some evidence of this from the banks, which, unlike the financial crisis a decade ago, are among the most stable and capitalized pillars on the market.
"Banks that are more liquid in this crisis than in 2008 and 2009 are more flexible wherever they can," said Snyder. "One of the things we've seen is that you can go to your bank lenders and negotiate practical circumvention options under certain circumstances. But of course that depends on the crisis being relatively short."
It can also be partly because of it Governments are putting pressure on banksThe Federal Reserve provided trillions of dollars in short-term loans to promote market liquidity and part of the burden of stabilizing the economy.
Before speaking to lenders, Evercore encourages customers to reevaluate their loan documents and ensure that they understand all the terms and know all the fundraising mechanisms available to them.
"You need to understand the financial maintenance covenants and project a" lower for longer "scenario. You should also understand every basket available to take on additional debt and equity when needed," said Shah.
"Understanding all the terms in the loan documents, how they work together, and potentially creative or alternative interpretations of those terms could make the difference between companies that have a viable contingency plan and those that don't."
Current transactions are torn apart
Restructuring is nuanced, complicated business involving a number of stakeholders. But many that were already running were thrown out the window.
"Another result of the current crisis is the number of restructuring transactions that are currently being torn apart and that will require the debtor to start over," said Shah. "There are numerous examples of lenders refraining from pre-arranged deals, holding back funding sources for investing capital committed to invest, etc."
The other bankers shared similar feelings:
"Probably everyone will reevaluate the risk. If there were deals on the table three weeks ago, they'll all be reevaluated," said Yearley.
"Existing business is very difficult. And we have to rethink what we focused on just two weeks ago," added Reynertson.
Many lenders are reluctant to use capital due to market uncertainty. And companies could go bankrupt much longer than expected, "while liquidity is drying up and additional funding is more difficult to find," said Shah.
However, Reynertson was confident that the business would still take place after the markets calmed down.
"If there was logic for a transaction, it still exists, but the economy may need to be changed," he said.
"Corporate restructuring needs to find a way to access capital and meet its commitments. They don't go away. They not only liquidate. They have a reason to exist, it's just that their capital structures have been designed for another business . "