Doomsday for Distressed-Debt Issuers Has Been Rescheduled

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(Bloomberg) -- The day of reckoning for distressed companies isn’t canceled, it’s just postponed.

That’s the forecast from Michael Eisenband, co-head of the turnaround consulting unit at FTI Consulting Inc., who sees the long-predicted spike in defaults fully materializing in 2020. It could take that long for interest rates to tick high enough to deny over-indebted companies the ability to refinance, Eisenband said in an interview.

The surge will trail nine months to a year behind the point when credit markets tighten, with companies looking to refinance about 18 months before they hit the wall, said Eisenband, who has worked on bankruptcies including General Motors Co., Lehman Brothers Holdings Inc. and Toys “R” Us Inc. In the meantime, he said, easy money and fearless investors are encouraging companies to make risky deals that increase their chance of ending up on FTI’s client list.

“Whenever we see somebody that did a deal like, ‘We cannot believe they did that deal,’ we say they are building our future inventory,” said Eisenband, 57, who divides duties at the unit with co-head Carlyn Taylor.

FTI is among turnaround firms, credit raters and distressed-debt specialists that have been forecasting a default spike for the past two years, only to see the apocalypse repeatedly rescheduled. At one point last year, Chief Executive Officer Steven Gunby had to explain during an earnings call why he was still adding expensive talent to the restructuring team amid the dearth of distress. Even now, Moody’s Investors Service and S&P Global Ratings are predicting that default rates will decline over the next year.

Gunby stuck with it, and FTI on April 26 reported quarterly revenue jumped 35 percent to $143 million in the corporate finance and restructuring segment, citing higher demand from companies for turnaround services. The unit now counts 910 people, 10 more than a year ago, and the utilization rate -- the percentage of an employee’s time spent on billable work -- rose to 71 percent from 59 percent as Washington, D.C.-based FTI worked for Weinstein Co., Southeastern Grocers and Tops Markets LLC.

“You invest when the right talent is available, regardless of whether the restructuring market is booming, because when the market is booming, the competition for talent is greater,” Eisenband said by email.

Retail Status

To be sure, there are pockets of distress now, with credit markets effectively still closed to troubled retailers, according to a May 4 report from Noel Hebert at Bloomberg Intelligence. But maturities don’t look critical until after 2019, he wrote, and few would say the tally of struggling debt issuers is robust. S&P reported that its roster of distressed companies fell to 54 as of mid-April from 57 a month earlier.

“People have been chomping at the bit now for years,” said David Tawil, president of Maglan Capital, a New York hedge fund that invests in distressed companies.

Moelis & Co., the New York-based investment bank, has also subscribed to the grow-while-you-can theory amid the drought.

“Look, it could get worse. I guess nobody could default," CEO Ken Moelis said during last month’s earnings call. "I’m happy we held the team together, we’ve added to it, we’ve integrated it, it continues to be a solid part of our business, and I think it has a lot more upside than downside.”

©2018 Bloomberg L.P.

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