Banks become owners, may open restructuring door
NEW YORK |
NEW YORK (Reuters) - Banks like JPMorgan Chase have found themselves the owners of a wide range of businesses, from distressed oil companies to hotels and newspapers, as a result of a recent wave of bankruptcies.
And that has created an opening for a new breed of restructuring expert, like Mark Dalton of the recently formed Halsey Lane Holdings, eager to help lenders turn around their unexpected acquisitions so they can sell them -- and make money.
For years, banks have ended up owning companies -- particularly in economic downturns -- because of bad loans and bankruptcies. But this time around, a broader variety of companies has failed, acquisitions of troubled companies are few, and the timing of the economic turnaround is uncertain.
Even companies that have restructured debt may present a liability for banks down the road. New bankruptcy regulations and an emphasis on financial restructurings due to high debt loads have shortened the time companies spend in bankruptcy court -- and they may not be operationally strong when they emerge.
That is what the new restructuring experts are counting on.
"A lot of the time, these companies may still be troubled because their time in bankruptcy period is short," said Dalton, who previously worked at hedge fund Avenue Capital and private equity firm Trimaran Capital.
Halsey Lane Holdings, AlixPartners and Loughlin Meghji are among the restructuring firms targeting opportunities to help banks manage the companies they acquired in the wake of the 2009 bankruptcy wave.
"During the last cycle, certain companies quickly utilized bankruptcy court to address financial restructuring needs as opposed to the operational restructuring," said Sanjeev Khemlani, senior managing director at restructuring advisory firm FTI.
"As a result, there is an opportunity for the new owners to create value -- cost-cutting exercises have helped, but revenue growth and margin expansion are needed," he said.
SWAPPING DEBT FOR EQUITY
With the resale markets moribund for many of the most troubled assets -- such as commercial real estate and media -- banks often have no choice but to swap their debt for equity and wait it out.
"The banks would be clobbered if they tried to get out at the bottom," said Charles Smith, a managing director at Loughlin Meghji, who previously worked in JPMorgan's syndicated and leveraged finance group.
But neither are banks seen as "natural owners" of these assets, he said. "They're not really known for being operational managers."
Whether banks want or need help operating these businesses is another issue. Banks already have specialized units charged with managing troubled companies and restructuring their loans as they go south.
One restructuring head at a commercial bank, who requested anonymity, said he has been bombarded with approaches from firms offering to manage specific assets -- or his entire portfolio of equity assets -- in return for a percentage of the gains in the value of the assets. But he's not interested.
"We'd much rather focus on making sure that we have solid corporate governance, the best people on the board (of directors), and the right people to add value to the company. We are looking for people not just with specific industry expertise, but that have financial expertise and audit expertise," he said.
Fred Crawford, chief executive of AlixPartners LLP, told Reuters, "I would expect that the motivation of a lender, be it a bank or private equity firm ... is to generate an appropriate level of return in a reasonable amount of time."
Still, what is clear is that banks, after one of the biggest years of corporate bankruptcies on record, are running more businesses.
Just this week, an oil and gas exploration company, Cross Canyon Energy Corp, emerged from bankruptcy in the hands of lender CIT Group (CIT.N), which received equity worth 95 percent of the new company.
JPMorgan Chase (JPM.N) ended up with a piece of Reader's Digest when it emerged from bankruptcy earlier this year, and the bank also counts publisher Journal Register Co among its holdings.
Meanwhile, lenders including Credit Suisse Group (CSGN.VX), Citizens Bank of Pennsylvania and CIT are vying for control of the bankrupt publisher of the Philadelphia Inquirer and Philadelphia Daily News.
In the real estate sector, Credit Suisse took ownership of the Gansevoort Hotel in Miami Beach earlier this year, while Citigroup (C.N) took over the St. Regis Monarch Beach Resort last year before putting it back up for sale. Wells Fargo (WFC.N) and others took over hotel-casino Resorts Atlantic City late last year. (Reporting by Caroline Humer; editing by John Wallace)
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