Sprayregen sees more quick sales ahead

By Joseph A. Giannone

NEW YORK (Reuters) - Companies that binged on cheap credit in recent years will create new challenges as they stumble into bankruptcy, Goldman Sachs Group Inc (GS.N) restructuring adviser James Sprayregen said on Tuesday.

Over the past 23 years that Sprayregen has been in the business, U.S. companies have been through several bust periods. Yet the current credit crisis introduces some new wrinkles that will likely prompt more Chapter 11 liquidations.

"There's going to be less balance sheet available, if any, to finance your way through a long-term capital restructuring," Sprayregen told the Reuters Restructuring Summit. "You're going to see more forced quick sales."

The extensive use of leverage during flush times earlier this decade means companies have fewer unencumbered assets with which to sustain themselves over a protracted Chapter 11 reorganization.

Boom-and-bust cycles are nothing new, but Sprayregen said more companies have overindulged on debt than ever before. In addition to the usual fixes to how companies operate -- slashing jobs and shedding divisions -- "you're going to have a lot of deleveraging going on, probably more of that than in any of the previous cycles."

The current period also introduces some new forces that were not as significant as in prior periods, including credit default swaps, hedge funds and private-equity funds. Meanwhile there have been few bankruptcies since lawmakers made some significant changes to the bankruptcy code in 2005.

"It made reorganizations more expensive and more difficult," he said. "I don't think the bite of the new statutes has played through yet.

Sprayregen predicted more distressed companies will pursue quick sales or reorganize outside of the courtroom.

"The transaction costs of going through the courts is high," he said. "You're going to have more liquidations through the court, too."

CREDIT TIGHTER

Sprayregen said the flow of credit to companies has continued despite the recent turmoil among banks and brokers. By the same token, lenders stung by losses are keeping a tighter grip on the purse strings, he said.

"Since June 2007 things have been very much tighter in the credit markets, but there is still a willingness to lend to sufficient-quality companies, and (those) with the right story," Sprayregen said.

These changes follow a painful year for banks, which have absorbed half a trillion dollars in losses since mortgage, corporate lending and other debt markets seized up in 2007. As lenders try to get their own houses in order, they've imposed more demands on borrowers.

"Price has gone up. Leverage has gone down. Covenants have come in. Credit agreement terms have tightened," he said. "But there is still money out there to be lent. It takes longer to get done."

Not even the cataclysmic events of recent days, which drove Lehman Brothers Holdings (LEHMQ.PK) into bankruptcy and prompted an embattled Goldman to abandon its broker-dealer model, stopped the flow of loans and bond financing, he said.