Houlihan Lokey exec sees defaults rising

Jeff Werbalowsky, co-Chief Executive Officer and Senior Managing Director of Houlihan Lokey's Board of Directors, speaks at the Reuters Finance Summit in New York November 6, 2007.

NEW YORK (Reuters) - A long-anticipated rise in corporate debt defaults is starting to manifest, fueled by falling housing prices, slowing retail spending and other factors, the co-head of a major U.S. restructuring firm said on Tuesday.

Jeff Werbalowsky, co-chief executive of investment bank Houlihan Lokey Howard & Zukin, is seeing evidence that debt defaults are rising from their historically low rate of less than 1 percent at the end of 2006.

Corporate debt defaults, which often lead to Chapter 11 bankruptcies and out-of-court restructurings, hit a recent peak of 12.7 percent in 2002, but have stayed relatively low since then, which experts generally attribute to the wide availability of cash for corporations to refinance debt.

"Defaults are already starting now," Werbalowsky told the Reuters Finance Summit in New York.

A rise in defaults would bring more business to firms like Houlihan, which surveys put at the top of the list for "middle-market" restructuring and merger and acquisition advisory services.

Industry experts have long predicted the record issuance of high-yield debt in recent years would lead to a wave of defaults. So far, however, companies have found easy access to capital to refinance, much from hedge funds willing to buy corporate bonds, and have thus avoided bankruptcy.

Werbalowsky said a rise of even a few points in the default rate would create a cascade of restructuring business for his and other similar firms, such as Greenhill & Co (GHL.N), Lazard LAZ.UL, Evercore Partners (EVR.N) and others.

"Five percent will create a huge restructuring boom," Werbalowsky said.

One area likely to face heavy restructuring is ethanol suppliers, he said. Like telecommunications companies in the 1990s, ethanol suppliers have poured huge amounts of capital into building infrastructure, prodded by the U.S. government.

But ethanol demand is not rising as rapidly as predicted, Werbalowsky said, without naming any firms that could need debt restructurings.

"There are real problems in all those ethanol deals," he said. "It's typical when you send a regulatory message, which the government did. It's inevitable you will have a boom-and-bust cycle."

He also predicted restructurings coming up would be much more litigious, due to the plethora of aggressive hedge funds that have bought debt of the companies becoming distressed. These funds are more apt to exert their ownership rights through court actions, he said.

"The next wave of restructurings will be more litigious because the capital structures are more complicated," he said. "You have more aggressive, sophisticated, intelligent, annual-bonus-incentivized people in every part of the capital structure than you ever had."