May 6, 2010 / 8:37 PM / in 8 years

Stock drop could hit deals, restructurings if extended

NEW YORK, May 6 (Reuters) - The sharp drop in the stock market on Thursday -- if it is followed up by further declines in coming days -- may put deals and restructurings on hold as companies reassess how much they are worth and lenders take another look at the financing, experts said.

“Typically, it’s not one event that concerns us on the existing financial loans, but it can affect those that are in the process of being executed,” said Jack Williams, a bankruptcy law professor at Georgia State University.

That goes for both mergers and acquisitions -- where there is an added issue related to the companies ability to set a value on a stock-for-stock deal -- and for restructurings, he said.

The IPO, or initial public offering market, has already started to feel the effects of market uncertainty due to negative news such as Greece’s debt problems. Conglomerate Swire Pacific scrapped a $2.7 billion Hong Kong IPO by its property unit on Thursday.

The Dow Jones Industrial Average fell as much as 9 percent before ending down 3.2 percent at 10,520.32 for the day.

The drop in equities -- even after a creep back up -- is still a blow to a company’s equity value, particularly if it is followed by other declines, Williams said.

“If you have a company whose loan covenants are tied to, among other things, the market value of equities that it holds as assets, then that is going to have a detrimental affect and it would not be unusual to blow that particular asset value covenant,” Williams said.

One mergers and acquisitions banker said that it would take more than one day to have a negative effect.

“One bad day does not kill a deal. A prolonged stretch of bad days could, but one day does not a disaster make,” he said.

Another banker said that deals already signed up would be solid and unlikely to fall apart.

“If it isn’t signed, maybe,” the banker said.

Both bankers declined to be named because they were not authorized to speak on the topic.

The unexpected drop -- coming at a time when the markets had been expecting recovery -- could create more bankruptcies as it introduces uncertainty to companies that are already in financial distress and looking for new financing.

“If this represents a return of risk adversity to the debt markets, there are lots of U.S. companies that might face Chapter 11. In the past few months, the return of the junk bond market has saved many companies from going into bankruptcy, we’ll have to see if that has ended,” said Stephen Lubben, a professor of law at Seton Hall University School of Law by e-mail.

Additional reporting by Jessica Hall and Megan Davies

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