MacFadyen: Envisioning the Turn
June 19, 2009
Over the past few years I’ve had the chance to participate in numerous panels and roundtables focused on the distressed space. During the bubble, we’d usually discuss a few specific sectors, be it the airlines or auto parts, and then spend the rest of the conversation forecasting just how bad the fallout would be when the market finally collapsed. I’d note that even for the distressed crowd, a naturally pessimistic bunch, very few people expected things to be this bad. For the most part, though, they deserve credit for being remarkably accurate about the sequence of events.
I only bring this up because every deal over the past couple of weeks, with very few if any exceptions, could qualify a distressed transaction. In a lot of cases, the targets are these serially troubled assets, such as Spiegel, acquired by Patriarch Partners last Friday, or Eddie Bauer, which filed for bankruptcy a day earlier. But even the “non-distressed” sales, that aren’t part of a bankruptcy, seem to be motivated by a need, rather than a desire, to sell. It may be a private equity firm that has to show a return ahead of a fundraising or a company looking two years out and recognizing they may not be able to refinance their debt.
Amid all this, however, signs of progress have emerged. In fact, taken together, there is plenty of reason for optimism if one is predisposed to patience.
(A lot of commentators would call these signs “green shoots,” but for some reason that term annoys the hell out of me. It’s on the same level of distaste as “grindage” or any other Paulie Shore-era nonsense.)
With that aside, the point I’m trying to make is that there is no logical reason for a company today to put themselves up for sale unless they absolutely have to. It’s not that buyers aren’t interested, because increasingly more and more are. It’s just that there isn’t enough capital out there to support valuations anyone would find compelling.
Slowly, more and more companies are positioning themselves to be buyers. Public companies are regularly tapping the equity markets with follow-on offerings that solve the dual purpose of paying down debt and re-arming their balance sheets for growth. The high-yield market, meanwhile, has become active enough that some deal pros are inclined to say “stupidity” has returned in certain cases (their words, not mine). And we’ve even seen some new players enter the debt space, such as Thomas H. Lee Partners’ potential new BDC. Moreover, as distressed debt gets priced up, investors will likely move from secondary buys back to new facilities.
Individually, these trends don’t amount to much. As part of a larger puzzle, though, this is all part of a slow buildup. There won’t be one day in which the market discovers that all is well in the world. It won’t be like September 15, 2008, when everyone discovered en masse the severity of the problem. But perhaps a year from now, people may look back and realize that things haven’t been so bad for a while.
And I'd add that the distressed players waited a long time for their day in the sun. They never really complained during the prolonged bubble, but merely stood by confidently, putting their trust in the cyclicality of the markets. Traditional deal pros, even if they downplayed the cycle in the past, can rest assured that eventually the market will find a new normal.
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