Restructurings will become increasingly complex because of the rise of alternative investors in the distressed debt marketplace, Kenneth Buckfire, managing director and co-founder of Miller Buckfire & Co., said in his keynote address. Buckfire said he expects bankruptcies and restructurings to become longer and more complex because of the large number of diverse creditors that will make up the creditor committees. He warned that the increasing role of alternative investors as lenders to distressed companies is causing a shift in the creditor committees' balance of power toward the interests of alternative investors.
Buckfire noted that hedge funds and collateralized loan obligation funds have lent large amounts of capital, often in the forms of second-lien loans, resulting in distressed companies becoming highly levered and swimming in cash. In 2005, $16 billion of second-lien debt was issued, compared to $1.2 billion between 1999 and 2000, according to Buckfire. The average leverage of companies supported by second-lien lending in 2005 was 4.3 times. "We have never had so many levered companies as we have today," he said.
Meanwhile, banks have moved away from their traditional role and are less motivated to hold onto loans. "The banks have broken away from traditional lending routes. They view themselves more as service providers," he said. He cited the move by mid-size banks to outsource their work-out groups as an example of this trend.
Because banks are taking smaller positions in loans, they no longer have an interest in helping to bring about the consensus of creditors. Buckfire pointed out that compared to banks, alternative investors like hedge funds have complex hedging strategies, such as taking short positions, which are not conducive to driving consensus among different creditors. Alternative investors do not have stable capital bases or staying power, he said. He cited Mirant Corp. and Exide Technologies as two examples of complex restructurings. "There are multiple creditor constituencies that have different viewpoints that make a consensus more difficult to get," Buckfire said.
The large number of creditors involved in restructurings will also result in lower recoveries, he predicted. The increase in second-lien and third-lien lenders has added to the number of creditors seeking recoveries. "There will not be enough pie to go around. One creditor's victory will be another creditor's loss," said Buckfire.
He predicted turnaround firms and consultants will take on a larger role in restructurings as consensus among creditors becomes more difficult to achieve. He also predicted that in five years the distressed debt marketplace will be a bear market. "It will be a hard market to make money. It is now a mature asset class. It is fully priced. There are no market inefficiencies due to a lack of information," said Buckfire. "It will be slim pickings for private equity firms."