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Kicking the Can Down the Road

June 28, 2011

Good news for troubled companies sweating it out about their next refinancing. Banks continue to "Amend and Extend" their commercial loans and are putting minimal pressure on companies who can continue to service the interest on their debts.

According to the most recent TMA (Turnaround Management Association) survey, 60% of respondents expect to see banks as or more accommodating than they were in 2010.

"There is little incentive for financial institutions to be tough on companies that continue to underperform," said James B. Shein, Ph.D., clinical professor of management and strategy at Northwestern University's Kellogg School of Management. 

"The regulators have backed off if the bank is deemed sound and they have ample liquidity -- and bonuses are still based on deals closed, including refinancings," Shein said. 

The survey recap tells us that; "Such extensions grant troubled companies reprieve from refinancing worries and keep the U.S. high-yield corporate default rate from spiraling as in 2009, when the rate topped 13 percent".

This kicks the can further down the road with 2013 now predicted to be the year of peak reckoning for business loans. With interest rates low, companies can service their debt and put off the need to pay down principle for several more years. Much like the bottom of the housing market, three years after the financial collapse, this time horizon remains in the distant future. Who knows, maybe the banks, like Congress, will fabricate ways to avoid this reality for ever.

Meanwhile business lending continues to improve with 60% of respondents seeing a greater availability of credit this year compared to one year ago. Healthy companies continue getting an outsized availability of bank credit while only 17% of respondents said financing can be obtained by companies either in mid-decline or late decline.

Lending based on equipment, inventory and other hard assets ranks highest among prevalent forms of available financing. Liquidation values continue to improve after the glut of 2009 which is helping companies attract greater leverage from their assets. The counter of this is that we have seen companies greatly reduce their equipment, inventory and receivable exposure over the last few years.

As I've mentioned previously, we continue to see the economy splitting between companies with healthy profits and those who are just hanging on. With extended loan patience we are seeing some banks proactively urging the languishing companies to get professional help while there is still time for a turnaround. We've reached a point in the economic cycle where banks have the breathing room to better assess their credits and have the foresight to see a business heading for trouble. We've recently been engaged by two firms who are each several months away from crisis but have a strong desire to get healthy and avoid that crisis all together.

Despite the recent doom-and-gloom, the economy continues to recover, especially for businesses. We have seen strong growth in many of our clients which includes; trucking, retail, recreation and parts manufacturing. Although the economy has recently faced some transitory headwinds, we expect growth to continue through 2011. 



Jeff Sands is a Director with Dorset Partners LLC, (, an advisory firm specializing in corporate turnarounds, financial restructuring and profit improvements. He has recently been engaged in his sixth gift/décor business turnaround and enjoys working in the industry.