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Turnaround Industry Trends the Good, the Bad, the Ugly

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Turnaround Industry Trends the Good, the Bad, the Ugly TURNAROUND INDUSTRY Wednesday, April 4, 2012 TRENDS Time: 3:45 p.m. – 4:45 p.m. THE GOOD, THE BAD, THE UGLY PANELIST William K Snyder CRG Partners LLC Chuck Moore Conway MacKenzie, Inc. Keith Cooper FTI Consulting John Dischner AlixPartners LLP Kevin Carmody McKinsey & Company 2 JOHN DISCHNER KEY MARKET METRICS IN 2011, THE AVERAGE SIZE OF TOP 20 BANKRUPTCIES GOT LARGER, BUT WAS STILL MUCH BELOW SIZE OF 2009 Top 20 Chapter 11 Bankruptcies By Year 2011 2010 2009 Liabilities at Liabilities at Liabilities at # Company Filing Date Filing # Company Filing Date Filing # Company Filing Date Filing ($'s in millions) ($'s in millions) ($'s in millions) 1 AMR Corp. 11/29/11 $ 29,552 1 Truvo USA LLC 07/01/10 $ 3,574 1 General Motors Corp. 06/01/09 $ 172,810 2 Dynegy Holdings LLC 11/07/11 6,181 2 Metro-Goldwyn-Mayer Studios Inc. 11/03/10 3,451 2 Chrysler LLC 04/30/09 55,200 3 NewPage Corp. 09/07/11 4,200 3 Great Atlantic & Pacific Tea Co. 12/12/10 2,531 3 General Growth Properties Inc. 04/16/09 27,294 4 Opti Canada Inc. 07/13/11 3,011 4 Innkeepers USA Trust 07/19/10 1,519 4 Charter Communications Inc. 03/27/09 24,186 5 MSR Resort Golf Course LLC 02/01/11 1,900 5 Vertis, Inc. (2010) 11/17/10 1,467 5 Lyondell Chemical Co. 01/06/09 19,337 6 General Maritime Corp. 11/17/11 1,413 6 Blockbuster Inc. 09/23/10 1,465 6 R.H. Donnelley Corp. 05/28/09 12,374 7 Borders Group Inc. 02/16/11 1,293 7 Saint Vincent Hospital 04/14/10 1,092 7 Idearc Inc. 03/31/09 9,515 8 Appleseed's Intermediate Holdings LLC 01/19/11 1,082 8 Almatis BV 04/30/10 1,038 8 AbitibiBowater Inc. 04/16/09 8,783 9 Jefferson County, Ala. 11/09/11 1,000 9 TerreStar Networks Inc. 10/19/10 1,000 9 Extended Stay Inc. 06/15/09 7,674 10 Red Star Trucking Inc. 08/15/11 1,000 10 Boston Generating LLC 08/18/10 1,000 10 Station Casinos Inc. 07/28/09 6,483 11 Vitro SAB de CV 04/14/11 1,000 11 Penton Business Media Holdings Inc. 02/10/10 1,000 11 Smurfit-Stone Container Corp. 01/26/09 5,582 12 Lee Enterprises Inc. 12/12/11 995 12 nCoat Inc. 08/16/10 914 12 Visteon Corp. 05/28/09 5,324 13 Graceway Pharmaceuticals LLC 09/29/11 859 13 Mesa Air Group Inc. 01/05/10 869 13 Lear Corp. 07/07/09 4,540 14 Solon SE LLC 12/13/11 774 14 Xerium Technologies Inc. 03/30/10 813 14 Spectrum Brands Inc. 02/03/09 4,446 15 Solyndra LLC 09/06/11 749 15 Natural Products Group LLC 01/27/10 804 15 Aleris International Inc. 02/12/09 3,980 16 Angiotech Pharmaceuticals Inc. 01/30/11 682 16 Oriental Trading Co. 08/25/10 757 16 Reader's Digest Association Inc. 08/24/09 3,400 17 William Lyon Homes 12/19/11 610 17 American Media Inc. 11/17/10 668 17 FairPoint Communications Inc. 10/26/09 3,234 18 Superquinn Ltd. 07/18/11 567 18 Centaur LLC 03/06/10 681 18 Nortel Networks Inc. 01/14/09 3,200 19 Nebraska Book Co. 06/27/11 564 19 Atrium Corp. 01/20/10 665 19 Erickson Retirement Communities LLC 10/19/09 3,000 20 Indianapolis Downs LLC 04/07/11 546 20 Neff Corp. 05/16/10 609 20 Premier International Holdings Inc. 06/13/09 2,907 Total $ 57,979 Total $ 25,917 Total $ 383,269 Source: TheDeal.com as of Jan. 6, 2010. Average $ 2,899 Average $ 1,296 Average $ 19,163 Excludes Financial Companies 4 WHEN COMPANIES DO FILE, THERE IS A LONG-TERM TREND TOWARD PRE-NEGOTIATED BANKRUPTCIES AND SHORTER CASE LENGTHS Average Length of Chapter 11 Filings 1,500 1,300 1,100 Prenegotiated or Prepackaged (As a Percentage of Total Corporate Chapter Cases) 900 60% 700 500 50% 300 40% AverageDurration in Days 100 1980 1985 1990 1995 2000 2005 of Cases Chapter 11 30% Year of Filing Source: LoPucki Database as of Sept 6, 2011 20% Percentage 10% 2008 2009 2010 2011 Year of Filing Source: LoPucki Database as of Sept 6, 2011 5 AT THE SAME TIME THE FED HAS EASED MONETARY POLICY, THE HIGH YIELD MARKET HAS SEEN A RESURGENCE—LEADING TO LOWER DEFAULT RATES High Yield Issuances ($ in Billions) $500 $400 $300 $200 $100 $- 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: Advantage Data.com as of December 15, 2011 6 KEITH COOPER CREDIT MARKET EFFECTS FTI CONSULTING RESTRUCTURING MARKET OUTLOOK AND CAPITAL MARKETS UPDATE March 2012 8 RESTRUCTURING MARKET OUTLOOK AND CREDIT MARKETS UPDATE OVERVIEW Restructuring Market Outlook and Credit Markets Update Corporate debt default rates have steadily declined since early 2010 but may have bottomed in late 2011. U.S. corporate default rates have ticked up from just under 2.0% in 4Q11 to 2.4% currently—still well below its long-term average of 4.5%. Corporate default rates typically lag the economic cycle. Moody’s recently said the default rate is “probably at the bottom of the default cycle right now.” (January 2012) The number of monthly corporate debt defaults has picked up notably in recent months. Corporate credit market conditions deteriorated sharply in mid-2011in reaction to sovereign debt concerns and slowing global growth but corporate credit flows have improved dramatically so far in 2012 compared to 2H11. Global corporate credit markets remain vulnerable to events that impact European sovereign debt and its financial institutions. The corporate default outlook is worse for Europe than the U.S. at the moment. The corporate debt “maturity wall” is no longer a material concern for 2012, as most risky borrowers have already refinanced such debt. However, the distressed debt ratio has moved sharply higher since mid-2011 and remains elevated despite improving credit market flows—implying higher corporate defaults in the year ahead. The three major rating agencies all project a moderate increase in corporate default activity in 2012—and a below average year for corporate defaults. Our default expectation, which relies on the distressed debt ratio, looks for a higher up tick in default activity than the rating agencies are—more in-line with an average year for defaults. 9 RESTRUCTURING MARKET OUTLOOK AND CREDIT MARKETS UPDATE OVERVIEW (CONTINUED) 2011 was a slow year for corporate default activity by historical standards, both domestically and globally. Corporate debt default activity in 2011 was down by approximately 35% compared to 2010 . Credit markets were very receptive to risky corporate borrowers through 1H11, especially institutional lenders, prior to the second episode of a potential Greek debt default. Debt refinancing and Amend & Extend deals completed in 2010 and early 2011 pushed out debt maturities for many risky borrowers into 2013 and beyond. Covenant lite features of many loans issued during the credit boom gave at-risk borrowers needed breathing room and operating flexibility during the downturn and into the early recovery. Volatility in global financial markets in the second-half of 2011 did not have a severe impact on corporate default activity, though defaults have picked up since September. Several recent defaults were previous distressed debt exchanges (DDE) that ultimately couldn’t avoid a formal business failure. History tells us that a high percentage of DDE will fail within a few years of completing the exchange. Corporate credit market conditions have undoubtedly improved in 2012 compared to six months earlier but remain more restrictive than a year ago. Despite the recent improvement, credit markets continue to cautiously ration access to capital and the cost of credit for high risk corporate borrowers. 10 RESTRUCTURING MARKET OUTLOOK AND CREDIT MARKETS UPDATE GLOBAL CORPORATE DEBT DEFAULTS FELL AGAIN IN 2011 All things considered, it has been a remarkable recovery for the global corporate sector from the depths of the 2008 financial crisis and ensuing recession S&P Rated Global Corporate Defaults (# of Defaulting Issuers) 300 265 Source: S&P 250 229225 200 136 150 120 126 108 93 100 81 70 57 56 53 43 39 39 50 34 32 35 19 19 26 21 20 23 2924 0 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 11 March compared to only 5 only to compared March - 12 S&P Rated Monthly Corporate Debt Defaults 3-Month Moving Avg. of S&P Rated Defaults 45 40 Source: S&P Source: S&P 40 35 35 Global U.S. only 30 Global U.S. only 30 25 25 20 20 15 15 10 10 # of # defaulting issuers # of # defaulting issuers 5 5 0 0 Jan'08 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan'09 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan'10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan'11 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan'12 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan'09 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan'10 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan'11 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan'12 Feb There have been 23 corporate defaults (14 U.S.
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