Source: Reuters
 
Rising interest rates, record oil prices and geopolitical instability may send chills down the spines of finance directors of debt-strapped global corporations.
 
But these trends are good news for a small group of Wall Street specialists who work with troubled companies and creditors to renegotiate debt and cut costs.
 
The next big wave of restructurings could start next year, experts said. For corporate restructuring experts at firms like Blackstone Group, Lazard, Rothschild LLC and Miller Buckfire Lewis Ying & Co., that would mean a new round of fat fees of $300,000 a month or more, plus percentages of debt restructured.
 
Creditor advisers like Chanin Capital Partners and Houlihan Lokey Howard & Zukin are also optimistic.
 
Barry Ridings, Lazard's co-head of restructurings, sees 2005 as the dawning of "restructuring heaven" for a small club of investment banks that fend off hungry creditors at large, debt-burdened companies.
 
"We're going to see a lot more restructurings in 2005," said Ridings, a veteran of several decades of corporate booms and busts.
 
The reason? Many companies won't be able to pay interest charges on debt accumulated during a boom in cheap financing in the last two years, particularly if major shocks beset the financial system. Further oil-price or interest-rate hikes, volatile currencies from trade imbalances, or even wars and terror attacks could be inevitable, some say.
 
"A lot of businesses are surviving because of low interest rates and haven't figured in the prospect of higher interest rates," said Barry Dichter, a bankruptcy lawyer at Cadwalader, Wickersham & Taft who helped restructure debt at K-Mart (KMRT.O: Quote, Profile, Research) , Enron (ENRNQ.PK: Quote, Profile, Research) and other large bankruptcies.
 
DEEPER INTO JUNK
 
Companies seeking capital to expand have found a lucrative source in the near-$1 trillion market for high-yield junk bonds -- those rated 'BB+' or lower. Investors soaked up some $134 billion of those bonds in 2003, close to the all-time peak of $140 billion in 1998, according to Thomson Financial.
 
But the proportion of lower-rated junk bonds -- those with a higher risk of default -- has risen since 2002. Experts say that means more marginal companies with high debt loads are in danger of being forced to renegotiate debt, particularly if external conditions worsen.
 
"Underwriting standards have been relaxed, and marginal (companies) have been able to get financing in the last 18 months," said Edward Altman, professor of finance at New York University's Stern School of Business. "Once these companies have to depend on their cash flows, a fair number won't survive."
 
Rising interest rates leave two types of companies particularly vulnerable: those that have been bought by private equity firms in leveraged buyouts, and those with "floating rate" notes, which adjust to interest-rate increases. Financings for both kinds of companies have been strong in recent years.
 
"There is substantially more floating rate debt than ever before," said Tom Benninger, head of the UBS AG restructuring arm. "A pickup in interest rates could change the market much faster than ever in the past."
 
Financial-service and energy companies would be among the hardest hit in a higher-interest-rate environment because they are heavily leveraged with floating rate notes, said Benninger, who has helped restructure debt for such clients as Telewest Global Inc. (TLWT.O: Quote, Profile, Research) , NextWave Telecom Inc. (NXLCQ.PK: Quote, Profile, Research) and Trump Hotels & Casino Resorts Inc. (DJTC.OB: Quote, Profile, Research)
 
Mid-sized companies, which are big users of adjustable-rate bank debt, could also be hit hard if interest rates rise.
 
"The middle market tends to be the leading edge," said Brad Scheler, head of restructuring for law firm Fried Frank Harris Shriver & Jacobson. "We'll see more covenant and interest payment defaults, because the cost of accessing capital will go up, and the ability to raise capital will be more challenging."
 
BUYOUT LEVERAGE
 
Some experts say the level of debt in some private equity portfolio companies is also unsustainable because of the very nature of the leveraged-buyout process. In addition, buyout firms jacked up debt for many of these companies with refinancings to fund dividends to investors.
 
William Brandt, chief executive of Chicago-based restructuring firm Development Specialists Inc., predicts interest rates could rise by a full percentage point in the next year -- and slam many leveraged-buyout companies.
 
"With an increase in interest rates, which is inevitable, you will see a lot of private equity companies hurting big-time," Brandt said. "If the economy improves modestly but interest rates rise steeply, you will have a lot of (restructuring) work for these portfolio companies."