Turnaround Pros Expect Debt Default Rates to Climb in 2009

Turnaround experts predict corporate debt default rates will rise above 10 percent in 2009 as the credit crunch continues to hobble companies that soaked up easy credit.

'The credit crisis prompted and exacerbated by the subprime mortgage crisis will prove a day of reckoning for overleveraged companies and companies operating on the margin,' said Arthur Perkins, president of the Turnaround Management Association and co-head of the West Region Reorganization Services practice for Deloitte Financial Advisory Services LLP.

Nearly 70 percent of respondents to TMA's annual Trend Watch credit poll anticipate a surge of defaults over the next three years. Half pinpointed 2009 as the critical year, while 8 percent thought it might happen sooner. Another 8 percent targeted 2010.

'Default rates on high yield corporate bonds have spiked in double digits in previous recessions, climbing to 10.3 percent in 1991 and 12.8 percent in 2002,' said James Shein, the Kellogg School of Management professor who chairs the TMA Trend Watch Committee. 'Even though the $1 trillion market is currently defaulting at about a 2 percent rate, the majority of respondents believe defaults will again spike to over 10 percent, most probably next year.'

Nearly all (94 percent) said credit is tighter this year than a year ago when only about one out of four respondents noted tighter credit. This year 80 percent said traditional lenders are less active and their loans have more restrictive covenants and conditions to be met than in the past.

With less financing available and Bankruptcy Code constraints, TMA leaders note a trend toward more prepackaged bankruptcies, Section 363 sales and liquidations.

Although four out of five respondents to both the 2007 and 2008 poll see hedge funds and private equity as part of a basic institutional shift in the economy's structure, the majority saw less funding for distressed companies from those sources and noted a jump in asset based lending in 2008.

The Turnaround Management Association (http://www.turnaround.org/), with 8,100 members in 43 chapters worldwide, is the only international nonprofit dedicated to corporate renewal.

Source: Turnaround Management Association

CONTACT: Michele Drayton, PR Manager of Turnaround Management
Association, +1-312-242-6044, mdrayton@turnaround.org

Web site: http://www.turnaround.org/