TURNAROUND INDUSTRY Wednesday, April 4, 2012 TRENDS … · 15 Solyndra LLC 09/06/11 749 15 Natural...

Wednesday, April

4, 2012

Time: 3:45 p.m.

– 4:45 p.m.

TURNAROUND INDUSTRY

TRENDS

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

# Company Filing Date

Liabilities at

Filing # Company Filing Date

Liabilities at

Filing # Company Filing Date

Liabilities at

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

2010 20092011

Top 20 Chapter 11 Bankruptcies By Year

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

100

300

500

700

900

1,100

1,300

1,500

1980 1985 1990 1995 2000 2005

Avera

ge D

urr

atio

n i

n D

ays

Year of Filing

Source: LoPucki Database as of Sept 6, 2011

Prenegotiated or Prepackaged

(As a Percentage of Total Corporate Chapter Cases)

10%

20%

30%

40%

50%

60%

2008 2009 2010 2011

Year of Filing

Perc

enta

ge

of

Chap

ter

11 C

ases

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)

$-

$100

$200

$300

$400

$500

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

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.

RESTRUCTURING MARKET OUTLOOK AND CREDIT MARKETS UPDATE

9

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

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)

1934

1932

43

70

93

3926 21

3520 23

57

108

136

229225

120

5639

24

126

265

81

53

29

0

50

100

150

200

250

300

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

Source: S&P

11

CORPORATE DEFAULTS WERE TRENDING LOWER UNTIL

4Q11 BUT ARE MOVING UP


There were only 53 rated issuer defaults in 2011 (39 were U.S. based) compared to 81 rated defaults in

2010 (57 were U.S. based), according to S&P.

Default activity began to pick up notably in the last quarter of 2011, with 8 defaults recorded in each

month compared to 3.5 average monthly corporate debt defaults for the preceding year.

There have been 23 corporate defaults (14 U.S. based) in 2012 through mid-March compared to only 5

through the same period a year ago

S&P Rated Monthly Corporate Debt Defaults

0

5

10

15

20

25

30

35

40

45

Jan '0

8F

eb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan '0

9F

eb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan '1

0F

eb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan '1

1F

eb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan '1

2F

eb

# o

f d

efa

ult

ing

issu

ers

Global U.S. only

Source: S&P

3-Month Moving Avg. of S&P Rated Defaults

0

5

10

15

20

25

30

35

40

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan '0

9F

eb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan '1

0F

eb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan '1

1F

eb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Jan '1

2F

eb

# o

f d

efa

ult

ing

issu

ers

Global U.S. only

Source: S&P

12

U.S. CORPORATE DEBT DEFAULT RATES REMAIN LOW

BUT HAVE BEGUN TO TICK UP


The U.S. corporate high-yield debt default rate (which is calculated as a rolling twelve month figure) was just

under 2.0% at year-end—less than one-half its long term historical average—but has moved up to 2.4% by

the end of February—a fairly big movement in only two months’ time.

S&P is projecting a U.S. speculative-grade corporate default rate of 3.3% by the end 2012 in its baseline

forecast while its pessimistic scenario calls for a 5.3% default rate.

The recent pace of corporate debt defaults puts us on a pace to exceed S&P’s baseline default forecast

U.S. Speculative-Grade Default Rate

0

10

20

30

40

50

60

70

80

90

100

Jan-8

5

Jan-8

6

Jan-8

7

Jan-8

8

Jan-8

9

Jan-9

0

Jan-9

1

Jan-9

2

Jan-9

3

Jan-9

4

Jan-9

5

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

0

2

4

6

8

10

12

in %

Source: S&P

Note: Shaded areas

represent recession

13

THE DISTRESSED DEBT RATIO HAS INCREASED

SHARPLY SINCE MID-2011


The distressed debt ratio is defined as the percentage of all speculative-grade corporate debt that S&P considers

distressed at each month end1. It is a market-determined metric that anticipates future defaults.

At the peak of the credit crisis in late 2008, more than 8 of 10 spec-grade corporate bonds were considered

distressed by S&P before ebbing considerably starting in mid-2009 as credit market conditions improved.

S&P’s distressed debt ratio1 has nearly tripled to 14% since last May—close to its long-term average.

$80 billion of U.S. spec-grade debt is currently considered distressed compared to only $20 billion in May.

U.S. Distressed Debt

$0

$50

$100

$150

$200

$250

$300

$350

$400M

ay-0

6

Aug-0

6

Nov-0

6

Feb-0

7

May-0

7

Aug-0

7

Nov-0

7

Feb-0

8

May-0

8

Aug-0

8

Nov-0

8

Feb-0

9

May-0

9

Aug-0

9

Nov-0

9

Feb-1

0

May-1

0

Aug-1

0

Nov-1

0

Feb-1

1

May-1

1

Aug-1

1

Nov-1

1

Feb-1

2

In b

illio

ns o

f $

0

50

100

150

200

250

300

350

400

450

500

550

600

# o

f Is

suers

Debt amount (left scale) Total distressed issuers (right scale)

Source: S&P

U.S. Distressed Debt Ratios

0

10

20

30

40

50

60

70

80

90

Jan-0

0

Jun-0

0

Nov-0

0

Apr-0

1

Sep-0

1

Feb-0

2

Jul-0

2

Dec-0

2

May-0

3

Oct-0

3

Mar-0

4

Aug-0

4

Jan-0

5

Jun-0

5

Nov-0

5

Apr-0

6

Sep-0

6

Feb-0

7

Jul-0

7

Dec-0

7

May-0

8

Oct-0

8

Mar-0

9

Aug-0

9

Jan-1

0

Jun-1

0

Nov-1

0

Apr-1

1

Sep-1

1

Feb-1

2

(in

perc

en

t)

Spec-Grade Bond Distress Ratio

S&P / LSTA Leveraged Loan Distress Ratio

Source: Standard & Poor's

SOURCE: Source

1 S&P defines distressed debt as a bond with a yield spread over Treasuries in excess of 1000 bps or a

performing loan trading at less than 80 cents on the dollar. The distress ratio is the number of

distressed issues relative to all high-yield issues

14

NEW CORPORATE DEBT ISSUANCE FELL SHARPLY

IN 2H11 BUT HAS RESUMED


High-Yield Corporate Debt Issuance Nearly Came to a Halt in 3Q11 But Has Soared So Far in 2012

Spec-grade corporate debt issuance slowed sharply this past summer after setting an all-time high in 1H11.

A “risk-on” mentality has again gripped fixed income investors so far in 2012 and money flows into HY bond

and loan funds have been very strong.

February 2012 was the second best month on record for HY bonds, with some $37 billion of new issuance

Monthly U.S. Spec-Grade Corporate

Debt Issuance

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Jan-0

8

Mar-0

8

May-0

8

Jul-0

8

Sep-0

8

Nov-0

8

Jan-0

9

Mar-0

9

May-0

9

Jul-0

9

Sep-0

9

Nov-0

9

Jan-1

0

Mar-1

0

May-1

0

Jul-1

0

Sep-1

0

Nov-1

0

Jan-1

1

Mar-1

1

May-1

1

Jul-1

1

Sep-1

1

Nov-1

1

Jan-1

2in

billio

ns

HY Bond Issuance Institutional Loans

Source: Reuters LPC

15

HIGH-YIELD BOND ISSUANCE HAS COME ROARING

BACK TO LIFE IN 2012


Following its summer swoon in 2011, high-yield bond issuance is now on track to have its best quarter ever

SOURCE: Reuters LPC

U.S. High-Yield Corporate Bond Issuance

16

RISING COST OF CREDIT FOR SPECULATIVE-GRADE

CORPORATE BORROWERS


High-Yield Corporate Bond Spreads Widened Considerably in 2H11 But Have Narrowed of Late

The average spread differential between investment grade and high-yield corporate bonds widened from

300 basis points (bps) last April to 600 bps by early autumn but have recently narrowed to 425 bps.

Despite the recent narrowing of spreads, single-B and CCC rated yield spreads are 200-400 basis points

higher compared to a year ago

U.S. Corporate Bond Spreads by Rating(Speculative-Grade, in basis points)

0

500

1000

1500

2000

2500

3000

3500

Jan-0

4

Apr-0

4

Jul-0

4

Oct-0

4

Jan-0

5

Apr-0

5

Jul-0

5

Oct-0

5

Jan-0

6

Apr-0

6

Jul-0

6

Oct-0

6

Jan-0

7

Apr-0

7

Jul-0

7

Oct-0

7

Jan-0

8

Apr-0

8

Jul-0

8

Oct-0

8

Jan-0

9A

pr-0

9

Jul-0

9

Oct-0

9

Jan-1

0

Apr-1

0

Jul-1

0

Oct-1

0

Jan-1

1

Apr-1

1

Jul-1

1

Oct-1

1

Jan-1

2

BB B CCC

Source: S&PU.S. Corporate Bond Spread Differential(Investment-Grade vs. Spec-Grade, in bps)

0

100

200

300

400

500

600

700

800

900

1000

1100

1200

Jan-0

3A

pr-0

3Jul-0

3O

ct-0

3Jan-0

4A

pr-0

4Jul-0

4O

ct-0

4Jan-0

5A

pr-0

5Jul-0

5O

ct-0

5Jan-0

6A

pr-0

6Jul-0

6O

ct-0

6Jan-0

7A

pr-0

7Jul-0

7O

ct-0

7Jan-0

8A

pr-0

8Jul-0

8O

ct-0

8Jan-0

9A

pr-0

9Jul-0

9O

ct-0

9Jan-1

0A

pr-1

0Jul-1

0O

ct-1

0Jan-1

1A

pr-1

1Jul-1

1O

ct-1

1Jan-1

2

Source: S&P

17

ACCESS TO CREDIT REMAINS CHALLENGING FOR LOW

RATED CORPORATE ISSUERS


As credit market conditions normalized following the recession, “deep junk” (B- or worse) issuers were

eventually able to tap corporate credit markets again. Nearly 40% of new high-yield issuance through

September 2011 was rated B-minus or worse—approaching the range of the pre-recession credit cycle.

In recent months the percentage of new deep junk bond issuance has fallen sharply despite the fierce rally

in high-yield bond markets—evidence that fixed income investors remain circumspect about very weak

issues despite their renewed risk appetite

Low Rated U.S. Spec-Grade Bond Issuance

0

10

20

30

40

50

60

70

Mar-9

5

Sep-9

5

Mar-9

6

Sep-9

6

Mar-9

7

Sep-9

7

Mar-9

8

Sep-9

8

Mar-9

9

Sep-9

9

Mar-0

0

Sep-0

0

Mar-0

1

Sep-0

1

Mar-0

2

Sep-0

2

Mar-0

3

Sep-0

3

Mar-0

4

Sep-0

4

Mar-0

5

Sep-0

5

Mar-0

6

Sep-0

6

Mar-0

7

Sep-0

7

Mar-0

8

Sep-0

8

Mar-0

9

Sep-0

9

Mar-1

0

Sep-1

0

Mar-1

1

Sep-1

1

(in

%)

Ratio of B- & below to total spec-grade issuance by issue count Ratio of B- & below to total spec-grade issuance by par amount Long-Term Average

Source: S&P

18

REFINANCING DOMINATES LEVERAGED LENDING

ACTIVITY

In contrast to pre-recession corporate lending that overwhelmingly consisted of “new money”

loans to speculative-grade borrowers, a solid majority of leveraged lending since 2010 has been

for refinancing purposes, as lenders remain hesitant to increase their net exposure to high risk

corporate borrowers

19


U.S. Leveraged Lending

$0

$50

$100

$150

$200

$250

1Q

03

2Q

03

3Q

03

4Q

03

1Q

04

2Q

04

3Q

04

4Q

04

1Q

05

2Q

05

3Q

05

4Q

05

1Q

06

2Q

06

3Q

06

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

in b

illio

ns

Refinancing New Money

Source: Reuters LPC

THE CORPORATE DEBT MATURITY WALL HAS BEEN

CONTAINED FOR NOW

Recent research from Fitch Ratings indicates that more than $300 billion of U.S. speculative-

grade corporate debt originally scheduled to mature between 2012-2014 has now been pushed

out to 2015-2017

20


U.S. HY Bond & Leveraged Loan

Maturity Schedule

$418

$459

$491

$213 $154 $100

$347

$402

$492

$314 $256 $

187

$300

$336

$424

$323

$362

$282

$0

$100

$200

$300

$400

$500

$600

2012 2013 2014 2015 2016 2017

in b

illio

ns

12/31/2009 12/31/2010 9/30/2011

Source: Fitch Ratings


CONTAINED FOR NOW (CONTINUED)

21


The vast majority of these refinanced corporate debt obligations are bank loans, which have

either been pushed out via Amend & Extend (A&E) agreements or taken out via HY bond

issuances.

Nearly 85% of the $1 trillion of speculative-grade U.S. corporate debt coming due through

2014 are leveraged loans

U.S. Leveraged Loans

Maturity Schedule

$360

$382

$365

$80

$29

$2

$305

$351

$398

$172 $130

$39

$266

$294

$352

$194

$239

$134

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

2012 2013 2014 2015 2016 2017

in b

illio

ns

12/31/2009 12/31/2010 9/30/2011

Source: Fitch Ratings U.S. High Yield Bond Maturity Schedule

$58

$77

$126

$133

$125

$98

$42

$51

$94

$142 $

126

$148

$34

$42

$72

$129

$123

$148

$0

$20

$40

$60

$80

$100

$120

$140

$160

2012 2013 2014 2015 2016 2017

in b

illio

ns

12/31/2009 12/31/2010 9/30/2011Source: Fitch Ratings


CONTAINED FOR NOW (CONTINUED)

22


Two financial maneuvers have allowed speculative-grade borrowers to push out the debt maturity wall: amendments & extensions (A&E)

of existing loan agreements and bond-for-loan takeouts.

These transactions embody the proverbial “kicking the can” mentality of the corporate sector.

Lenders have demonstrated they are not anxious to be overly confrontational with struggling borrowers in this precarious business

environment.

Spec-grade borrowers who are able to access the high-yield bond market can replace 5 or 6 year term loans with 10-year money that

also comes with fewer restrictions—albeit at a higher cost.

The resurgence of the high-yield bond market in 2012 has reignited the popularity of bond-for-loan pay downs. A&E’s have also come

back following two quarters of near dormancy

Bond-For-Loan Paydowns

$0.0

$2.0

$4.0

$6.0

$8.0

$10.0

$12.0

$14.0

Jan-0

9F

eb-0

9M

ar-0

9A

pr-0

9M

ay-0

9Jun-0

9Jul-0

9A

ug-0

9S

ep-0

9O

ct-0

9N

ov-0

9D

ec-0

9Jan-1

0F

eb-1

0M

ar-1

0A

pr-1

0M

ay-1

0Jun-1

0Jul-1

0A

ug-1

0S

ep-1

0O

ct-1

0N

ov-1

0D

ec-1

0Jan-1

1F

eb-1

1M

ar-1

1A

pr-1

1M

ay-1

1Jun-1

1Jul-1

1A

ug-1

1S

ep-1

1O

ct-1

1N

ov-1

1D

ec-1

1Jan-1

2

in b

illio

ns

Source: Reuters LPC

Leveraged Loan Amend & Extend Volume

$0

$5

$10

$15

$20

$25

$30

$35

1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 YTD12

in b

illio

ns

Source: Reuters LPC

MATURING TERM LOANS TO PE SPONSORS ARE

ESPECIALLY WORRISOME

23


Nearly 700 large terms loans (>$100mm) representing more than $300 billion of leveraged loans that are scheduled to mature through

2014 were made to U.S. based PE sponsors.

Over 85% of these loans to sponsors were originated prior to 2008 during the height of the LBO boom.

Pricing margins on these loans averaged 335 basis points over LIBOR.

More than 40% of these loans are currently rated single-B or worse.

For aggressive deals done before the credit crisis and recession, PE sponsors will be challenged to make the new math work as these

loans approach maturity.

Most of these scheduled loan maturities occur in 2013-2014. Levels for 2012 appear to be manageable.

How much farther will “the can be kicked”?

Term Loan Maturities to PE Sponsors

$44,4

48

$108,4

45

$151,6

52

$58,3

58

$40,7

41

$103,6

95

$134,5

03

$12,6

07

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

2012 2013 2014 2015

in m

illio

ns

Total Term Loan Maturities Originated Prior to 2008

Source: Reuters LPC

Term Loan Maturities to PE Sponsors 163

264

258

136

153

235 2

03

27

0

50

100

150

200

250

300

2012 2013 2014 2015

Num

ner

of T

erm

Loans

Total Term Loan Maturities Originated Prior to 2008

Source: Reuters LPC

U.S. CORPORATE CREDIT QUALITY HAS WEAKENED

CONSIDERABLY OVER THE YEARS

24


SOURCE: Standard & Poor’s Global Fixed Income Research

(shown below in percent) 1981 1986 1991 1996 2001 2006 2011

U.S corporates (total) 24 35 28 34 39 50 53

All financials 13 19 15 6 8 13 16

Financial institutions 10 18 21 9 13 16 21

Insurance 23 19 7 3 5 11 12

All nonfinancials 25 39 33 44 49 62 64

Auto/capital goods/aero/metals 34 46 45 57 68 74 69

Consumer & service 30 49 41 55 55 70 70

Energy/natural resources 34 42 32 46 46 62 65

Forestry, homebuilders 26 46 42 57 66 71 74

Health care/chemicals 24 46 36 47 59 71 74

High technology/office equipment 48 59 68 46 61 75 73

Media and entertainment 43 73 66 73 74 83 88

Real estate 42 19 13 17 17 29 33

Telecommunications 3 4 3 44 63 73 84

Transportation 28 19 29 31 43 58 67

Utility 4 9 4 9 9 18 10

Sources: Standard & Poor's Global Fixed Income Research

U.S. Speculative-Grade Share Of Ratings By Sector

S&P calls it the “March To Junk” : the development of leverage finance markets, a growing appetite for credit risk by

institutional investors and the widespread acceptance of LBOs as a feature of modern capitalism have resulted in a

deteriorating credit profile for the U.S. corporate sector over the last 30 years.

64% of rated U.S. corporate issuers (exc. the financial sector) are now spec-grade compared to 33% in 1991

U.S. CORPORATE CREDIT QUALITY HAS WEAKENED

CONSIDERABLY OVER THE YEARS

25


SOURCE: Standard & Poor’s

Moreover, about 43% of all rated U.S. corporate bond issuers (excluding financials) are currently rated B or worse. So not only

has the proportion of spec-grade issuers increased but they have become “junkier” too

Note: Data as of Sept. 30, 2011. Includes parent and subsidiary-level issuers

AAA AA A BBB BB B

CCC and

lower

% Spec-

Grade

All financials 2 119 305 199 50 55 9 15.4%

Financial institutions 1 45 98 102 26 37 4 21.4%

Insurance 1 74 207 97 24 18 5 11.0%

All nonfinancials 4 29 252 540 451 896 91 63.5%

Auto/capital goods/aero/metals 0 2 31 57 79 112 9 69.0%

Consumer and service 0 5 35 66 62 166 15 69.6%

Energy/natural resources 1 5 29 54 56 93 14 64.7%

Forestry, homebuilders 0 0 4 19 19 43 4 74.2%

Health care/chemicals 1 9 19 42 49 149 5 74.1%

High technology/office equipment 2 2 17 27 44 85 2 73.2%

Media and entertainment 0 1 5 24 59 141 30 88.5%

Real estate 0 0 13 56 24 16 1 37.3%

Telecommunications 0 0 11 3 19 54 3 84.4%

Transportation 0 2 3 23 17 31 8 66.7%

Utility 0 3 85 169 23 6 0 10.1%

Total: All nonfinancials 4 29 252 540 451 896 91

Pct. of Total 0.2% 1.3% 11.1% 23.9% 19.9% 39.6% 4.0% 63.5%

Grand Total 6 148 557 739 501 951 100

Pct. of Grand Total 0.2% 4.9% 18.6% 24.6% 16.7% 31.7% 3.3% 51.7%

Data as of Sept. 30, 2011. Includes parent and subsidiary-level issuers. Sources: Standard & Poor's

U.S. Issuer Ratings Distribution By Sector (Issuer Count)

CHUCK MOORE MIDDLE MARKET TRENDS

TMA MEMBERSHIP TRENDS BY TYPE OF FIRM

27

1 Total North American membership was 7,483, 7,873, 8,022, 7,572 and 7,391 as of 12/31/2007-

2011, respectively

Figures for North American membership only

Large Firms = Alix Partners, Alvarez & Marsal and FTI Consulting

Accounting Firms = BDO, Deloitte, Ernst & Young, Grant Thornton, KPMG and

PricewaterhouseCoopers

National Independent/Middle Market = Aurora Management, Barrier Advisors,

Bridge Associates, Capstone Advisory, Conway MacKenzie, Conway DelGenio, CRG

Group, Focus Management, Getzler Heinrich, Keystone, Kibel Green, Loughlin

Meghji, Morris Anderson, Richter Consulting and Zolfo Cooper

Total Number of Members 2007 2008 2009 2010 2011

Large Firms 234 255 300 318 309

Accounting Firms 180 192 240 252 282

Nat Indep / Middle Market 195 225 255 285 255

Sample Total(1) 609 672 795 855 846

YOY % Growth / Decline

Large Firms 9.0% 17.6% 6.0% -2.8%

Accounting Firms 6.7% 25.0% 5.0% 11.9%

Nat Indep / Middle Market 15.4% 13.3% 11.8% -10.5%

Sample Total(1) 10.3% 18.3% 7.5% -1.1%

150

200

250

300

350

2007 2008 2009 2010 2011

Large Firms

Accounting Firms

Nat Indep / Middle Market

REDUCTION IN SIZE OF SPECIAL ASSET GROUPS

28

Banks have been consolidating their workout groups across the country and

reducing the overall number of people assigned to handle special assets

The rationale for such reductions, include:

Significant amount of real estate workouts have been completed

Fewer stressed/distressed credits currently in portfolios and an expectation

of fewer transfers to special assets over the near term

Shorter workout periods and fewer bankruptcy filings

Regulatory leniency on ratings, etc. leading to more patience on the part of

lenders as they wait for an opportunity to get re-financed out of the situation

TYPE OF WORK MIDDLE MARKET FIRMS ARE

EXPERIENCING

Fewer bankruptcies

Fewer CRO engagements

Increased viability assessments

Kick the tires and offer recommendations

Provide comfort to lenders and establish “road signs” for when things turn

bad

Most assessments are fixed price and squeeze margins

Expanding into alternative work streams

Banks have worked through a majority of their real estate issues and are now

dealing with smaller C&I loans

29

MIGRATION FROM TURNAROUNDS TO TRANSACTIONS

For those companies that get truly distressed, they have run out of time and

exhausted most options by the time a restructuring advisor is hired

Instead of trying to fix companies, turnaround professionals are increasingly

coming on the scene to facilitate or manage a distressed company through

a sale or liquidation transaction

Real turnaround opportunities occur in a much smaller percentage of

engagements (<20%) than they have traditionally

Transactions are attractive for lenders because they can occur rather quickly,

require minimal administrative costs and, generally, provide greater certainty as

to outcome

30

EXTRA SLIDE WITH INTERESTING INFORMATION

Given the large stack of maturities between 2015-2017, particularly for middle market borrowers who have

not been able to refinance, there will be significant restructuring activity as these companies are forcibly

deleveraged

Compounding matters is the fact that by 2016-2017 all of the vast majority of CLOs will be outside their

reinvestment window, which has been a major driver of the current amend and extend cycle. Moreover,

many of these CLOs will be approaching their own legal final maturities and therefore will not be able to

extend even if they wanted to. New CLO activity is running at a fraction of its historical highs seen in 2007

at $150bn annually. For 2012, CLO issuance is expected to be about $12bn. Not nearly enough to replace

the lost supply

31 SOURCE: Distressed Debt Investing

http://2.bp.blogspot.com/-xCklyV-RxFM/Tz2tssM3nrI/AAAAAAAAAhE/lnctVjKLBb0/s1600/Conference7.jpg

KEVIN CARMODY NEW PLAYERS IN THE FIELD

THE COMPETITIVE LANDSCAPE HAS CHANGED IN THE

RESTRUCTURING COMMUNITY AS A NUMBER OF FIRMS HAVE

ENTERED OR RE-ENTERED THE MARKET … EACH WITH THEIR

OWN STRATEGY AND VALUE PROPOSITION

33

HOW DO THESE NEW ENTRANTS DIFFER AND WHAT WILL

DETERMINE IF THEY WILL SUCCESSFULLY GAIN MARKET SHARE

IN AN ALREADY COMPETITIVE RESTRUCTURING COMMUNITY?

The new entrants are concentrated into three distinct categories:

Accounting firms with global scale and technical expertise that can be

applied to financial advisory assignments

Management consulting firms that combine deep industry, global and

functional expertise on restructuring advisory and interim management

assignments

Investment banks with strong industry expertise that specialize in valuation,

restructuring advisory and balance sheet recapitalizations

34

AS THE ACCOUNTING FIRMS CONTINUE TO BUILD

SCALE IN THEIR U.S. RESTRUCTURING PRACTICES,

HOW WILL THEY COMPETE AGAINST THE INCUMBENTS?

How have the accounting firms overcome conflict issues and other obstacles that

prompted them to exit the U.S. restructuring market a decade ago?

What types of services do the accounting firms offer (advisory, crisis

management, bankruptcy administration)?

Do these services differ substantially by firm?

How are these firms building their restructuring bench (internal vs. external

hires)?

What are the early results?

35

HAS THE ENTRY OF TRADITIONAL MANAGEMENT CONSULTANTS

INTO THE RESTRUCTURING COMMUNITY SHIFTED THE BALANCE

OF POWER ON DEBTOR ENGAGEMENTS?

What types of services do these firms offer (i.e., restructuring advisory, crisis

management, operational, etc.)

What is the value proposition that differentiates the management consulting

firms from the incumbents?

Does the value proposition resonate in the C-Level suite?

Does branding make a difference?

How does this impact when consultants are retained?

What are the early results and keys to future success?

36

WHAT IMPACT WILL A NEW BREED OF BOUTIQUE

INVESTMENT BANKS HAVE ON RESTRUCTURING

TRANSACTIONS AND CAPITAL MARKETS ACTIVITY?

How are these new investment banks different?

What are the competitive challenges and hurdles that these banks will

encounter?

Which market segments are hot?

Who is leading the charge?

Do these faces look familiar?

What are the other success factors?

37

APPENDIX

38

January

2012

ALIXPARTNERS’

RESTRUCTURING

EXPERTS 2012

OUTLOOK SURVEY

www.alixpartners.com

DISCLAIMER – IMPORTANT INFORMATION REGARDING

THIS REPORT

© AlixPartners, LLP, 2012

This report was prepared by AlixPartners LLP (“AlixPartners”) for general information and distribution on a strictly

non-reliance basis. No one in possession of this report may rely on any portion of this report. The recipients of the

report accept that they will make their own investigation, analysis and decision relating to any possible

transactions and/or matter related to such and will not use or rely upon this report to form the basis of any such

decisions. To the extent that it is lawfully able to do so, no liability or responsibility whatsoever is accepted by

AlixPartners for any loss howsoever arising from any use of, or in connection with, the Report.

This report may be based, in whole or in part, on projections or forecasts of future events. A forecast, by its nature,

is speculative and includes estimates and assumptions which may prove to be wrong. Actual results may, and

frequently do, differ from those projected or forecast. Those differences may be material. Items which could

impact actual results include, but are not limited to, unforeseen micro or macro economic developments and/or

business or industry events.

The information in this report reflects conditions and our views as of this date, all of which are subject to change.

We undertake no obligation to update or provide any revisions to the report to reflect events, circumstances or

changes that occur after the date the report was prepared. In preparing this report, AlixPartners has relied upon

and assumed, without independent verification, the accuracy and completeness of all information available from

public sources or which was otherwise provided to us. AlixPartners has not audited or verified the data reviewed in

connection with the preparation of this report.

Neither this report nor any of its contents may be copied, reproduced, disseminated, quoted or referred to in any

presentation, agreement or document with attribution to AlixPartners, at any time or in any manner other than for

the internal use of the recipient, without the express, prior written consent of AlixPartners.

40

ALIXPARTNERS' RESTRUCTURING EXPERTS 2012

OUTLOOK SURVEY

Executive Summary

Survey Overview

Key Findings

© AlixPartners, LLP, 2012 41

EXECUTIVE SUMMARY

56% expect to see a higher number of corporate bankruptcies in 2012 than 2011

42% expect to see more large-cap filings

Sectors most likely to face distress are: Retail, Restaurants and Commercial Real Estate,

followed by Media, Financial Services and Healthcare

58% expect to see a higher number of distressed-investing opportunities

91% expect an equal or higher number of pre-packaged and pre-arranged bankruptcies with

assets or liabilities of $100 million or more

34% expect to see a municipal bankruptcy comparable to 2011’s Jefferson County, Ala.

60% expect to see President Obama re-elected, of which a clear majority (68%) feel this

would have no impact on bankruptcy and restructuring activity in 2012

But 61% say that a Republican win would be better for the “restructuring of America,” with a

significant 9% saying a third party would be



OUTLOOK SURVEY


Executive Summary

Survey Overview

Key Findings

SURVEY OVERVIEW


Date: January 17-24, 2012

Population: 126 high-level, North American-based corporate-restructuring professionals

(attorneys, investment bankers, distressed-debt experts, hedge-fund managers, etc.

Survey Focus:

The evolving state of the restructuring industry

What to watch for in the year ahead (distressed industries, distressed-debt investing, etc.)

The impact of government policies on both restructuring and corporate well-being

44


OUTLOOK SURVEY


Executive Summary

Survey Overview

Key Findings

CORPORATE BANKRUPTCIES:

56% EXPECT TO SEE MORE IN 2012 THAN 2011


31

13

56

Yes No Expect to see

about the same

number as last year

46

Do you expect to see more corporate bankruptcies in the U.S. in 2012 than there were in 2011?

Percent

42% ANTICIPATE MORE LARGE-CAP BANKRUPTCIES IN

2012


58

42

No Yes

47

Do you expect to see more large-cap bankruptcies (>$1 billion in assets) in 2012 than in 2011?

Percent

RETAIL, RESTAURANTS AND COMMERCIAL REAL ESTATE

SEEN AS MOST LIKELY TO FACE DISTRESS; MEDIA, FIN.

SVCS. AND HEALTHCARE ALSO CITED OFTEN


0

2

15

16

18

18

18

20

23

24

35

41

49Retail

Restaurants

Media

Financial institutions

Healthcare

Energy and resources

Automotive

Technology

Commercial real estate

Municipal

Transportation and logistics

Consumer goods

Aerospace and defense

48

Which sectors are most likely to face distress in 2012? (choose up to three)

Percent

59% EXPECT PRIVATE COMPANIES TO SEE A HIGHER

DEFAULT RATE THAN PUBLIC ONES


29

12

59

Lower About equal Higher

49

Will privately owned companies in the U.S. see a higher or lower default rate than public companies

in 2012?

Percent

58% EXPECT TO SEE MORE DISTRESSED-INVESTING

OPPORTUNITIES THAN IN 2011


31

11

58

About the same level

of distressed investing

opportunities

Less distressed

investing opportunities

More distressed

investing opportunities

50

Expectations Regarding the Number of Distressed Investing Opportunities in 2012

Percent

91% EXPECT AN EQUAL OR HIGHER NUMBER OF PRE-

PACKAGED/ PRE-ARRANGED BANKRUPTCIES WITH

ASSETS OR LIABILITIES OF $100M OR MORE


1

9

54

32

5

About the same

as in 2011

Somehat higher

than in 2011

Significantly higher

than in 2011

Somewhat lower

than in 2011

Significantly lower

than in 2011

51

According to AlixPartners research, in 2011 43% of U.S. corporate bankruptcies in the U.S. with assets or

liabilities of $100 million or more were pre-packaged or pre-arranged. In 2012, the number of pre-packaged

or pre-arranged bankruptcies for companies of that size will be:

Percent

34% EXPECT TO SEE A MUNICIPAL BANKRUPTCY

COMPARABLE TO 2011’S JEFFERSON COUNTY, ALA.


66

34

No Yes

52

In 2011, Alabama's Jefferson County was the largest municipal bankruptcy in U.S. history. Will there be a

municipal default larger than that in the U.S. in 2012?

Percent

60% EXPECT PRESIDENT OBAMA

WILL BE REELECTED …


1

39

60

Third party Republicans Democrats

53

Which party will win the 2012 U.S. presidential election?

Percent

… OF WHICH A CLEAR MAJORITY (68%) FEEL WILL

HAVE NO IMPACT ON BANKRUPTCY AND

RESTRUCTURING ACTIVITY IN 2012


68

13

20

Have no impact on bank-

ruptcy and restructuring

activity in 2013

Generate less bankruptcy

and restructuring activity

in 2013

Generate more bankruptcy

and restructuring activity

in 2013

54

Based upon your answer to the previous question, will this:

Percent

HOWEVER, 61% SAY THAT A REPUBLICAN PRESIDENT

WOULD BE BEST FOR THE “RESTRUCTURING OF

AMERICA”; 9% SAY A THIRD PARTY WOULD


9

61

30

Democrats Third party Republicans

55

Which party's presidential win would be best for the restructuring of America?

Percent

AlixPartners is ready to field a team of relevant experts whenever

and wherever they are needed. Our professionals work from 16

global offices with engagements in more than a dozen different countries.

They speak more than 50 languages, and have experience in every corner of the world.

Call us. We’ll be there when it really matters.

GLOBAL LOCATIONS

Dallas

2101 Cedar Springs

Road

Suite 1100

Dallas, TX 75201

214.647.7500

London

20 North Audley

Street

London W1K 6WE

United Kingdom

+44.20.7098.740

0

Chicago

300 N. LaSalle Street

Suite 1900

Chicago, IL 60654

312.346.2500

Detroit

2000 Town Center

Suite 2400

Southfield, MI 48075

248. 358.4420

Los Angeles

515 S. Flower Street

Suite 3050

Los Angeles, CA 90071

213.437.7100

New York

40 West 57th Street

New York, NY 10019

212.490.2500

Milan

Corso Matteotti 9

20121 Milan

Italy

+39.02.360.12000

Munich

Mauerkircherstr. 1 a

81679 Munchen

Germany

+49.89.20.30.40.00

Düsseldorf

Hofgarten Palais

Bleichstraße 8 – 10

40211 Düsseldorf

Germany

+49.211.97.55.10.

00

Tokyo

Marunouchi

Building 33F

2-4-1 Marunouchi

Chiyoda-ku

Tokyo 100-6333

Japan

+81.3.5533.4800

Shanghai

Suite 6111

Plaza 66 Building I

1266 Nan Jing

West Road

Shanghai, 200040

China

+8621.6171.7555

Paris

49/51 Avenue

George V

75008 Paris

France

+33.1.76.74.72.00

San Francisco

4 Embarcadero Center

31st Floor, Suite 3110

San Francisco, CA

94111

415.848.0283

Washington, DC

1602 L Street, NW

Suite 300

Washington, DC 20036

202.756.9000

Dubai

Gate Village 10, Level 03

P.O. Box 125115

Dubai Intl Financial

Centre

Dubai, United Arab

Emirates

+971.4.401.9246

Boston

2 Faneuil Hall

Marketplace

Boston, MA 02109

617.742.4400


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