Alexandria, Va. — Current market conditions, notably limited deal flow, low interest rates, an abundant supply of debt capital and motivated private-equity buyers, are leading to aggressive deal structures similar to those prior to the recession for middle-market companies, according to an article in the December edition of the ABI Journal. “With the lack of available future tools to affect a restructuring, events of distress or default may be more event-driven or company-specific in a broadly healthy economy, and the situations will likely be more acute,” James E. Fleet of Phoenix Management Services (Chadds Ford, Pa.) and Patrick J. Hughes of Phoenix Capital Resources (New York) write in their article, “Who’s on First, What’s on Second: Capital Markets in Transition.” Fleet and Hughes examine the current lending structures for middle-market companies and potential scenarios for these companies as the lending environment changes when interest rates go up. “Aggressive behavior on the part of senior lenders, mezzanine lenders and buyout shops in many ways is akin to the attitudes that were commonplace leading up to the economic downturn in 2008,” they write. “The thin deal market has led to ‘ginned up’ valuations in middle-market buyouts.” Highly leveraged middle-market companies, which are narrowly able to service their debt under current lending conditions, will be at risk of default when rates rise as the economy improves, according to Fleet and Hughes. “With middle-market companies levering up in the inexpensive-debt environment with stretched deal structures, a day of reckoning is looming on the horizon,” according to Fleet and Hughes. Potential scenarios facing such middle-market companies include: - Out-of-court restructuring: “The various capital stakeholders are left to the valuation fight, with an acceptance of either: shortfall of recovery on loan principal for senior and/or mezzanine lenders; debt-to-equity conversions; or costly capital infusions with significant ownership dilution.” - Bankruptcy: “Given an environment where interest rates are rising and capital structures are fully stretched, out-of-court negotiations may prove to be less effective than in recent years. The bankruptcy tool, while expensive, may return in popularity to resolve these issues with a gavel.” - Liquidations: “Given the circumstances of highly levered balance sheets, recoveries might often be short of the stretched senior loan balances. In the same respect, there is little left for the mezzanine lender typically, with the equity investor most certainly out of the game.” To obtain a copy of “Who’s on First, What’s on Second: Capital Markets in Transition,” published in the December issue of the ABI Journal, please contact John Hartgen at 703-894-5935 or via email at [email protected]. ### ABI is the largest multi-disciplinary, nonpartisan organization dedicated to research and education on matters related to insolvency. ABI was founded in 1982 to provide Congress and the public with unbiased analysis of bankruptcy issues. The ABI membership includes more than 13,000 attorneys, accountants, bankers, judges, professors, lenders, turnaround specialists and other bankruptcy professionals, providing a forum for the exchange of ideas and information. For additional information on ABI, visit www.abiworld.org. For additional conference information, visit http://www.abiworld.org/conferences.html.