Here's a market signal that is hard to see from Wall Street. That is, turnaround--the practice of helping companies to preserve their access to capital during a period of financial wobble--is so unnecessary that you might call it dead.  

The evidence is found in a couple of rarified nooks and crannies of the financial system. First, look at the booming operations of direct lending hedge funds. These funds are making loans to companies that might not have previously qualified for credit (or who might have called on turnaround consultants to help them qualify for said credit). Great news for the borrower--they have essentially cut out a pesky, if I may say, middleman. The hedge funds also operate with lower operating costs, including in branch operations. In part, this is because the funds do not have the need to manage assets versus liabilities, the way a bank balances deposits against loans. So far, so good for the borrower and their new lenders.

Did I mention that the hedge fund lenders also have reduced credit monitoring functions? This, too, might be seen as a relic of an over-regulated banking system. Then again...

Flat Monitors

The operative word is "might." Sometimes banks monitor credit for the purpose of sending a report to Washington. And sometimes they monitor credit for the purpose of getting their money back. Keeping with the credit theme, many commentators say that direct lenders are willing participants in the current trend toward low-covenant or no-covenant bank loans. That is, loans without contractual triggers that alert the lender to change in borrower's circumstances.

I recently asking a direct lending executive what they do when a borrower gets in trouble. And his answer was that the firm would "take over" the wayward borrower. If this is true, it suggests that the next cycle will be very different from other downturns. What will the national mood be when Joe's metal bending shop becomes a subsidiary of a hedge fund? Banks are forbidden from foreclosing on operating assets for the purpose of promoting their own ownership. Will this be true of their less-regulated cousins?

Workout-No Sweat

The second evidence of turnaround's demise is seen in the quiet hallways of the banks' workout departments. (This is the department that either collects your loan balance, or bids you 'Aloha.'  No borrower wants to be sent to the Aloha room.) The area is hushed, because there are far, far fewer workout folks needed now. Once upon time, if a firm hit a series of bumps in the road to profitability, a quiet referral to the collection specialists was in order. They in turn would suggest that a short course in rehab be entered, supervised by an unaffiliated, outside expert (i.e., me).

These days, there is so much money available to lend, all a bank has to do is clear the throat and suggest the borrower might be happier with another money-changer. Once the borrower gets the hint, there is abundance of coin ready to finance the most uncertain of financial setups.

The ironic sight, then, is of former workout officers who are clothed in rags, while rich borrowers light their cigars with c-notes.  On the other hand, is it a sign of a possible inflection point if all the collection people are on the dole?  Could that be a sign that we have gone too far in making fresh capital available?

Thankfully, middle market companies are hungry for plenty of advice. Now they would like to grow as quickly, and as profitably, as possible. For them, the capitalist dream includes the word "exit" stapled to a big buyout check.  

Sad to say, the workout world is dead, dead, dead. There are mounting piles of fuel for the next fire, but as of yet, no signs of smoke.

Published on: Feb 22, 2018
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