A round-up of market news for January, 2012:
Restructuring Activity: The big news hit on January 19th when Eastman Kodak Co (EK) officially filed Chapter 11, “making Kodak one of the biggest corporate casualties of the digital age.” Reporting nearly $302 million in Ebitda losses over the first three quarters of 2011, EK’s demise had been on the horizon for nearly 20 years.
EK’s bankruptcy was due, in part, to the company’s outdated business model: EK missed the digital-imaging boat, relying instead too much and for too long on a business model that emphasised the vanishing business of printing physical photos for customers.
After filing for Chapter 11 November 29th, 2011, AMR, the parent airline of American Airlines, risks losing control of the bankruptcy exit as the carrier is being eyed by US Airways Group, Delta Airlines, and the private equity firm TPG Capital as an acquisition target. This development only highlights the increasing transaction-oriented nature of restructurings, in which these situations have a tendency to end in a sale.
Lending Market: The latest Federal Reserve Beige Book had mixed news for the lending market. Loan demand seemed to be on the uptick, though the New York Fed noted tightening of C&I lending standards, and there are indications that small businesses continue to struggle with access to financing, likely due to the changing landscape of the community lending market.
Commercial Real Estate: After a promising November that saw the delinquency rate fall 26 basis points, the national real estate market took a severe hit in December, 2011. According to a Trepp report, the delinquency rate for commercial real estate loans in the U.S. increased seven basis points, to 9.58%. And while the industrial delinquency rate fell 17 basis points from the month before, it was the worst performing sector for 2011, ending the year at 12.03%. Overall, experts expect the national rate to increase by as many as 75 basis points in 2012, as the first wave of loans originated in 2007 reach their balloon dates within the next 6 months.
Policy Issues: The market is seemingly overly sanguine on the prospects of the Euro Crisis being contained. While spreads for Italian and Spanish sovereign debt have declined in the past month, spreads have widened in Greece and Portugal.
Christine Lagarde, Managing Director of the IMF, has begun to suggest that public sector (including the ECB) bondholders will need to participate in any restructuring of Greek debt. With Greece lacking the funds for 14.5 billion euro of bond redemptions in March, we anticipate negative credit shocks to the market this spring.
Entrepreneur Issues: PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA) report that 2011 was the strongest year for investments in start-ups in a decade. Additionally, nearly half (1,810 of 3,673) of all VC investments across industries in 2011 went to seed and early-stage ventures. We view these developments as presaging a funding squeeze as companies seeking B and C rounds of funding find fewer investors inhabiting that space, potentially resulting in an uptick in M&A activity among these companies.
Margaret Bogenrief is a partner with ACM Partners, a boutique crisis management and distressed investing firm serving companies and municipalities in financial distress. She can be reached at [email protected]