“Hard Slog” towards US recovery in 2010

10/01/2010

Most US turnaround professionals predict a hard slog toward economic recovery in 2010 as businesses weighed down by debt hit rough patches, and credit markets shun them. Nearly half (49 percent) of the respondents to a survey carried out by Turnaround Management Association's (“TMA”) distressed industries forecast, think durable improvement in the economy is unlikely until at least the second half of 2010. About thirty percent think the worst is over, but nearly 20 percent suggest the economy has yet to hit rock bottom. 

Three-quarters think the commercial real estate industry will fare the worst in 2010 as debt matures, and lenders remain reluctant to refinance. TMA report that while respondents overwhelmingly picked commercial real estate as a major problem for 2010, the causes cited were economic conditions and debt levels, not oversupply. If it were oversupply, it would take a lot longer to fix, which suggests that problems in commercial real estate will not be long term. 

Nearly all respondents (92 percent) said economic conditions pose the greatest threat to struggling industries, and the most hard pressed will contend with too much debt compounded by lack of access to capital, according to 78 percent and 52 percent of respondents, respectively. 

Over-leveraged balance sheets are seen as one of the primary causes of industry problems 2009, many lenders were more willing to Extend and Amend terms and conditions so that borrowers were not in default. It is unclear if these borrowers took this opportunity to improve operations, reduce expenses and sell off assets to reduce debt, or are just hanging on for an economic turnaround. So it becomes a question of how long lenders will delay declaring defaults. 

If the economy recovers without sufficient job creation, most respondents suggest the unemployment rate could be lowered through tax incentives designated for hiring, retraining, capital spending, and technology investment. To a lesser degree, respondents think targeted stimulus spending on measures such as creating public works projects and youth work programs could help absorb some of the millions of out-of-work Americans. But getting more people back to work is critical, as employment is the crucial underpinning for the consumer-driven economy to function.

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