Winter 2019
Winter Update from Ted Gavin

I thought about starting this newsletter with a pithy quote like "the weather may be cold, but business is hot!", but I realized that doing that isn't pithy, it's silly. I'm not selling used cars, for Pete's sake. Also, maybe business isn't hot for everyone. Maybe the weather isn't cold for everyone. Life is varied for our professional community, and I shouldn't make assumptions about how anyone is experiencing the market, or the world at large.
 
Bottom line: we've all started a new year and that brings new cases, new opportunities, and new challenges, both professionally and personally. I am excited by the possibilities a new year provides for our team and our broader professional community. We have a lot to talk about this time!  
 
In this edition of The Next ChapterRoss Waetzman G/S Director - CIRA,CDBV, continues the tradition of providing his economic outlook for the year ahead. He came close to predicting nearly every key indicator in 2018, and we expect this year's forecast to be equally as impressive. If you know of companies in or nearing distress, you might want to share this article with them and reach out to Ross here for an even deeper understanding of the data.   
 
Joe Solmonese, G/S Managing Director - Corporate & Nonprofit Engagement, continues his interim management assignment and role as Transition Chair at Planned Parenthood Federation of America. Following the appointment last year of Dr. Leana Wen as president, he will continue this engagement through mid 2019.
 
As many of you know, our team is committed to attending various industry conferences and networking events across the country. This year is no exception. So far, Anne Eberhardt, G/S Senior Director - CFE, CAMS, attended The 24th Annual Rocky Mountain Bankruptcy Conference in Salt Lake City, UT where she participated on a panel titled "The Good, the Bad, and the Ugly: Accounting Basics for Bankruptcy Professionals." Panel members focused their discussion on what trustees and creditors should keep in mind about debtors, and when and why valuations are needed. If you'd like to contact Anne to hear more about the take-aways from the conference, you can contact her here
 
Jeremy VanEtten was in Las Vegas last week at the TMA Distressed Lending Conference. As a member of the NextGen Global Committee, he hosted the NextGen Reception,Thursday evening at the High Roller Observation Ferris Wheel at The LINQ.  
 
Every year, our team collectively attends over twenty conferences around the country, and after every conference, we talk about how much better it is to meet with people in person. Technology has definitely made it easier to interact with people across great distances and time zones, but it's not the same as being with someone face to face. Don't you find that when you're able to sit down and talk with a colleague, you gain so much more from the conversation? This sharing of information is not only good for us individually, we think it's good for the restructuring industry, too.
 
Here's where you'll find us in the next few months. Please be sure and say hello when you run into us at a networking event or between sessions!
 
Connect with the G/S Team in 2019
 
Feb 27: IWIRC at the Shore, Atlantic City, NJ 
Anne Eberhardt  
 
Feb 27: VALCON ABI, Las Vegas, NV 
Ted Gavin and Ross Waetzman 
 
March 2: Norton Bankruptcy Litigation Seminar, Park City, UT
Anne Eberhardt
 
April 10: IWIRC Annual Spring Meeting, Washington, DC
Anne Eberhardt
 
April 11-14: ABI Annual Spring Meeting, Washington, DC
Ted Gavin, Amy Gavin, Joe Solmonese, Stan Mastil, Ross Waetzman, Anne Eberhardt, Jeremy VanEtten, Chuck Lewis
The State of Distress: 2019 Outlook
by Ross Waetzman, CIRA, DDBV
U.S. economic growth will continue in 2019, though with increasing risks. These conditions are already accelerating the challenges for distressed companies. For those able, 2019 may be the last window to shore up their financial situation before conditions deteriorate further.

As I stated last January, the Federal Reserve hiked rates four times in 2018, a 1.0% increase over 2017. Though higher rates were expected to reduce personal consumption, Q3 2018 personal consumption expenditure (PCE) growth accelerated to 3.5%: a 59.0% increase over the prior year period. Though my 2018 forecast called for a moderate reduction in PCE, several factors contributed to stronger than expected growth:
  • 2017 tax reform driving higher personal tax refunds;
  • falling oil prices, which reduced gasoline prices by 45.1%; and
  • low unemployment, which remained 1.0% below the natural rate of unemployment.
2018 Gross Domestic Product (GDP) was also strong, growing 3.0% as of Q3 2018 (28.2% higher than in 2017). This expansion should continue during 2019, though at a reduced rate.
The Federal Reserve has implied it does not intend to raise rates in 2019, signaling concern about disrupting increasingly fragile economic conditions. Ignoring geopolitical considerations, these conditions prime 2019 GDP by 2.0% to 2.5%.
 
The strong economy is allowing corporations to reduce indebtedness. Non-financial issuers have reduced leverage by 3.5% since 2009, while high-yield issuers (those with S&P ratings below A-) reduced leverage by 2.7% since 2009. [1] Nonperforming commercial loans (90+ days past due) have also declined, falling 49.0% as a percent of total commercial loans since Q2 2016. 

The following outlines several geopolitical flash-points threatening U.S. growth.
The largest threat to U.S. prosperity may be the Chinese economy, which is growing near a 28-year low. Nonperforming loans are estimated at 24.0% of total loans; this is close to pre 2008 levels in the U.S. and Europe. Though China's Central Bank is encouraging banks to lend, M1 money supply (an indication of transactional spend) contracted from 25.3% in 2016 to 11.8% in 2017 to current estimates of 1.5%, implying companies are hoarding cash. China is also wrestling with a large housing price bubble. Representing 9.8% of global imports, the impact of sharp Chinese recession could weigh significantly on the globe and U.S.
 
2019 is continuing one trend that should garner attention among higher-risk borrowers. Lenders are charging significant premiums to lower-rated issuers. The premium charged to  
CCC-rated issuers over Treasury securities had been in decline during 2018 but has been on the rise since July, an indication that lenders are increasingly becoming risk adverse.
 
In summary, the U.S. benefited from strong growth in 2018 that could continue into 2019. However, threats to growth far outweigh potential for simulative surprises. In short, prudent corporations in or nearing distress should undertake corrective action soon, while opportunity still permits.
 
[1] Leverage = Debt / EBITDA; an indication of the years required to repay debt at constant profit levels.
 
Ross Waetzman has 25 years of professional service experience advising companies as well as their lenders and equity holders on matters of financial and strategic significance, both out-of-court and in bankruptcy. He is a Certified Insolvency & Restructuring Advisor and has been awarded the Certification in Distressed Business Valuation.
 


Value
 
by Anne Eberhardt, Senior Director at Gavin/Solmonese
 
The topic of value has been a recurring theme in my work. In January, I spoke on the topic of valuation at the Rocky Mountain ABI Conference, and several of my recent cases have centered on the value of companies during the months leading into bankruptcy.

The word, value, has many meanings. In its verb form, to value a company might mean preparing an estimate of its market price. But we can also value a company - or an organization, or a person - because of the incalculable joy they bring to our lives.

In its noun form, value might mean the price a willing buyer would consider paying for something. It could also mean something has a low price. But value also has a more noble connotation, referring to the philosophies and guidelines that govern our everyday actions.

I recently suffered a devastating personal loss, and the values of my colleagues and friends within the bankruptcy community - displayed by the kind words, the check-in texts, calls, and emails - has given me strength. It is these values, which cannot be reduced to a number, for which I am immeasurably grateful.  
 

Meet Our New Team Member

Michael (Yutian) Zhang

Please join us in welcoming our newest Gavin/Solmonese team member Michael (Yutian) Zhang. Based in our Wilmington office, Michael will be working with the G/S team providing analysis for buy-side and sell-side M&A and financial restructuring engagements.

An experienced analyst, Michael worked for Orolia (Rochester, NY) and GeoInvesting, LLC (Greater Philadelphia area) on pre-market and post-market operational leads and equity reports. He also participated in valuation assignments calculating consideration of EBITDAR (R&D).

Michael graduated from Shanghai University in China and the University of Technology Sydney (UTS). He later completed his master's degree at Simon Business School - University of Rochester, graduating as a Beta Gamma Sigma recipient with a concentration in corporate finance and quantitative finance. Michael is fluent in English and Chinese (Mandarin).  
 
When he's not crunching numbers, Michael enjoys table tennis, skiing, and playing guitar and drums.
Our Gallery

The 24th Annual Rocky Mountain Bankruptcy Conference, Salt Lake City, UT Panel discussion:  The Good, the Bad, and the Ugly: Accounting Basics for Bankruptcy Professionals  

Anne Eberhardt, Gil A. Miller (moderator), Hon. Kimberley H. Tyson, John H. Curtis, Vernon L. Calder
 

ABI Anthony H.N. Schnelling Endowment Fund Mid-Atlantic Wine Dinner, Philadelphia, PA (La Famiglia Ristorante)
 
Ted Gavin, Mette Kurth, Tom Horan , Ross Waetzman, Alane Becket, Bob Fishman



Flyers game at the Gavin/Solmonese suite, Well Fargo Center, Philadelphia, PA - Jeremy VanEtten, Sydney Darling, Chris Hemrich  
 


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