Banking & Finance and Economy and Environment

Turnaround specialists in demand: Economy creating opportunities for Periculum Capital, other firms

May 5, 2008

Even storm clouds have silver linings, if you know where to look. Likewise, even a slowing economy has market opportunities, for those who can adjust.

Economists haven't agreed yet about whether the U.S. economy has slipped into recession. But Indianapolisbased investment banking firm Periculum Capital Co. LLC isn't waiting for the official call. Known since 1998 for its expertise in corporate finance and mergers and acquisitions, Periculum is beefing up its expertise in business restructuring.

"Most people who build businesses aren't great at fixing a business whose balance sheet is broken," said Periculum Co-managing Director Joe Broecker. "Most entrepreneurs are in growth mode. They're not thinking about shutting down plants. They're focused on how to expand and hustle."

Founded in 1998, Periculum has often been involved in fund raising for promising new businesses, or finding the bank credit necessary for major mergers and acquisitions. For 2006 and much of 2007, those were busy areas to work. But more recently, a combination of factors has left many businesses with weaker prospects than they'd anticipated. The increasing price of commodities like fuel drives their costs up, while at the same time, their sales expectations are declining along with the national economy.

If this were a normal downward slump, most businesses would simply approach their lenders to renegotiate the terms of their loans. But these days, banks are clamping down hard on credit as they work through the subprime mortgage market's meltdown, as well as the aftershocks it created for banks everywhere.

Periculum Co-managing Director Bob Shortle saw the writing on the wall months ago.

"You knew at some point, this would cause distress at some of these companies," Shortle said. "The core business may still be good, but the balance sheet sure looks ugly."

Increasingly, Periculum has found its clients overleveraged, saddled with debts they assumed when prospects were brighter. Now they must not only put their expansion plans on hold indefinitely, but also find a way to convince skittish bankers to extend their loans.

Periculum isn't the only one noticing the problem. Jim Carr, partner at Indianapolis law firm Baker & Daniels, said he's getting many more calls from distressed firms who want help in avoiding bankruptcy.

"Lots of banks are becoming much more careful about their portfolios and less friendly about extension of credit or the extension of terms of credit," Carr said. "Companies are used to, and have been used to, relative laxity in banks' lending facilities and extensions of facilities. They're now running into a different environment they don't understand."

Jeff Hokanson, an attorney with locally based bankruptcy law firm Hostetler & Kowalik PC, said businesses just didn't anticipate the downturn. Now they're scrambling to respond.

"I can tell you everybody's talking about it on the street. Everybody's nervous about it. People who do what I do, bankruptcy law, are starting to get very busy," he said. "You can only plan for what's reasonable. It's the absolutely unforeseeable changes in the market that are just killing people."

To address that problem, Periculum has hired two corporate turnaround veterans, Christopher Black and Frite Schutte.

Before joining Periculum, Black was chief financial officer of Jeffersonvillebased American Commercial Lines Inc., a company whose stock had slid from historic highs of $40 per share to $4 each in 2001. Although the company was saddled with a half-billion dollars in debt and a market worth of just $100 million, Black helped it reorganize and negotiate new terms with its bankers. The reorganization helped American Commercial Lines' stock recover back to $31 by the time Black left.

Before his time at American Commercial Lines, Black helped manage the turnaround of Lafayette's Wabash National Corp. His successor, Schutte, also assisted in that reorganization. Now the pair will attempt to engineer similar turnarounds for Periculum's clients.

"It's the same exact process," Black said. "You may have one less zero."

Periculum isn't the only firm operating in the turnaround niche. David Hamernik, owner of Indianapolis-based Hamernik LLC, said the key to a successful turnaround is first understanding the problem. That means investigating a wide spectrum of issues, such as the details of banks' tighter lending standards. And while it may seem expensive to hire consultants in tough times, Hamernik said it's necessary.

"Seek help. People are people. We all tend to think we can doctor ourselves. Some people try to fix their own car. Sometimes, it's just a good idea to get an outside opinion," he said. "Don't be afraid to ask somebody."

Executives should also understand that banks aren't the bad guys. They don't make money unless they offer loans. So bankers may be more responsive to new terms than you expect.

"Nobody wants to make a bad loan worse. If there's any business solution, lenders aren't unreasonable. They're looking for a way out," Hoakenson said. "The business needs to understand they need to give the bank a way out and lead everybody out of the woods."

Most important, don't delay, because it's much easier to make corrections at the start of a downturn than it is later, when decisions may be made for you.

"It's a rough truism," Carr said. "But the later you get on top of these issues with effective advice, the more costly it's going to be and the fewer options you're going to have."
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