Year of Volatility – Final True Up for the 2011 Weil Restructuring Outlook Survey
Contributor(s)

Co-authored by Adam Strochak
At the beginning of the year, we asked our readers to gaze into their crystal balls and tell us what would happen in 2011.  We figured if anyone could predict the direction of key economic indicators in the restructuring world, it would be you.  The books are now closed on 2011 and it’s time to see how predictions stacked up against actual performance.
As was true with just about everything in 2011, volatility was the keyword.  For the most part, our survey results were close to actual performance on key metrics, like the number of large chapter 11 filings and the Dow Jones Industrial Average.  On interest rates, however, predictions missed by a mile, with none of our 125 respondents – not a single one, nada, zip, zilch, zero – correctly predicting that at year end the yield on a 10-year T-bill would be below 2%.  We all had that one totally wrong.  The conventional wisdom at the start of 2011 was that interest rates would rise to stave off inflation that might result from the low cost of borrowing, but growth expectations have not gone according to plan, and the low interest rate environment is still with us for the time being.
Over half of our readers correctly called the number of jumbo chapter 11 cases set to file in 2011, but only just, with ten super mega cases filing (and six of those coming in the last quarter of the year).  Approximately 40% of our readers correctly called the trailing 12-month global speculative grade default rate, which ended the year at 2.05% according to Standard & Poor’s.  Half of our readers correctly called what the Dow Jones Industrial Average would end the year at, with the index clocking in at a predictable 12,217.
When determining what industries would face the most financial distress in 2011, however, there were some surprising results.  Readers overwhelmingly expected distress in the commercial real estate industry, while only two companies with liabilities over $100 million filed for chapter 11 in that industry in 2011.  Homebuilding was another sector expected to face significant trouble, and again, only four companies with liabilities over $100 million sought bankruptcy court protection.  On the flip side, the manufacturing, media/communications/publishing and retail sectors each chalked up a large number of chapter 11 filings, which while understandable in hindsight, was not foreseeable at the start of 2011.
On behalf of the BFR Blog team, thanks very much for taking part in the 2011 survey, read on for the specifics, and watch this space for the 2012 Weil Restructuring Outlook Survey, coming soon.

What phrase best describes the economic outlook for 2011?

“1929 All Over Again”0.8%
“Double-Dip Recession”4.8%
“Stag-Flation”9.6%
“Flat is the New Normal”33.6%
“Jobless Recovery”33.6%
“Steady As She Grows”17.6%
“Party Like It’s 1999”0.0%

There was no right or wrong answer to this question, but in our judgment the vast majority of respondents picked a choice that fit 2011 in one way or another.  We had some economic growth by the numbers (in the United States), but it didn’t feel like we were moving forward due to all the ups and downs and our sense is that in early 2012 we stand at pretty much the same place we were in early 2011.  “Jobless Recovery” sums it up on the employment front.  And even the one respondent who thought we’d be staring down 1929 all over again gets an honorable mention because the European debt crisis looked downright 1929-ish from time to time during 2011.

How many super-mega chapter 11 cases (assets greater than $1 billion) will file in 2011?

Here’s what people said…

None0.0%
1-1056.5%
11-2034.7%
21-308.9%
31-400.0%
Greater than 400.0%

Though the first six months of 2011, it was looking like a slow year for jumbo chapter 11 cases with only two filings (Borders and Terrestar).  A late surge in filings turned things around though, with six of the largest bankruptcies of 2011 filing in the last quarter, and we ended the year with ten cases involving companies listing more than $1 billion in assets:

No.DebtorAssetsFiling Date
1.MF Global Holdings$40.541bnOctober 31
2.AMR Corp.$25.088bnNovember 29
3.Dynegy Holdings$9.949bnNovember 7
4.PMI Group$4.219bnNovember 23
5.NewPage Corp.$3.512bnSeptember 7
6.Integra Bank Corp.$2.421bnJuly 30
7.General Maritime Corp.$1.782bnNovember 17
8.Borders Group$1.425bnFebruary 16
9.Terrestar Corp.$1.376bnFebruary 16
10.Lee Enterprises$1.15bnDecember 12
11.Nebraska Book Company$657mJune 27
12.Seahawk Drilling$504mFebruary 11

In addition, there was one private company, MSR Resort Golf Course LLC that listed $2.2 billion in assets, bringing the total to 11.  So, we’re calling this one a draw and in our view anyone who picked either 1-10 or 11-20 cases – over 90% of respondents – got it right. As a point of comparison, there were 19 super-mega chapter 11 cases in 2010.  In the very busy year of 2009, the 20th largest case was Station Casinos with $5.8 billion in assets.

What will the trailing 12-month default rate for non-investment grade corporate debt (junk bonds) be as of December 31, 2011?

Here’s what people said…

Less than 2%11.4%
2-3%39.8%
3-5%39.8%
5-10%6.5%
10-15%2.4%
Greater than 15%0.0%

 
According to Standard & Poor’s, the trailing 12-month global speculative-grade default rate ended at 2.05% in December 2011, down from 3.3% in December 2010.  Almost 40% of respondents picked the correct range.  Or for you glass-half-emptiers out there, more than 60% missed the mark.
What industries will face financial distress in 2011?
We asked you what industries were most likely to face financial distress in 2011.  There is no clear way to measure this one, and many companies face distress without resorting to a bankruptcy filing, but here are the results compared to the number of actual bankruptcy filings in those sectors:

IndustryHere is what people said…

Number of Filings

Percentage*

Airlines18.5%

1

1%

Automotive5.0%

0

0%

Banking and Finance30.3%

4

3%

Commercial Real Estate71.4%

2

2%

Energy14.3%

6

7%

Homebuilding49.6%

4

4%

Media/Communications32.8%

11

12%

Retail52.9%

10

11%

Technology5.0%

3

3%

Telecommunications10.9%

3

3%

    * Chapter 11 and chapter 15 filings with liabilities over $100 million.

To complete the picture above, here’s a breakdown of the major chapter 11 and chapter 15 filings with liabilities over $100 million across all industries during 2011:

IndustryChapter 11/15 Debtors with
Liabilities Greater than $100 M
Number of Filings
AirlinesAMR Corp. (American Airlines)

1

Agriculture/FoodAllen Family Foods, Inc.
Cagle’s, Inc.

2

AutomotiveNone.  And a good thing at that, because the automotive industry had it rough for several years before 2011.

0

Banking and FinanceIrwin Mortgage Corporation
MF Global Holdings Ltd.
PMI Group, Inc.
R.E. Loans, LLC

4

Commercial Real EstateJameson Inns, Inc.
November 2005 Land Investors, LLC

2

EnergyAES Eastern Energy, L.P.
AES Thames, LLC
Dynegy Holdings, LLC
Evergreen Solar, Inc
Seahawk Drilling, Inc.
Solyndra, LLC

6

Entertainment/SportsDallas Stars
Los Angeles Dodgers

2

InsuranceNew Stream Secured Capital, Inc.
Tokio Marine Europe Insurance Limited (Chapter 15)

2

Health Care, Medical and PharmaceuticalAngiotech Pharmaceuticals, Inc. (Ch. 15)
Clare at Water Tower
Graceway Pharmaceuticals LLC
Nevada Cancer Institute
Otero County Hospital Association, Inc. (d/b/a Gerald Champion Regional Medical Center)
Verdugo Mental Health

6

Homebuilding/Residential PropertiesBarnes Bay Development, Ltd.
Maguire Group Holdings, Inc
RCR Plumbing and Mechanical, Inc.
William Lyon Homes

4

Hospitality and Gaming (New)155 East Tropicana, LLC
Aliante Gaming, LLC
Ambassadors International
Indianapolis Downs, LLC
MSR Resort Golf Course

5

Media/Communications/
Publishing
AR Broadcasting Holdings, Inc.
Blockbuster Canada Co. (Ch. 15)
Caribe Media, Inc.
Inner City Media Corporation
Lee Enterprises, Inc.
Nebraska Book Company
Summit Business Media Holding Company
MTB Bridgeport-NY Operating LLC
Open Range Communications Inc
SP Newsprint Holdings LLC

11

MiscellaneousAhern Rentals, Inc. (Equipment Rental)
Delta Petroleum Corporation (Marketer of Petroleum Products)
Getty Petroleum Marketing Inc. (Marketer of Petroleum Products)
Manistique Papers, Inc. (Recycling)
Marco Polo Seatrade B.V. (Vessel Management)
PTL Holdings LLC (Trailer Rental/Leasing)

6

ManufacturingBlitz U.S.A., Inc
Bowe Bell & Howell Holdings, Inc.
Chef Solutions Holdings, LLC
Constar International
Friendly Ice Cream Corporation
Hussey Copper Corp.
NewPage Corporation
Raser Technologies, Inc.
The Merit Group, Inc.
Vitro SAB de DV (Ch. 15)

13

RestaurantsPerkins & Marie Callender’s Inc.
Real Mex Restaurants, Inc.
Sbarro, Inc.
SSI Group Holding, Inc.

4

RetailAnchor Blue Holdings
Appleseed’s Intermediate Holdings, LLC
Borders Group, Inc.
BP Clothing, LLC
DSI Holdings, Co. (Deb Shops, Inc.)
Filene’s Basement, LLC
Harry & David Holdings, Inc.
Nebraska Book Co.
Robb & Stucky Limited LLP
Ultimate Acquisition Partners

10

Personal ServicesJackson Hewitt Tax Services
JK Harris and Company, LLC

2

TechnologyAlexander Gallo Holdings, LLC
Hartford Computer Hardware, Inc.
ShengdaTech, Inc.

3

TelecommunicationsSatelites Mexicanos, S.A.
Qualteq, Inc., d/b/a VCT New Jersey, Inc.
TerreStar Corporation

3

TransportationArchBrook Laguna LLC
Arpeni Pratama Ocean Line, Inc.
Baytown Navigation Inc.
General Maritime Corporation
Omega Navigation Enterprises, LLC
Trailer Bridge, Inc.

6

The big surprise here was that there were not more large chapter 11 filings in the commercial real estate sector.  The industry is still in distress, but the data suggest that out-of-court workouts, “amend and extend” transactions, consensual deed-in-lieu deals and traditional foreclosures are allowing commercial real estate borrowers to avoid bankruptcy.
What will the Dow Jones Industrial Average closing price be on December 30, 2011?
Here’s what people said…

Less than 9,0001.6%
9,001 to 10,0001.6%
10,001 to 11,00010.5%
11,001 to 12,00029.0%
12,001 to 13,00050.8%
13,001 to 14,0005.6%
Above 14,0000.8%

After jitters caused by declining economic numbers, the downgrade of U.S. debt, and European sovereign debt concerns, the Dow closed the out 2011 up around 6%, ending the year at 12,217.  Just over half of our respondents called this one correctly!
What will the yield on a 10-year US Treasury note be on December 30, 2011?
Here’s what people said…

Below 2.0%0.0%
2.0 to 2.5%1.6%
2.5 to 3.0%5.6%
3.0 to 3.5%16.9%
3.5 to 4.0%42.7%
4.0 to 4.5%28.2%
4.5 to 5.0 %3.2%
Above 5.0%1.6%

At December 30, 2011, the yield on the 10-year T-bill stood at 1.89%.  Yep, you read that right.  Even after the controversial downgrade by Standard & Poor’s, this bellwether interest rate continued to fall and ended the year under 2%.  Absolutely everyone missed this prediction, and most missed it by a wide margin with over 90% of our respondents predicting that the yield would be 3% or greater and more than 75% forecasting 3.5% or higher.
Closing Arguments. . .
In addition to our questions, we also asked survey responders to provide their own commentary on what lies ahead for 2011.  There were a variety of responses, and all were right in one way or another, but one stands out for its prescience, pointing out that the “wild card” for 2011 would be “sovereign debt and whether the huge worldwide government deficits may continue to be financed at reasonably low interest rates.”  Bravo.  You can’t get much closer than that.  Perhaps 2012 will see some resolution of the sovereign debt crisis in Europe and the structural and political problems that seem to keep the United States perennially on the edge of crisis.
Got a prediction you think will tell the story of 2012?  Hold that thought and come back shortly, when we’ll open the 2012 Weil Restructuring Outlook Survey.