From Dealbook
An excerpt below:
Mr. Milmoe, who led the Skadden team that advised Refco, the commodities broker that collapsed into bankruptcy in October 2005, was asked recently about the next wave of bankruptcies. Following are excerpts from the discussion.
Q. Why has corporate bankruptcy activity been so slow?
A. It’s part of a normal cycle. Over 35 years, give or take, we see high levels of activity every five to seven years with some regularity. The deals most easily charted are the ones that are a function of economic policies: easy money versus tight money. At the moment, we are experiencing a massive amount of available cash, and that cash for investment has been available for two and a half to three years. What we’re predicting is that companies who were bailed out of a difficult situation two or three years ago are now coming up on a situation where they will have gotten in trouble again. Some percentage of those companies will continue to be rescued by available capital. But with others, people will say, “This was a bad investment, and we’re not going to throw more good money after bad.â€
Q. When you look at the recent boom in leveraged buyouts, do you think of it as bankruptcy work in the making?
A. During the last cycle there was — or there used to be — a stigma associated with private equity firms’ having their portfolio companies go into bankruptcy. But if you look back at the period from 1999 to about 2002, enough portfolio companies went in that a flippant kind of remark gained some currency: “If at least one of your companies doesn’t go into bankruptcy, you’re not trying hard enough.†The analogy is: “You’re not going to hit home runs unless you strike out.†Of course, I’m a lawyer, and I bill by the 10th of an hour. There are multibillionaires out there who got to be multibillionaires by taking risks, identifying companies that had the wherewithal to load up on leverage and still make wonderful equity returns. Still, you hate to see decisions being made that are not wise.