Morgan Joseph

MORGAN JOSEPH FINANCIAL RESTRUCTURING NEWSLETTER SEES FUTURE INCREASE IN NUMBER OF DISTRESSED TRANSACTIONS

Depressed Asset Values Continue to Affect Restructurings and ABL Lending

Competition for Larger Issues, More Muted Recovery for Middle-Market
3/15/10

NEW YORK, NY, March 15, 2010 – The financial markets are not out of the woods yet, at least for mid-market companies and borrowers relying upon asset-backed financing, according to the latest Quarterly Financial Restructuring Newsletter issued by Morgan Joseph & Co. Inc., the full-service investment bank focused on middle market companies.

“Borrowers remain highly leveraged, and combined with a renewed source of funding from the capital markets, expectations for increased levels of distress driven transactions in 2010 would seem inevitable,” comments the newsletter prepared by Morgan Joseph’s Financial Restructuring Group, headed by Managing Director James D. Decker.

Moreover, it points out, that while financing markets have proved resilient and the recovery year over year has been unprecedented, “many middle market borrowers have not witnessed a similarly prolific rebound with respect to their financing sources. Access to capital for middle market borrowers has remained constricted compared to their larger peers, as the debt market continues to place significant value in the liquidity offered by larger issues.”

The report also notes that premiums of LIBOR spreads for below $50 million EBITDA borrowers versus larger borrowers have reached 10-year highs. “Despite being provided with less overall leverage and tighter terms, middle market borrowers faced an average premium to their larger counterparts of almost 100 bps versus 2008 and prior, when such premiums were generally less than 50 bps.”

In addition, it states, depressed asset values have led to difficulty in providing adequate protection to incumbent secured lenders, and the inability to place a priming new money DIP (debtor in possession) facility, resulting in additional leverage for secured lenders as they become the primary or only option for additional liquidity prior to a Chapter 11 filing.

Among other observations, the Morgan Joseph Financial Restructuring Group’s newsletter points out:

· Improving capital markets and increases in new loan issuances will provide more options to existing lenders, driving true distressed company activity in the second half of 2010.
· ABL (Asset Based Loan) structures will be affected by declining asset appraisals and increased commodity pricing, leading to liquidity tightening.

· While the continuing credit market recovery has slowly improved the availability of DIP facilities, and despite the apparent bottoming of the DIP market in early 2009, DIP facilities remain elusive for many borrowers and those that are raised command a sizable premium versus the historical market. In addition, a greater preponderance of DIP facilities are being provided by pre-petition agents, as compared to priming new-money DIP facilities, leading to greater lender leverage as well as the proliferation of lender-friendly economics and structures.

· The recovery in the secondary market seen in the second half of 2009 has led to a rebound in the larger new issue market. Capital has migrated to the higher all-in yields of new originations, which are now nearly half of December 2007 origination levels and a quarter of yields in December 2008. The trend has been evidenced by increased competition for larger issues driving reduced pricing, lower original issue discounts, rescission of LIBOR floors, upsizing of facilities and the reemergence of second-lien tranches and dividend recaps.

About Morgan Joseph
Morgan Joseph & Co. Inc., a New York City headquartered full service investment bank, provides financial advisory and capital raising services including M&A and restructuring advice, and equity and debt private placements and public offerings. In addition, Morgan Joseph provides research and trading for institutional clients. Morgan Joseph’s staff of over 130 includes more than 70 investment bankers, who are highly experienced professionals mostly from major Wall Street firms and intimately familiar with the issues facing middle market companies. The firm is a member of both the Financial Industry Regulatory Authority (FINRA) and the Securities Investors Protection Corp. (SIPC).

The five Principals managing the Morgan Joseph Financial Restructuring Group collectively have over 70 years of financing and restructuring experience. Since 2001, they have completed more than 80 company and creditor transactions, and restructured approximately $25 billion of debt in in-court and out-of-court transactions.