Both the Michigan and U.S. economy are plugging along in fairly good shape, although just about everybody would like to see a higher rate of growth.
Yet amid the outlooks for continued moderate growth comes a reminder from three local professionals who work to turn around distressed companies: The economy is much closer to the next economic downturn than it is to the past recession.
“We’re busier than we were 18 months ago. We haven’t seen obvious signs of a recession or a major uptick in stress, but we’re busier and the economy cycles, so sooner or later there’ll be a downturn,” said Matt Miller, managing director at Blue Water Partners LLC in Grand Rapids.
“We’ve been saying this for a few years now,” he said. “We think, and others think, that we’re edging closer to a downturn. Our best guess is we’ll get busier here sooner or later.”
Those sentiments were among the observations made by a trio of turnaround professionals that MiBiz contacted for perspectives into the state of their industry and what that says about the economy.
Companies that were “victims of the Great Recession” presently are driving the turnaround business at Blue Water Partners, according to Miller. They survived the tumultuous period “but never quite recovered and eventually they succumbed to the weight of low capacity and relatively high debt service,” he said.
“The business shrank through the recession. Maybe it improved some, but they’re still operating with a lot of excess capacity and they borrowed years ago, and it’s been difficult to service their debt,” Miller said. “They’ve been able to fund the business one way or another, and ultimately they run out of runway.”
In the most recent Chapter 11 Distress Research Index from Polsinelli | TrBK, the reading for the fourth quarter of 2015 raised two points to 44.63, which was about 9.5 percent higher than a year ago. The index also increased for the second consecutive quarter, the first time that’s happened since the benchmark period in the fourth quarter of 2010.
“The fourth quarter results suggest that not only is distress no longer falling, but instead, it is now increasing for the first time post-Great Recession,” according to the report, which is published by Kansas City-based law firm Polsinelli PC with data from TrollerBk.com. The index is based on Chapter 11 bankruptcy filings by entities with assets greater than $1 million, excluding individual and involuntary cases.
Contrary to a half-decade ago, economic factors are not necessarily driving businesses right now, or causing the stress of client companies, according to turnaround executives in West Michigan. Despite the generally favorable economic conditions, the experts remain concerned about a cooling in the auto industry that has been riding high the last few years.
“We are seven years into a five-year automotive cycle, and there’s a ton of indicators within my world that would suggest doom and gloom on the horizon,” said Bob Wolford, an attorney in the turnaround practice at the Grand Rapids office of Miller, Johnson, Snell & Cummiskey PLC, a law firm with a large automotive supplier focus.
As indicators of an impending downturn, Wolford cites rising interest rates, as well as a possible dip in auto sales. Within the industry, auto suppliers getting their margins squeezed by OEMs could experience additional stress if sales and production volumes start to slip, he said.
The auto industry also faces a “fairly significant” model changeover later this summer, said Doug Wilterdink, managing partner at DWH LLC in Grand Rapids.
Auto suppliers have had to invest heavily and take on debt to retool for the new models, potentially putting financial stress on companies, according to both Wolford and Wilterdink.
“What we’re being told is that right now there is a huge wave of it relative to what is normally done annually and the auto companies are gearing up for trouble,” Wilterdink said. “This is a hot topic with the auto guys. If you don’t have a strong balance sheet and you have to start funding the tooling and the startup costs associated with model changes, those weak companies end up distressed companies.”
The turnaround business at DWH overall is “reasonably busy” with conventional turnaround work that generally involves companies that have management problems or have been hit by fraud or some other issue, Wilterdink said.
“It’s one of those things where if you’re not making money in this type of climate, something else is more fundamentally wrong,” Wilterdink said.
Another potential cause of distress is interest rates. A half-point increase in interest rates “could start causing some stress for marginally performing companies,” he said.