Major US Municipality Default is More Likely than a Sovereign Debt Default Globally

Amid the economic turmoil in Greece, more restructuring experts believe that a major U.S. municipality default is more likely than is a sovereign debt default at some point in 2010 or 2011. Some 90% of restructuring pros polled last week predicted a major U.S. city will default this year or next, versus 63% who anticipate the default of a country in the same time period, according to an informal but closely watched annual survey by AlixPartners, the global business-advisory firm.

“Many companies with weak balance sheets are now being allowed some ‘runway’ to hopefully deal with underlying operating issues. However, without improved operational performance, a looming maturity, even one 12 months out, is still problematic.”

“In our 2009 survey of restructuring professionals, a large number pointed to municipalities as the top upcoming problem sector of the U.S. economy,” said Peter Fitzsimmons, AlixPartners’ president of North America and co-head of the firm’s Turnaround and Restructuring Services practice. “Clearly, that sentiment has only intensified. On a more positive note, however, 60% of those surveyed say they don’t believe the U.S. will experience a double-dip recession.”

The survey was conducted last week among 91 bankruptcy lawyers, bankers, fund managers and other restructuring professionals to gauge expectations around a host of issues, including economic growth, financial reform, employment, bankruptcy trends and government fiscal health.

When asked where a sovereign debt default would most likely occur geographically, 74% said Europe; another 12% pointed to South America, while 8% cited the Middle East. Asia and North America each were cited by only 1% of the respondents.

The poll unearthed a surprising dichotomy of opinion on the current health of corporate America. Approximately one-third (31%) of the restructuring experts said they believe U.S. bankruptcy filings will jump by more than 15% during the coming 12 months, despite the record number of filings in 2009. At the same time, however, 33% said the increase in the number of filings will come in somewhere between 1% and 6%.

The survey also found that a near-unanimous majority, or 97%, of experts believe the recent trend of prepackaged, pre-arranged and accelerated bankruptcies will continue in 2010 and beyond. Again, in almost unanimous agreement, 98% of respondents believe that corporate bankruptcies in 2010 will be seen mostly in middle-market companies (those with assets of less than $1 billion). Additionally, 82% of respondents said an accelerated proceeding is a better solution for all involved in large-cap-company restructurings either “always” or “a majority of the time.”

This survey was taken in the midst of a year in which many companies have received temporary relief from their debt woes thanks to “amend-and-extend” maturities arrangements. But that is no panacea, according to Lisa Donahue, a managing director at AlixPartners and co-head of the Turnaround and Restructuring Services practice.

“I think this trend underscores the ongoing need for companies, regardless of industry, to aggressively manage liquidity and improve operations during these tumultuous times,” said Donahue. “Many companies with weak balance sheets are now being allowed some ‘runway’ to hopefully deal with underlying operating issues. However, without improved operational performance, a looming maturity, even one 12 months out, is still problematic.”

In examining the U.S. economic outlook, the survey found that the vast majority, or 72%, anticipates that the country’s unemployment rate will be somewhere between 7% and 9% at the end of 2010. However, the balance of the restructuring experts – or 28% of those polled – believe unemployment will rise to the 10% to 12% range.

In terms of expectations for GDP growth this year, there was broad disagreement in the survey. Roughly one-third of respondents, or 33%, believe 2010 GDP growth will be anywhere from 2% to 3%, while 29% say it will be higher than 3%. The other 28% believe growth will be in the 1% to 2% range. Approximately 75% say that another economic stimulus package won’t be needed in 2010 or 2011.

Most U.S. restructuring experts sounded a dour note on the prospects of success for the major financial reform packages now before Congress. Asked whether such reforms would fix the fundamental issues behind the recent financial crisis, 91% said “no.”

When asked, “Which (political) party is best situated to facilitate an effective, post-financial crisis restructuring of America,” 42% said Republicans, while 20% pointed to Democrats. Tellingly, however, fully 38% answered “other.”