Business is picking up for Tom Desmond. While that may be good for him, it's a potentially troublesome indicator for banks and the economy.
Desmond, managing partner at New England Consulting Partners, describes himself as a "turnaround guy." His Boston-based firm specializes in assisting distressed small and medium-size businesses — typically those in hot water with lenders.
"Ninety-nine percent of our work comes from banks. That's the referral source," Desmond said in a recent interview. As part of most loan agreements, banks can require borrowers to engage a consultant if they violate a covenant or show some other sign of difficulty managing their debt. "It's anything in violation of the loan documents," Desmond explained. "It could be not getting the monthly financial statements on time. It could be the borrowing base deteriorating…When a company trips a covenant, the bank has to react. They just can't brush it to the side."
In March, NECP hired two new specialists in response to what it termed "increased demand for its services." One of the hires, Jamin Hutchens, will lead a new office in Boca Raton. NECP maintains additional offices in Dallas, Denver and Detroit. NECP's expansion comes amid a
NECP's job involves helping companies before they're forced to consider a bankruptcy filing. The number of businesses falling into that category also appears to be on the rise, according to Mark Powers, an attorney at Bowditch & Dewey in Boston who specializes in bankruptcy and complex business litigation.
"What I'm seeing in the past year, 15 months, I get more bank customers that are in covenant default," Powers said in an interview. "I'm not seeing widespread payment defaults that are leading to foreclosures and secured property sales, but I think there are more borrowers who are in distress."
Similarly, Alan Tantleff, a senior managing director at FTI Consulting, a prominent Washington, D.C.-based turnaround firm, said his phone has been ringing more frequently lately. Much of Tantleff's work involves hospitality and casino real estate, a sector that's been particularly hard-hit by rising interest rates and before that, COVID-19. "There's always a frictional level of restructuring that's going on," Tantleff said in an interview. "Business models break, they stress, things happen."
Tantleff traced the pickup in recent call volume to multifamily and office projects, two other areas of focus.
"Lately, with the increase in interest rates, multifamily has picked it up. And with the obsolescence of certain classes of office real estate, that's picked it up a little bit more, as well," he said.
Making the list
Any uptick in problem borrowers means banks turn more frequently to their lists. When small-business clients encounter financial difficulties, banks provide them with names of turnaround firms they trust. Clients select a consultant from the bank's list.
"To be a consultant for a bank, or even an attorney, you have to be on the approved list," Desmond, an accountant by training, said. "The bank has to have faith in your ability to help their customer No. 1, and then make sure that the reporting is what it should be."
After founding NECP in 2001, Desmond hustled to build clientele. He joined the Turnaround Management Association, the Secured Finance Network and other trade groups. He attended meetings and he did a lot of one-on-ones with bankers. "You introduce yourself to the relevant bankers," Desmond said. "When a person says yes, you meet with them and show them your methodology. If you're lucky, they put you on a list for an engagement."
Once a firm makes a list, it can start doing business, one client at a time. "If you get the job, you've just got to make sure you do really well. Then they say, `Oh, Tom did a good job on this one. It was a smaller deal, but he really did a good job.' If another one comes up, hopefully you get that."
While their work is difficult and unheralded, turnaround consultants play a critical role helping resolve troubled loan relationships. They re-establish frazzled lines of communication and provide a clear-eyed view that is sometimes missing inside struggling companies.
"I think sometimes with [distressed] small or family-owned businesses, it's good to get a very smart, disinterested financial person in place," Powers said. "Sometimes you see with smaller or midsize businesses, maybe it's a family owned business — whether it's first generation, second generation or third generation — it's like a separate member of the family. Whoever is managing things may not be looking at the company's prospects objectively."
"I think the restructuring industry is a lot bigger than one would expect," Tantleff said. "A lot of the work goes on behind the scenes. It's not particularly glamorous, so it's not always elevated to the front pages."
Like Powers, Tantleff said a struggling company oftentimes benefits when an experienced, practiced outsider takes a fresh look at its situation. "I think it's very healthy and cathartic to bring in a third party that can validate the company's own assumptions, make tough choices, look at things objectively…to take the emotion out of it," Tantleff said.
Keeping it on the line
In broad terms, a consultant's work involves drafting a turnaround plan, then securing lender and borrower buy-in. "I worked at Jones Lang LaSalle as a broker, and the broker skills are incredibly useful to this job," Tantleff said of his time at the global real estate firm. "You are brokering turnaround plans…You are coaxing and coercing and you are getting a deal done."
Tantleff and FTI serve a global clientele, with many clients of significant size. Tantleff presided over the recent liquidation of Singapore-listed Eagle Hospitality Trust, selling 18 hotels and returning approximately $400 million to creditors. "Somebody needed to come in, present a plan and implement a plan to turn the thing around, and we did," Tantleff said.
Desmond's clients aren't as large typically, many are small manufacturers, but developing a solid plan is no less important. Desmond's methodology is focused on repairing a company's cash flow while managing expectations and demands of lenders and other creditors in order to buy time to stabilize. A true turnaround where the client rights the ship and resumes normal business operations is the desired outcome. However, depending on circumstances, Desmond might also seek to find a new lender or — in extreme cases — shut things down.
Fortunately for Desmond, liquidation, a process he called a "nightmare" is a rare, worst-case-scenario event. Desmond keeps an updated list of lenders he can turn to if a bank decides it wants to end a relationship with one of his clients, but that too appears to be occurring less frequently. Indeed, banks are demonstrating increased flexibility if they see a chance to save the company and the relationship, Desmond said.
"Our forte is doing the cash-flow model, writing a plan, with 100% input from the company, communicating it to the bank and saying, `Listen, this is a good credit, you should stick with it, or if you want to leave, then give me nine months to find a new bank,' Desmond said.
"More and more, they've been sticking with the company," Desmond added. "Once we fix them, the banks have been keeping them on the line, as we say…Their first goal is to save the company and keep it on the line."
Both Tantleff and Desmond take pride in their work. They believe they add value that far outweighs the fees they charge. Still, convincing clients is sometimes a challenge initially. Turnaround consulting "is a delicate job," Powers said. "The consultant has to establish trust with the borrower."
"Usually, at the beginning, we're not really welcome," Desmond acknowledged. "You have to earn the trust of the customer…The worst thing a guy like me, the turnaround guy, can do is take fees out of a company and not add value because what you're doing is diminishing the value of the estate, not to mention your reputation…If you're not adding value, get out. Get out of there."
For Tantleff, it's all about working with a sense of urgency.
"A good turnaround professional will get in, identify and help fix the problem and get out," Tantleff said. "You need to understand the liquidity situation…How long does this company have before something bad happens, or something worse happens?"
You don't turn down work
Desmond realized early in his career he would need to expand NECP beyond its Boston roots. "I went to a TMA breakfast in Boston about 23 years ago," he said. "I walked in the room, looked around, and there were 10 or 12, very competent turnaround guys…Everybody in that room knew what they were doing. I said to myself, 'There's no way there's enough deals in New England to feed this room.' So that's when I started trying to put down a footprint to go national."
Desmond's growth strategy boils down to a single, simple phrase: You don't turn down work.
"You don't do it," Desmond said. "If somebody calls me and tells me they need me in Seattle, tomorrow, I say yes. I get on the plane, I call my colleagues, I say, `We have to manage this.'"
There's plenty of stress, but Desmond loves the work. "I can't tell you how many times I've gone into a company at 9 a.m. stressing out about how we're going to get it to 5 p.m.," Desmond said. "Somehow we get to 5 p.m. and we come back the next day and chip away at it again. Not everybody's cut out for that. They just don't like that lifestyle. I love it and everybody in the firm, we all love it."
It's a sentiment Tantleff shares. "I love the fact that as a turnaround consultant, you're in the field," Tantleff said. "You're in the trenches with your company. You're fighting for everyone's rights, whether you're on the company side or the creditor side."
