> > Proving that some of the biggest dopes have some of the fattest
> > wallets:

> > FOR TROUBLED FIRMS, A FLOOD OF BIG LOANS

> > They Gain Time to Fix Woes---or Delay a Fix; Hedge Funds Play Role

> > By Bernard Wysocki Jr.

> > Bally Total Fitness Holding Corp., a Chicago health-club operator, is
> > deep in debt and has periodically been considered a candidate for
> > bankruptcy.

> > That didn't prevent Bally from borrowing $284 million last October.  A
> > unit of JP Morgan Chase & Co. arranged the loan, with investment banks
> > and a hedge fund participating.

> > "I'll never forget being in a board meeting and saying to our
> > investment bankers:  "How on God's earth was this so easy?" says
> > Steven Rogers, a finance professor at Northwestern University who was
> > then a Bally director.  "They said:  'There's a lot of money out
> > there.'"

> > In a world awash in investable funds, even many of the most troubled
> > companies are finding lenders willing to offer them big money.  This
> > rescue financing, as it is sometimes called, can give companies time
> > to clean up their balance sheets and avoid a trip to bankruptcy
> > court.  US
> > filings for bankruptcy reorganizations---a painful experience for
> > employees, creditors and shareholders alike---are at a 10-year low.
> > Also at historic lows are US corporations' debt defaults.

> > Rescue financing gives the economy more flexibility to work through
> > some of its problems, says Dhruv Narain of Goldman Sachs Group Inc.
> > "Today, a lot of this is being done out of court, outside of Chapter
> > 11," says Mr. Narain, co-head of the US restructuring group at
> > Goldman, a big player in emergency financing.

> > But some worry that all the money flowing to troubled companies deters
> > them from solving their problems.  It just lets them "kick the can
> > down the road," says William Derrough, co-head of recapitalization and
> > restructuring at investment bank Jefferies & Co.

> > It can also be risky to have so much debt sloshing around the
> > economy's shakier regions.  When rescue lending fails, the extra debt
> > can make a bust just more spectacular.  Among lenders that risk taking
> > it on the chin are hedge funds, which have largely replaced banks as
> > lenders in this kind of finance.  Says Mr. Derrough:  "To quote Alan
> > Greenspan, there's some irrational exuberance on the part of
> > investors."

> > How and when the credit cycle might turn isn't known.  But nearly all
> > economists believe that interest rates will eventually rise for loans
> > on risky assets.  Lenders will become more cautious and the result
> > will be tighter credit, possibly even a so-called credit crunch....

> > Rescue money can come in the form of bonds or even equity infusions,
> > but many of the recent deals involve credits known as leveraged
> > loans---those carrying interest rates of at least 1 1/4 to
> > 1 1/2 percentage points above the London interbank offered rate, or
> > Libor.  This leveraged-loan market is booming.  It has tripled over
> > five years to $500 billion....A slice of this sume is rescue
> > financing....Leveraged loans are often used in buyouts that load up
> > companies with debt, and more such loans could be injected as "rescue"
> > finance if companies hit trouble.

> > The Federal Reserve is watching the leveraged-loan market as an "area
> > of possible financial risk," a Fed governor, Randall S. Kroszner, said
> > in a recent speech.  He said the Fed was "mindful that high levels of
> > leverage can lead to credit problems relatively quickly for both
> > borrowers and lenders when conditions turn."

> > The frothy late-1980s era of high-yield "junk" bonds gave way in the
> > early 1990s to a recession, the collapse of the savings-and-loans and
> > the downfall of the main junk-bond underwriter, Drexel Burnham Lambert
> > Inc.  A severe credit crunch ensued, with all but blue-chip companies
> > having trouble securing debt funding.

> > In 1998, a crisis at hedge fund Long Term Capital Management, amid
> > turmoil in global debt markets, brought on a milder credit squeeze.
> > Three years later the combination of the dot-com meltdown, another
> > recession and the Sept. 11, 2001 terrorist attacks led to a wave of
> > bond defaults....

> > The Bally case illustrates that in today's Wall Street, a slew of bad
> > news over a period of several years doesn't preclude a company from
> > raising large amounts of cash that give it another chance to work out
> > its problems.

> > Bally, an operator of nearly 400 fitness centers...has posted big
> > operating losses as its membership revenue has declined.  It piled up
> > a mountain of debt, more than $800 million....

> > In 2006, as losses mounted and the stock fell, Bally's chief executive
> > departed.  The company named a former Bear Stearns investment banker,
> > Donald Kornstein, as chairman.  In late 2006, Bally concluded it
> > couldn't make a crucial debt payment.

> > The $284 million loan JP Morgan then arranged helped Bally dodge that
> > bullet.  It pushed the company's next deadline---on $300 million of
> > debt---forward six months to next October....

> > "Thanks to an electric jolt to its economic heart, Bally came back to
> > life..." wrote Peter Cohan, a Babson College business professor, in a
> > blog which he recommened selling Bally stock short, or betting on a
> > decline.

> > The help was short-lived.  In March, Bally didn't file its 2006
> > financial statements on time.  The New York Stock Exchange delisted
> > its shares after the price fell below $1....With the October deadline
> > looming...Mr. Kornstein started intensive talks with Bally's largest
> > stockholders and variosu creditors.  On May 31, Bally announced a
> > complex plan, approved by key creditors, under which it would go
> > private after a quick trip to bankruptcy court.

> > The filing would wipe out existing shareholders and reduce debt by
> > $150 million....Mr. Kornstein declined to be interviewed.  He hailed
> > the agreement in a written statement, noting it wold cut Bally's
> > annual interest bill by $29 million.  Bally's announcement said "while
> > the company is in the process of restructuring, investments in its
> > securities will be highly speculative."

> > The announcement was a reminder that while some rescue loans clearly
> > work...others are at least partial failures...

> lisa lisa,
>  nice article. it goes to the heart of what i feel, that the real
> culprit of all of the financial mis-dealings in this country is
> because of deregulation and those obscene tax cuts for the wealthy,
> that includes the corporate ones also.
>  libertarians blame government, to a point its true, if government is
> controlled by conservatives and libertarians.
>  stuff like this would have been nipped in the bud real quick, if it
> even had a chance to become reality in the period from 1933-1968,
> after that milton friedmans insanity gained power and the rest is
> history.- Hide quoted text -