> 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...