Bruised Clients Reach Out for Relief.

A broad spectrum of Los Angeles companies is suffering the ill effects of the national economic slowdown, and that's bringing busy times to local restructuring consultants, bankruptcy attorneys, opportunistic investors and other counter-cyclical professionals.

While catastrophic business failures have thus far been confined to a relatively small number of dot-coms, the number of local businesses in financial trouble - and reaching out for help - is growing rapidly.

"The calls are coming in fast and furious," said Les Granow, head of the Center for Strategic Transactions at Ernst & Young LLP. "And the pain is pretty much spread around, in broadband, in telecommunications and other technologies. We see it particularly with younger companies that don't have a strong balance sheet and that did not anticipate the severity of the downturn."

Many businesses were caught off guard when the money spigot was turned off, greatly limiting access to both debt and equity capital. As a consequence, these companies are running into liquidity problems and have to find ways to make their reserves last longer.

Hence, either the companies themselves or their investors and/or creditors are knocking on Granow's and other consultants' doors to see what can be done to restructure the company and avoid bankruptcy.

"People don't realize the extent to which banks have pulled back, which effects the good customers as well as the bad," said Granow. "Over the last six months, we have seen an ever-increasing number of companies that are very concerned about how they are going to keep their access to capital and survive a downturn."

So far, there has not been a significant uptick in the number of bankruptcies in L.A. County. This is partly due to the fact that local businesses incorporated in Delaware (and there are many) often, prefer to file for bankruptcy protection there, because judges in Delaware are deemed to be more debtor-friendly than their counterparts in California.

Another reason is that bankruptcy filings are considered a lagging economic indicator, because companies facing insolvency issues are still trying to work through their problems by restructuring debts, liquidating assets, and streamlining cash management, among other measures.

"The companies and also the creditors are a little more savvy now then during the last wave of bankruptcies," said Chell Chelliah, practice unit leader with the reorganizations group of Deloitte & Touche LLP. "There is a greater tendency to explore other alternatives before filing for bankruptcy now. You are going to see more and more companies going through quite drastic restructuring and downsizing first."

This sudden need for help with reorganization and restructuring efforts is creating tons of work for consulting firms, which have been beefing up the practice groups that deal with troubled companies.

Other professional services firms have also gone into hiring mode as the economy slows down. For example, Levene Neale Bender Rankin & Brill LLP, a boutique law firm that specializes in bankruptcies, has been adding attorneys in recent months to handle the influx of work, according to Marty Brill, a partner with the firm.

"Our business has started to pick up since October, November of last year, and there has been both an increase in filings and in consulting work," he said. "There have been quite a few dot-coms of late that have run out of cash and where there is not a lot left to restructure, but we've been busy with other industries as well, such as theater chains, video retailers and the garment industry."

Bankruptcy calls

Bankruptcy law is essentially counter cyclical in that the work slows down during economic up cycles when fewer companies run out of money, picking up as the economy slows down and the money supply runs dry. As the longest economic expansion in U.S. history appears to be finally running out of steam, bankruptcy attorneys again find themselves in high demand.

"I have gotten six calls in the last two and a half weeks from people who didn't get their last round of financing," said Suzzanne Uhland, a partner with O'Melveny & Myers LLP. "These are essentially pre-IPO companies that have started to implement their business plan, that have contracts with vendors and that have, started to incur debt."

Like other bankruptcy attorneys, Uhland sees the increased activity of the last few months as indicative of what's to come. A worsening economic climate would result initially in more restructuring efforts, which may or may not involve layoffs, and eventually in more bankruptcy filings.

Although many people in the business community say tighter lending policies by banks is one of the reasons that businesses are running into financial problems right now, the banks themselves say that's a response to the changing economic climate that is forcing them to be more cautious.

"In the past few years, the (public capital) market had moved away from the financial institutions in terms of pricing," said Paul Watson, vice chairman and head of commercial and corporate banking at Wells Fargo & Co. "Nobody has been paying for the risks that we've been assuming, and now we're in a situation that we can charge more-rational rates."

Wells Fargo still has plenty of lending capacity, said Watson, and the bank sees opportunities in the changing business environment, but it is going to be looking for better returns. In addition, the bank has been training loan officers to work with borrowers on delinquency problems, according to Watson.

Investment opportunities

An economic downturn is also expected to create new opportunities for investors, who have the appetite to bail out distressed companies or to otherwise assist them in efforts to stay afloat, typically in exchange for a hefty equity stake or transaction fee.

For example, Santa Monica-based Prime Ventures LLC invested $27.5 million in moribund DrKoop.com Inc. last year, hoping that it could turn the health care Web site around. In another example, investment bank Digital Coast Partners LLC arranged the $15 million merger between L.A.-based eteamz.com Inc. and San Diego-based Active.com Inc.

But the e-commerce wreckage is hardly going to be the only arena where opportunistic investors are looking for troubled-but-still-promising companies.

Peter Nolan, a partner with leveraged buyout firm Leonard, Green & Partners LP in Century City, is eyeing opportunities in consumer-related and media businesses.

"We have an environment where a number of companies are trading at very low valuations," said Nolan. "And with the economy slowing down and with the worst lending climate we've seen in years, there are going to be more distressed companies for us to look at."

Leonard, Green in' recent years has taken private such companies as Leslie's Poolmart Inc. and Petco Animal Supplies, and currently has Rite Aid Corp. in a turnaround mode.

Another veteran local turnaround artist is Sandy Sigoloff, whose consulting business Sigoloff & Associates has been getting plenty of calls of late.

"It's mainly people looking for advice, nothing catastrophic so far," said Sigoloff. "Most people have learned to cope with a minor, as opposed to a major, slowdown. We have been through this binge for five years, and we're simply hinged-out at this point."

Likewise, businesses in the foreclosure industry' are gearing up.

Tower Communications, an L.A.-based e-government company that auctions foreclosed homes for the U.S. Department of Housing and Urban Development and for the Department of Veteran Affairs, is projecting a steep increase in business this year.

In 2000, Tower auctioned off 110,000 homes through Internet and telephone bidding, and Vice President Joy Chen expects that the number to go up as the economic slowdown starts to take its toll among low-income home owners.