Turnaround specialist predicts rise in defaults

Billionaire corporate turnaround specialist Wilbur L. Ross predicted Wednesday that bankruptcy filings in the U.S. and Europe would jump sharply next year because of soaring company debt levels.

Ross, best known over the last two decades for bringing distressed businesses back to health, told a London conference that he expected about 7% of junk bond issues to be in default by the end of next year, up from about 1% now.

“The number of defaults will rise even in the absence of an economic downturn or interest rate increases,” the chairman of New York-based WL Ross & Co. said. “There will be some tragedies.”

That may be a good thing for his firm, which raised $685 million this month from a partnership formed by Goldman Sachs Group Inc. The money would help him fund acquisitions of companies in bankruptcy proceedings.

The high prices some private equity buyers and other takeover outfits have been paying for companies will leave little room to maneuver if earnings don’t meet expectations, Ross said. The debt used to finance the transactions can then become onerous, he said.

Leveraged companies historically have been more likely to default in the third or fourth year after a buyout than earlier on. The current buyout wave began in 2003, which suggests that defaults should rise in 2007, Ross said.

But fixing the problems of debt-laden companies has become more difficult with the rise of hedge funds as investors and the introduction of new forms of debt, he said.

“There’s no such a thing as a lending relationship anymore; it’s all transactional,” Ross said. “It’s hard to get into a company and make decisions on how to fix it.”

In recent years, Ross has focused his turnaround efforts on troubled firms in industries such as steel and auto parts.

Ross worked for more than 20 years at Rothschild Inc. in New York, where he was a senior managing director and was anointed the “king of bankruptcy” by Fortune magazine in 1998.