With the US economy in a tailspin and financial markets paralyzed, few US companies will readily find lenders, forcing them to opt for some sort of restructuring in or out of a bankruptcy court.

The workout business has not been very active since the last bankruptcy wave of 2000-2002 that came on the heels of the dotcom bubble burst. But, it promises to be a source of fees for Wall Street firms that have seen some important sources of revenue falter amid the credit crisis.

M&A activity is down, IPO issuance has plummeted and sales of corporate debt or bonds backed by consumer debt have dramatically fallen off. Some industry participants believe the next wave of workouts will match the pace of the late 1980s and likely will be seen in Europe as well as the US.

So, helping repair broken companies may be an answer for firms where typical investment banking business is off.

But, there are limits to how much new restructuring business some of these firms can capture because of bankruptcy laws and the workout of a troubled corporation is not something all newcomers can learn on the job.

Up until now, the roles in restructuring have fallen into two categories: that of an advisor, a role taken on by firms such as Lazard, Houlihan Lokey, Jefferies, Blackstone and Rothschild, or that of a lender, a role typically taken on by larger firms such as Credit Suisse, JPMorgan Chase and Deutsche Bank. Away from this circle of investment banks, a unit of General Electric is a notable provider of loans for bankruptcy companies.

The notion of Wall Street getting into restructuring work is not a novel concept, says Greg Milmoe, a partner at Skadden Arps and co-head of its restructuring effort who points out that Drexel Burnham Lambert was involved with helping ailing companies raise money in the 1980s.

Also, Lazard's Felix Rohatyn was called in to advise New York City on its restructuring in the 1970s and Goldman Sachs as well as Chemical Bank--today's JPMorgan Chase--looked to find rescue financing for the Penn Central railroad which, in its time, was America's largest bankruptcy.

As Phil Jacob, head of restructuring at Credit Suisse, sees it, the restructuring business is "counter cyclical" and offers a "natural hedge" to downturns in the leveraged finance business. Lately, Jacob's team is doing less with leveraged loans and high yield because that market has effectively shut down amid the credit market turmoil. But, his professionals are busy helping businesses amend loans out of court or finding lenders for debtor-in-possession loans and exit financings (see related story).

"When the [bankruptcy] cycle is over, they morph back" to leveraged finance bankers, says Jacob, adding that "it [restructuring] is clearly an opportunity right now. A lot of firms need restructuring help."

Says Jeff Werbalowsky, chief executive of Houlihan Lokey, which may have one of the largest teams dedicated to restructurings: "When you don't have the opportunity to make money [on typical] financing[s] and you have client relationships, people more than ever try to hang on to the business," meaning they will take on roles for corporations they have not previously played, such as restructuring.

"It is the only, truly counter-cyclical business to our M&A and financing business," says Frederick Joseph, former CEO of Drexel Burnham who today is CEO of Morgan Joseph. The New York-based investment banking firm recently hired a restructuring team.

While it may not be the typical business they have become accustomed to in the recent years of easy credit, bankers likely will have their hands full when it comes to advising troubled companies, according to industry participants.

Mark Shapiro, head of restructuring and finance at Barclays Capital, believes "there is likely to be a deluge of restructuring opportunities in the next 12 to 24 months. You have seen the economy's continued deterioration led by the consumer downturn which hurts companies across a broad range of industries that are dependent on consumers."

Just How Bad Is It?

The dramatic decline in consumer spending on goods and services comes at a time when corporations are finding it harder to borrow money. The result is a waterfall-like effect. Lenders pull back, borrowers try to buy time and renegotiate their loans and those who fail to restructure their debt end up defaulting and petition for bankruptcy protection.

Through mid-October, 75 companies have defaulted this year, affecting $226 billion worth of debt, according to Standard & Poor's. That is more than three times the total number of defaults in 2007 and more than two times the number of defaults in 2006.

Defaults of debt for riskier corporations, the speculative or high-yield market, are expected to rise to 7.6% by September 2009--a watermark not seen in some six years.

"A total of 24 defaults were recorded during the most recent quarter in the US, compared with 20 in the second and 16 in the first," according to S&P, which warned that the "high level of stress in the financial system beginning in September--resulting in changes unprecedented since the Great Depression--is expected to ripple through more broadly."

In a separate report, the credit rating agency noted that, within the high yield market, downgrades are at the highest pace since 2002. Downgrades are particularly evident among homebuilders the automotive industry, forest products, and building materials as well as transportation. S&P also warned of downgrade risk in consumer based sectors such as retail, media and entertainment as well as consumer products.

Steven Strom, managing director and co-head of the restructuring group at Jefferies, has seen an increase in advisory work from gaming, building products, retail and restaurants. Meanwhile, Jim Millstein, co-head of restructuring at Lazard, says his firm has been engaged to advise auto parts suppliers, newspaper companies, printing companies, real estate developers and homebuilders such as Tousa.