AlixPartners released its Ninth Annual North American Restructuring Experts Survey and 2015 Outlook. Restructuring experts from across the US believe that following a cyclical decline in Chapter 11 business filings in recent years, the cycle may have bottomed and the market could be set for an increase in bankruptcies. In addition, the survey shows that the energy sector, both in the US and internationally, is expected to be an area with the greatest potential for restructuring activity in the year ahead. While Chapter 11 filings have decreased since 2009, 47% of experts surveyed predict an increase in the year ahead, while 31% expect no change.
The number of pre-negotiated and prepackaged bankruptcies has increased steadily since 2008. Experts tend to believe that this trend is here to stay, with 53% of experts surveyed expecting a further increase and 40% expecting no change.
The Outlook for Business Credit
In terms of expectations for the availability of credit for businesses and corporations, 41% of restructuring experts expect a tightening in the availability of revolving lines of credit and traditional bank loans, with 34% foreseeing no change. Consequently, an overwhelming majority (99%) of experts surveyed believe that the role of non-traditional lenders and investors will continue to grow in the term loan market.
Compounding the challenge for some companies facing restructuring situations, 74% of experts surveyed believe that CLO ownership negatively impacts restructurings. One possible explanation for this view is that borrowers with loans securitized into CLOs may find it more difficult to renegotiate or restructure their loans.
Global Restructuring Outlook
With global economies experiencing volatility, restructuring experts were asked where they see the greatest likelihood of corporate restructuring work in the year ahead. They answered that Western Europe (52%) and Latin America (37%) are the two regions with the greatest potential to generate restructuring situations, followed by Asia (24%) and Russia (19%).
Expectations for Industry Sector Vulnerability
When asked which industries are likely to face the most distress in 2015, respondents concluded that energy and resources was the top pick in both the U.S. (79%) and globally (78%), most likely due to the steep drop in commodity prices since June. Several energy companies are in the pipeline to be restructured, and the continued decline in energy prices was a major business story during the period when the survey was conducted, making it a top-of-mind issue for respondents.
Retail was the second pick in the U.S. (52%) and the third pick globally (29%). While retail is an industry that is always seen as ripe for restructuring—due to evolving consumer preferences and other factors—a key driving factor in recent years has been the rise of e-commerce, which continues to put pressure on traditional brick-and-mortar retailers.
Healthcare was third on the U.S. list (25%) but near the bottom of the global list (2%). In the U.S., the reforms of the Affordable Care Act, along with other changes, are upending established business models for healthcare companies, with restructurings likely to play out over the next several years. However, healthcare is run—or heavily regulated—by the government in most other countries, so the sector is far more stable in those markets.
Lessons From the Past
When asked who is to blame for repeat bankruptcies, respondents said they blame financial restructurings that are not deep enough (38%) and a company's operations not being adequately fixed the first time (32%). When asked about priorities for fixing the bankruptcy code, 27% of experts cited lease assumption/rejection deadlines and 22% cited extensions of exclusivity. Both of these point to the constrained deadlines within which debtors must work when in bankruptcy.
For senior leaders at companies that maybe on the brink, the margin for error that has existed over the past several years may be dwindling. Although prepackaged bankruptcies – often perceived as a quicker and less expensive way to restructure – are expected to grow, experts are wary of financial restructurings that are not deep enough and restructurings that don't adequately fix the underlying operating problems, causing some companies to take a second and third trip to the bankruptcy courts.
About the North American Restructuring Experts Survey and 2015 Outlook
The Ninth Annual North American Restructuring Experts Survey and 2015 Outlook, based on interviews conducted in late 2014 with 165 restructuring industry experts, highlights the evolving state of the restructuring industry and forecasts developments over the next 12 months. The survey polls senior attorneys, investment bankers, fund managers and other restructuring professionals across the United States about their outlook for the restructuring industry and related topics. To download a copy of the report overview please click here.
AlixPartners is a leading global business advisory firm of results-oriented professionals who specialize in creating value and restoring performance at every stage of the business life cycle.