Interest rates that remain near zero and debt maturities that have been pushed out to 2017 and 2018 have helped drive chapter 11 filings to historic lows. Has this difficult environment put corporate restructuring on life support?
To call the current macroeconomic climate difficult may strike some as cynical. Nonetheless, for the restructuring market in the US and abroad, the current outlook does indeed remain bleak. While some ‘patients’ will require restructuring care over the next two years, it may well be that the industry will not regain its health until 2016 or even later; and, even then, the patient will not likely fully recover to its halcyon days of the past.
Low interest rates and extended debt maturities tell only part of the story. Consumer sentiment in the US and much of Asia continues to rise, and with the easing of fiscal policy in Europe, the consumer has returned to the European market. On the corporate side, many businesses continue to hoard cash, which for now makes them virtually immune to any restructuring prospects regardless of fundamental weaknesses.
The restructuring industry need not fear, as there are signs on the horizon. The global economic recovery has generally been unspectacular and growth in the emerging markets has been lagging and shaky. Demographic shifts will continue to weigh on long-term growth in key economies. Interest rates will surely begin to climb in the US, UK and Asia in 2015, and in the Eurozone the following year. And, bank stress testing in Europe during 2014 could uncover additional weakness.
Private equity is sitting on over US $1 trillion, some of which is certain to be invested in highly leveraged distressed situations. And of course, fraudsters will find new ways to create distressed opportunities despite new regulatory schemes.
What this likely means is that more companies will fail to navigate the modest bumps in the road that lie ahead. Yet their restructurings will not be marked by extensive reorganizations, but rather by quick re-financings or sales either outside of, or in, truncated bankruptcies.