Experts predict rise in US, international restructurings

In a survey of professionals ranging from lawyers to bankers, distressed debt and reorganisation professionals anticipate retail and oil and gas as the sectors facing the most financial difficulties.  

Over three-quarters of US restructuring experts expect the number of distressed-related workouts in 2017 to either stay the same or increase, according to a new survey by AlixPartners released this month.

Of that 78 percent, some 29 percent think the number of restructurings will remain constant, while 49 percent anticipate an uptick in such activity. Two-thirds of those responding to the New York-based turnaround consulting firm’s survey expect many of financial distress will occur in the retail industry. Fifty-seven percent of those polled expect the same of the oil and gas industry.

Oil and gas companies have taken a beating due to persistently low oil prices, which began to tumble in mid-2015 before bottoming out in early 2016. The lowest oil price reached was lower than in the 2008 financial crisis.

The bankruptcies in the sector are staggering, according to figures from the December edition of Oil Patch Bankruptcy Monitor released by law firm Haynes and Boone.

In 2016 alone, there were 70 bankruptcy cases filed by oilfield-service companies in the US and Canada. Those cases resulted in $56.82 billion in debt, which consisted of $20.34 billion of secured debt and $36.49 billion in unsecured debt.

For 2015 and 2016, there were 114 oilfield-service company bankruptcies in the US and Canada, which totaled $74.2 billion in debt. That broke down into $29.77 billion of secured debt and $44.43 billion in unsecured debt.

The AlixPartners survey showed 48 percent of respondents believe oil and gas companies will reorganise in Chapter 11. Another 37 percent predicted most restructurings would be done out of court. Some 11 percent of think most companies will liquidate through asset sales, and 4 percent replied “other”.

A dominant theme in retail distress has been the difficulty of competing in online shopping, an arguably secular trend that hurts brick-and-mortar retailers.

The difficulties have taken down some of the names that were once a dominant force in American culture. In 2016, Sports Authority and Pacific Sunwear of California both sought court protection. In October, American Apparel filed its second bankruptcy case in as many years.

When it comes to restructuring activity abroad, a majority, 57 percent, expect to see an increase. A plurality, 38 percent, expect most non-US restructuring growth to take place in the UK. Some 25 percent expect Italy will see the largest increase in international workout activity, while China and Brazil are tied for third place with 18 percent each.

Despite Brexit’s largely muted effect, almost two-thirds of restructuring experts expect the referendum’s results will increase. Those sentiments were shared by many of the distressed debt experts Private Debt International spoke with in the days after the 23 June vote.

“It’s going to catalyse the distressed debt market substantially,” Jeffrey Schwartz, a partner at Robins Kaplan who co-chairs its restructuring and business bankruptcy practice, said at the time.

Markets stabilised relatively quickly, however. Bruce Karsh, Oaktree Capital Management’s co-chairman and chief investment officer, told listeners on the firm’s 28 July second-quarter earnings call that there were fewer distressed opportunities than many anticipated following Brexit.

AlixPartners conducted an online poll of 207 corporate-restructuring professionals, the plurality of which, 44 percent, were lawyers. Investment bankers and those involving in banking or lending comprised 19 percent and 14 percent, respectively.

The expectation of a restructuring uptick comes as general substantial raised a substantial amount of money for distressed debt, though less than in recent years.

According to PDI fundraising figures from the third quarter, the most recent statistics available, those type of funds raised nearly $17 billion, the second most raised for a strategy. At the same time in 2015 though, GPs pulled in $23.4 billion for distressed investing.

Limited partners remain committed to setting aside cash for distressed debt funds, though. At the end of October, PDI polled LPs and 93 percent planned to stay the course or increase the capital their fund committed to the strategy.

Sources constantly tell PDI we are later in the credit cycle, and returns for distressed securities, which can include bankruptcy claims and equity as well as debt, throughout most of 2016 were positive, according to the Barclays Distressed Securities Index. The early return estimate for 2016 is 14.2 percent, marking a roughly 24 percent swing from the 10.09 percent loss the strategy posted in 2015.