Restructuring activity in the US and other major economies is projected to increase in 2017. The biggest impacts on the US market flow from the slowdown in China and global sovereign instability; while in the UK, Brexit was cited by 68% of restructuring experts to result in increased demand for their services.
In the face of low commodity prices, rapidly changing digital environments, potential interest rate hikes, exchange rate volatility and wider uncertainty, businesses in a number of sectors are increasingly finding themselves stressed or even distressed. To understand the current market in turnaround and restructuring, AlixPartners conducted a survey of the industry, which involved 200+ senior North American-based corporate-restructuring experts, among whom 44% work in law, 19% in investment banking and 14% in banking/lending.
The research asked respondents to identify a number of key macroeconomic factors influencing restructuring activity in the US. The top most cited reason of a potential influence on the US sector is the slowdown in the US restructuring market, cited by 90% of respondents, this is followed by 5% that say it will have no impact and 5% that say it will decrease restructuring activity.
The second most cited reason is global sovereign instability, cited by 85% of respondents. Terrorism comes third, cited as potentially increasing restructuring by 48% of respondents. The potential aggression of Russia takes forth spot, with 34% of respondents believing it will impact restructuring in the US.
When it comes to expectations for the year ahead, the upheaval is, according to the experts, likely to form the backdrop for more restructuring activity, as cited by 49% of respondents. Around 29% expect the level of activity to remain flat, while 22% expect there to be less restructuring activity in 2017.
According to Lisa Donahue, Managing Director at AlixPartners, “As the year came to a close, 2016 will be remembered for some of the most impactful global events on record that not even the most well informed experts could have predicted. We expect this to continue in 2017.”
The sector projected to see the highest level of activity are retail, cited by 67% of respondents, oil & gas, cited by 57% of respondents and healthcare/medical/pharma, cited by 31% of respondents. Restaurants/foodservice, commercial real estate and maritime/shipping come in at 16%, 15% and 14% of respondents’ picks’ respectively.
The global picture highlights continued concern about two sectors, one, oil & gas (cited by 55% of respondents as likely to face distress), has been hit by lower commodity prices, while the other, maritime/shipping (cited by 40%), has been hit by lower trade volumes and overcapacity. Retail too continues to face stressors globally, as cross sector competition heats up, while sovereign debt comes in at 32% of respondents’ picks.
The research also considered the countries likely to face the biggest restructuring burden going forward. The UK came top of the list, cited by 38% of respondents, as the effects of Brexit, from the depreciation of the pound to uncertainty, hit home. Italy too is found to be likely to see distressed companies, as cited by 25% of respondents, bad debts in the country remain high, while China and Brazil – both come in at 18% of respondents’ picks. Europe more widely is viewed as generally stable, cited by 10% of respondents.
The respondents were also asked to consider the effects of Brexit on restructuring activity. The majority of respondents, 68%, believe that it is likely to result in increased activity, while 28% said it would have no impact. Around 4% said it would lower restructuring in the UK.
Fossil fuel industry faces pressures
The overall study highlights that fossil fuel companies are likely to continue to bear the brunt of restructuring activity as they seek to transform in the face of high costs and large debts. “Our survey respondents are saying that the challenges that oil and gas companies have faced for the past several years are not expected to subside this year,” says Jim Mesterharm, Managing Director at AlixPartners and co-head of the firm’s Turnaround & Restructuring Services practice for the Americas. “Oil and gas was the industry with the most corporate bankruptcies in 2016 and this could continue into 2017. It does not appear that there will be significant increases in oil prices in 2017. Given the high fixed costs and debt load of many oil and gas companies, this may push more firms to pursue restructurings.”