8 out of 10 restructuring experts expect financial distress to grow

More than 80% of industry experts anticipate the volume of restructurings to rise over the coming two years. North America and Europe are the geographical markets expected to lead the trend.

Companies around the world are coming under increasing pressure – as the global economy continues to struggle on multiple fronts. With limited prospects for growth, and rampant inflation still crippling consumer spending power, many firms are in a fight for their very survival.

This even includes some of the world’s largest firms. For example, while FTSE companies might be exhibiting their lowest rate of profit warnings in two years, the number is still conspicuously high. At the same time, a recent study found that corporate distress in Europe has risen 10% year-on-year – with the reduction of disposable income among its consumers leaving many customer-facing businesses vulnerable.

Further suggesting that this trend will continue into the future, a new study from CSC has found that more than 83% of sector professionals expect to see the volume of restructuring mandates grow significantly or modestly over the next two years. At the same time, as financial distress continues to mount, 25% predict a significant increase.

Accelerating markets

Michelle Dreyer, managing director of CSC’s global restructuring practice, commented, “The acceleration in global restructurings builds on the rise we’ve seen over the past 12-24 months. In the UK, for example, there were more than 25,000 registered company insolvencies in 2023, the most for 30 years. We’re seeing a number of companies that took on a considerable amount of debt during COVID and are now seeing that debt come due. But as rates are now so much higher, they can’t just go to their lender or a different lender and refinance.”

To some extent, then, the rise in restructuring may be the final admission of ‘zombie companies’ that they ought to seek help. To that end, Dreyer added that “some restructurings are actually companies that probably should have filed in 2020, but because they were so bolstered by the cheap money in the market, they’ve been able to hold out until now.” She added that the current boom was what “the aftermath of all that inexpensive money” looks like.

CSC commissioned research among 150 independent senior executives in the global financial services, legal, private credit, and private debt sectors to shed new light on what’s driving the rise in global restructurings, as well as challenges facing the industry, and key regional differences. In that respect, the respondents noted that Europe and North America would be the most prominent markets for restructuring, with 41% of experts pointing to each market.

However, the UK looks like it may be less likely to shed large numbers of its zombie firms. Only 30% of respondents said they thought it would see significant restructuring activity in the coming two years. This may be because of the country’s regulatory environment, according to the researchers.

“Regulatory changes can also have a positive impact on restructuring and make certain jurisdictions more attractive, resulting in the high use of COMI shifts,” noted Dreyer. “Only a very small minority said they use just one independent external vendor during restructuring processes, highlighting the difficulty of finding a one-stop-shop during what are exceptional times for management teams. At CSC, we provide expertise from highly experienced professionals across a variety of products and a truly joined-up, global cross-border service.”

Challenges

When companies go into administration or voluntary insolvency, they hire external experts like bankers, lawyers, and consultants. But what are the issues they need most support with from those professionals? The researchers found that 65% of industry experts said the biggest challenge to restructuring distressed companies was overcoming regulatory hurdles, which at times favors liquidation rather than rehabilitation.

Other key challenges are inexperienced management teams, which was cited by 55% of respondents, with those unaccustomed to the transition from normal company operations unsure of how to navigate a very different and complex bankruptcy environment. Meanwhile, 40% of respondents also highlighted rising interest rates as a major driver in the restructuring market.

Dreyer concluded, “Many individuals in management have little or no experience in dealing with the challenges of a systemic downturn. Management teams often have a difficult time transitioning from normal company operations to what is needed in a bankruptcy proceeding, meaning that the support of experienced providers who can move quickly to assist them becomes hugely valuable.”