Restructuring trends - a global view

Gathering headwinds

An expectation of an increasingly busy restructuring landscape is building as geopolitical tensions exacerbate the pressures within a global economy edging towards the end of the post-financial crisis economic cycle. This has become especially visible in recent weeks with the inversion of US and European yield curves in mid-August. Sectors ranging from retail to automotive also face disruptive shifts in technology, regulation and customer expectations.

As we explore in this second edition of our Restructuring trends: A global view, behind the global picture this story is more nuanced on a local level. These local and global trends are coalescing to reveal hidden weaknesses in companies buoyed by cheap credit and prolonged GDP growth over the past decade. Their ability to turn their businesses around is being impeded by the exceptionally unpredictable nature of the policy developments affecting international trade as an era of globalisation gives way to renewed economic nationalism.

Our report finds that there is a huge amount of ‘dry powder’ ready to be invested. In turn, regulatory developments ranging from India’s Insolvency and Bankruptcy Code to the EU Directive on Restructuring and Insolvency aim to accelerate restructuring and eliminate some of the impediments. Yet, more than ever, restructuring needs to be proactive, coordinated and transparent to be effective in this volatile and uncertain market. This greatly improves the chances of preventing collapse, stabilising the business and maximising asset values. Making this possible demands a clear understanding of both the big global picture and the nuanced local trends. Please download the full report to find out more.

Key themes

Geopolitical uncertainty

From US-China trade tensions and the impact of Brexit to international sanctions and disruption to international oil shipments, the global economy is subject to volatile political developments.

Many organisational structures, supply chains and operational models were built for an age of open global trade. Now, the resurgence of economic nationalism, sanctions and tighter border controls are transforming this landscape. Once stable trade agreements are now being torn up. Protectionist tariff hikes in one market can trigger retaliation elsewhere. Physical, political and economic barriers to trade now make reaching markets more difficult and uncertain by the day.

The next 12 months will see a number of planned or highly anticipated elections which is likely to ensure geopolitical uncertainty continues to drive markets. Download the report to find out more about the effects of this in your territory.

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Harmonisation of restructuring laws

The EU Directive on Restructuring and Insolvency came into force in June 2019. The updated EU regime creates a new toolkit for harmonisation across jurisdictions. Having lagged the UK in terms of the attractiveness of the legal environment for restructuring, markets such as Germany and France will increasingly see restructuring enacted domestically while the Netherlands may compete with the UK as a restructuring destination.

Similarly, the restructuring regime in Turkey is being updated with the introduction of new mechanisms including standstill and cramdown options, which are expected to speed up restructuring processes and attract fresh investment.

Meanwhile, the Indian restructuring and insolvency law is maturing, leading to increased investment opportunities, while the Middle Eastern jurisdictions of Saudi Arabia and the UAE have also seen major changes to local bankruptcy laws.

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Interest rate expectations reversed

Low interest rates have helped to mask some of the stresses in developed economies. Over the past ten years, capital has also gradually moved from the US to more ‘adventurous’ high risk/high reward jurisdictions in the search for yield.

In late 2018, investors anticipated tighter monetary policy and increasing yields would allow more capital to be allocated to ‘safe’ economies. However, the outlook is very different now, with central banks around the world cutting interest rates in the light of trade concerns and other headwinds.

Europe is slowing as Germany stutters and the UK braces itself for Brexit. The expectation overall is that monetary and fiscal stimuli will continue.

As such, investors are likely to see more of the same rather than the anticipated shift. Those solely focused on ‘safe jurisdictions’ will continue to struggle to find yield and will be forced to accept ever more borrower-friendly terms (low rates, cov-lite, etc). Others will be forced back to jurisdictions they wouldn’t previously have wanted to invest in. Download the report to find out more about the effects of this in your territory.

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Highly leveraged structures under the spotlight

Highly leveraged financing structures from the last few years are beginning to underperform in some countries, particularly in sectors that have been subject to significant levels of disruption. Although equity cushions have remained higher than in 2007 for new issuance, corporate performance has been more volatile given the multiple effects of geopolitics, technology and changing consumer demands.

The increased prevalence of cov-lite documentation in North American and European markets is, however, limiting lenders’ leverage to engage borrowers in restructuring discussions early, potentially limiting options for resolution. Download the report to find out more about the effects of this in your territory.

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NPLs

Banking and the wider financial services sector in many regions have been under pressure to reduce their non-performing loan (NPL) exposures. Depending on the regulator, the approach includes encouraging and facilitating NPL sales (e.g. Turkey and India) and providing government guarantees for senior securities and general securitisation (e.g. Italy). This has put a heavy regulatory compliance burden on these institutions, as well as making it harder for distressed companies to find new funding from lenders.

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Higher capital demands and squeeze on lending

Banks across Europe have started to prepare for new capital regulations (the so-called ‘Basel IV’). Changes include new risk-weighted asset (RWA) floors. The move to ‘Basel IV’ also seeks to usher in more harmonised approaches in risk-based capital requirement assessment across banks and underlying risk management and market discipline.

The effect of such changes is expected to result in a sharp increase in the RWA of banks, particularly those who relied on an advanced internal ratings-based (IRB) approach for their RWA calculation. The capital requirements of European banks could increase dramatically, which may prompt banks to pursue an aggressive reduction of their more capital-intensive portfolios, or try to reprice loans at considerably higher margins.

Higher capital demands are likely to have a knock-on impact on borrowing costs, especially for companies that do not have a credit rating. Furthermore, as banks may decide to reduce portfolios by selling to third parties, companies may find negotiations with lenders more complex.

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Industries

Many industries are feeling the effects from across these key themes. Download the full report to find out more about the challenges faced specifically within:

  • Agriculture
  • Automotive
  • Construction
  • Retail
  • Shipping and offshore

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Themes by countries and regions

 

Geopolitical uncertainty

Insolvency/Restructuring law changes

Regulation

Automotive

Construction/Real Estate

Retail

NPLs

Debt markets

Australia

 

 

 

Belgium

 

 

 

 

Brazil        

Canada

 

 

 

 

 

Cayman and BVI

 

 

 

 

 

CEE

 

 

 

 

 

East Africa

 

 

 

 

France

 

 

 

 

 

Germany

 

 

Greece

 

 

 

 

 

China and Hong Kong    

India

 

 

 

Ireland

 

 

 

 

 

Italy

 

 

 

 

 

Japan

 

 

 

 

 

 

Middle East          

The Netherlands

 

 

 

 

 

New Zealand

 

 

 

 

 

 

Nordic Markets            

Russia

 

Singapore                
South Africa            
South Korea        
Spain        
Turkey        
USA        
West Africa              

Contact us

Ed Macnamara

Partner, PwC United Kingdom

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