Decline in corporate restructurings since 2008 is due for a reversal?
January 2013 | MARKET OUTLOOK 2013
Financier Worldwide Magazine
US federal bankruptcy filings decreased significantly for the third straight year in 2012. For the fiscal period ending 30 September, total filings fell 14 percent to roughly 1.2 million; Chapter 11 filings decreased 12 percent to 10,597; and Chapter 7 filings fell 16 percent to 874,337. Across these cases, business bankruptcy filings fell 16 percent to 42,008.
Underlying this decline, prolonged in part by the use of amend and extend transactions, expected as well as realised bond yields have continued to fall. Analysts predict the 10-year Treasury will trade below 2 percent through March 2013, consistent with the realised yield, which fell to 1.62 percent on 9 November, coincident with the start of the Federal Reserve’s $400bn Operation Twist program, in which short-term maturities are replaced by long-term debt. This easy-money policy is expected to continue for the foreseeable future, with the Fed forecasted to add Treasuries to its $40bn per month of mortgage bond purchases after the $667bn Operation Twist program is completed.
Notwithstanding, there is compelling evidence to suggest that the decline in corporate restructuring will reverse in 2013. Though the economy has created new jobs, housing prices are recovering and consumer confidence is the highest it’s been in five years, the probability that US policy makers will not avoid the ‘fiscal cliff’ attributable to sequestration’s $607bn in spending cuts and tax increases starting 1 January 2013 appears to have been priced into the market based on the realised yield on 10-year Treasuries, which implies investors expect US gross domestic product to decrease by 0.3 percent versus growing 2.0 to 2.25 percent otherwise. This equates to an unemployment rate of above 9 percent, with significant job losses likely across the aerospace, construction, defence, federal, healthcare and technology sectors, in addition to retail and other sectors dependent on consumer confidence and discretionary spending.
Also noteworthy, an unintended consequence of the Fed’s easy-money, low interest rate policy has been an increase in the present value of pension fund liabilities and, in turn, the pension funding deficit and requirements for many companies under GAAP and ERISA accounting. Specifically, the aggregate funding deficit for companies in the S&P 500 was $355bn at the end of 2011, versus a funding surplus of $63bn at the start of 2008. In market cap terms, this represents a ratio of pension deficit to market cap of 9 percent.
Lastly, though the amend and extends implemented between 2008 and 2012 succeeded in pushing out the near-term bank debt maturities of borrowers, approximately $350bn of bank debt is scheduled to come due between 2013 and 2014. And while it may be that large corporates will be able to refinance or otherwise modify their debt maturities, smaller, more levered middle market firms, those having values of between $200m and $1bn, may not be similarly greeted by the market. Regardless, there is a limit to maturity extensions for even the largest of firms, and debtors unable to achieve their business plan due to competitive, operational or financial issues and retire debt will have no choice but to be restructured or sold.
Boris J. Steffen
T: +1 (202) 772 3172
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Boris J. Steffen