Global trends in restructuring and insolvency for 2015
March 2015 | SPECIAL REPORT: GLOBAL RESTRUCTURING & INSOLVENCY
Financier Worldwide Magazine
Restructuring and insolvency activity worldwide generally remains low as companies enjoy easy and affordable access to capital. Interest rates are low and capital markets in the US, and around the world, remain relatively open, apart from a recent stall in the high-yield market and continued financial sector problems in Europe.
In the wake of the 2008 financial crisis, interest rates dipped to near-historic lows. As a result, companies experiencing financial distress often have been able to refinance outstanding debt at reasonable interest rates instead of restructuring, either in or out of formal court proceedings. Analysts predict interest rate increases will not begin before the middle of this year at the earliest, and so barring unforeseen market events, if true, capital markets likely will remain open through 2015, and no across-the-board increase in restructuring activity is anticipated in the near term.
Nonetheless, macro forces, particularly in the energy sector, can and will have an impact, as is often the case, even when there is general access to capital. These industries bear watching and likely will present the most activity in the restructuring and insolvency space this year.
Energy and commodities
Most notable is the global decrease in commodities prices, especially the recent drop in oil. Since mid-2014, the price of US benchmark West Texas Intermediate crude oil has declined to approximately $48 per barrel as of 19 January. This already represents a drop of over 50 percent from its recent high, and additional decreases may be in the offing.
Many energy companies around the world, flush from years of historic high oil prices, have cash on hand or have hedges sufficient to weather temporary price declines. Others, especially those with high capital expenditures for exploration and production and lacking hedges, may not be able to handle the immediate liquidity impact from the current pricing pressure. Some of these companies may be forced to restructure their operations and debt obligations. A longer-term low-price environment will only increase the strain on the industry.
Oil, of course, is not the only commodity in the midst of price declines. Coal prices, for instance, have also dropped more than 50 percent since the end of 2010, putting significant stress on the sector in producing countries including Australia, Indonesia and the US. Indonesia, in particular, has already seen a number of large restructurings commence, including two of the region’s largest coal companies.
US municipal debt
The US municipal market is another sector that may experience a near-term increase in restructuring activity. In the wake of Detroit, Michigan’s emergence from Chapter 9 in December 2014, other distressed cities may look to bankruptcy as a solution for reducing their outstanding debt. While recent cases have ruled that pensions can be impaired in bankruptcy, the results of those cases favour pensioners over financial creditors. This all paves the way for municipalities to shed large financial and legacy liabilities through bankruptcy proceedings (or threaten bankruptcy and leverage that into an out-of-court restructuring).
The political unpopularity of restructurings of this type, though, cannot be overstated. Though many analysts agree that high debt loads and legacy liabilities in the sector need to be addressed, general economic improvement may allow politicians to delay the difficult decision to restructure to another day. Underfunded pensions in the US and other developed countries are a massive problem, and a day of reckoning is approaching.
In addition, the outcome of Puerto Rico’s current restructuring activities may have a significant impact on the municipal debt market. Given the widely-held nature of Puerto Rican debt, not only by institutional investors, but individuals as well through mutual funds, a large reduction in Puerto Rican debt could have broad-based implications for the municipal bond market and US and Latin American economies.
European restructuring activity continues to be impacted by government regulations in relation to bank capitalisation. In response to the 2008 financial crisis and subsequent European market dislocation, the European System of Financial Supervision was established to oversee and regulate the European financial sector. The system is comprised of multiple organisations, including the European Banking Authority, the European Securities and Markets Authority, and all the national supervisory authorities, to name but a few. Given the sheer volume of supervisory and regulatory agencies that have arisen in the wake of the financial crisis, the banking sector has been inundated with new regulations aimed at shoring up banks’ liquidity and preventing a similar crisis in the future.
Regulations require, among other things, banks to sell off non-core assets to increase reserves. Most recently, these sell-offs have been in the form of structured portfolio sales and will likely continue as such going forward. The impact of European quantitative easing (QE) is an unknown at this point.
China real estate
As growth in China has slowed to a quarter-century low, restructurings may be required to address defaults in the highly-levered Chinese real estate market. Property developers are among China’s most heavily leveraged companies. Loans to these companies originated from both ‘onshore’ entities, such as domestic Chinese banks and other financial institutions, and ‘offshore’ entities, such as non-domestic banks, private equity firms, etc. Indeed, there have been several high-profile defaults in the sector of late, and more may be on the way. For instance, large Shenzhen based property developer Kaisa Holdings defaulted in December 2014. Notably, Kaisa’s offshore creditors do not have direct recourse to its assets which are located exclusively in China and so may be structurally subordinated to the developer’s Chinese creditors. Kaisa’s default is likely to be of special interest, as its treatment of offshore bondholders may influence behaviours in similar situations in the market.
Although restructuring activity, on a macro, worldwide basis, generally remains slow in the face of generally easy access to capital, opportunities exist in certain sectors for those who are following industry trends and are prepared to act strategically in response. As certain industries experience distress, there will be restructuring opportunities for investors and advisers both.
James H.M. Sprayregen and Brad Weiland are partners at Kirkland & Ellis LLP. Mr Sprayregen can be contacted on +1 (312) 862 2481 or by email: firstname.lastname@example.org. Mr Weiland can be contacted on +1 (312) 862 7182 or by email: email@example.com.
© Financier Worldwide
James H.M. Sprayregen and Brad Weiland
INSOL / Kirkland & Ellis LLP