AlixPartners: 97% of Restructuring Executives Say Liability Management is a Temporary Fix

Global consulting firm AlixPartners released the findings of its 19th annual turnaround and transformation survey, which reveal that the world’s leading turnaround executives continue to see the high cost of borrowing as a major factor driving company distress and restructuring activity. Disruptive forces like ongoing global conflicts, economic uncertainty, shifts in consumer sentiment and the rise of artificial intelligence are adding to the potential for distressed situations in the coming year._x000D_
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Nearly all of the 700 participants in the survey say liability management exercises (LMEs) are merely temporary fixes and often are ineffective in the high interest rate environment. With a wall of maturities approaching in 2025-2027 in the leveraged loan and high yield debt markets, a subset of those companies with impending maturities will be challenged in their ability to refinance their debt. Merely extending the liquidity runway and pushing out debt maturities is “kicking the can down the road” and doesn’t address a company’s underlying operational business challenges._x000D_
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Kicking the Can isn’t a Plan_x000D_
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More than one-third of turnaround experts in the survey expect that a majority of distressed companies that extended their liquidity runway through LMEs or by raising additional capital in 2023 and into 2024 will end up distressed again in the next three years. Companies that extended maturities instead of using the capital to address the problems within their business via operational restructuring, lowering costs and identifying other profit improvement opportunities are likely to find themselves backed into a corner. Borrowers must put their new-found capital to work in addressing the pressures of elevated input costs, consumer spending contraction, and debt servicing demands, all of which eat away profit._x000D_
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“While I don’t see any peaks in restructuring activity like the global financial crisis or the more recent pandemic, I do expect the current trend of heightened activity to continue for the next two or three years,” Joff Mitchell, global co-lead of turnaround and restructuring services, said. “The most important thing for company management teams facing into this challenging environment of expensive capital is to be realistic about their projected cost of borrowing and recognize the greater strain this will place on their liquidity requirements.”_x000D_
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“Each creative solution to gain more time and liquidity will ultimately make everything harder to unwind if the day of reckoning comes, and we’ll see more liquidations, quick sales and forced auctions as a result, instead of thoughtful restructurings,” Jim Mesterharm, global co-lead of turnaround and restructuring services, said. “If a company isn’t fixed, the next restructuring will be that much harder because there is no more room to maneuver.”_x000D_
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Higher Borrowing Costs Expected to Continue_x000D_
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82% of survey respondents expect the cost of capital for borrowers to remain at current levels or increase further, down from 98% in 2023. Just 18% expect it to decrease. However, 28% of respondents say the availability of capital will increase in 2024 vs 2023 when 67% of survey respondents said capital availability would decrease._x000D_
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Distressed M&A to Rise_x000D_
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A significant majority (72%) of turnaround experts say companies are planning to refinance and sell assets to raise cash to pay down debt and reduce financial risks such as running out of cash or defaulting on debt. Asset sales could come in the form of carveouts and spinoffs which point to an increase in deal activity. To this end, 65% believe that the M&A transactions related to distressed assets will increase this year. Creditor cooperation agreements came in second with 41% of survey respondents saying they would use this liability management technique in the coming year._x000D_
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Top Drivers of Distress and Restructuring in 2024_x000D_
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Availability or cost of capital, geopolitical disruptions, and inflation are considered the top factors driving distress, while the impact of inflation has decreased. Geopolitical disruption has become the largest factor challenging the long-term global economy. 74% of turnaround experts believe U.S./China tensions will directly lead to increased distressed situations, while the impact of interest rates, climate change, and inflation is decreasing – only 4% of U.S. respondents claimed that climate change is the biggest challenge creating long-term economic consequences for the global market. Sufficient liquidity, cost reductions, and management’s flexibility and agility were also identified as the most common challenges confronting companies facing a turnaround or transition._x000D_
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No Signs of Easing in Financing Markets; Private Capital May be Filling the Financing Gap_x000D_
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Turnaround experts’ outlook for financing/credit terms remains grim, with 47% saying terms will become more restrictive in the next 12 months. Last year’s survey had 85% of respondents saying credit terms would be more restrictive in the year ahead. Fewer companies are tapping the capital markets to extend their liquidity runway this year compared to last year, according to the survey. The availability of private capital has grown as the banks have pulled back from the market and tightened credit lending standards. 87% of survey respondents said the availability of private credit will increase or remain steady compared with 2023. New market participants in the private credit space have seen this as an opportunity to fill a gap by providing financing to balance the decline in availability that the AlixPartners survey respondents are seeing._x000D_
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AI is an Opportunity_x000D_
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Nearly two-thirds (62%) believe the rapid advances in AI technology should be viewed by a distressed business as an opportunity, up 7% from last year’s survey, but 17% of survey respondents indicate AI was among the operational issues least likely to be addressed in the next 12 months._x000D_
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Commercial Real Estate Woes Continue_x000D_
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Similar to AlixPartners’ 2023 survey, Commercial Real Estate remains the top industry likely to face distress in 2024 globally, with 57% of respondents expecting that the sector will continue to face enormous pressure, followed by Retail (41%) and Automotive (34%). Methodology: Research for the 19th Annual Turnaround and Transformation survey was conducted in May 2024. Respondents comprised more than 700 lawyers, investment bankers, lenders, financial advisors, and other industry executives involved in corporate workouts representing more than 20 major industries across the Americas, Europe, Middle East and Africa, and Asia. For more information about the survey, please visit the survey website here.