Daily News: January 22, 2018

AlixPartners Predict Retail Distress Will Continue in 2018

AlixPartners released the results of its annual survey of 216 independent U.S. restructuring professionals and, based on the results, predicted 2018 to be perhaps even busier than 2017, with possible continued distress in retail, increased activity in the healthcare, restaurant and power industries, knock-on effects in many industries plus, for good measure, more municipal distress.

Among the key findings:

  • Last year’s record number of retail bankruptcies notwithstanding (with more retail bankruptcies filed than during the peak of the Great Recession), 84% of respondents picked it as one of their top three industries most likely to face distress in 2018, compared to 67% in AlixPartners’ poll a year ago. Indeed, 53% of respondents said the shift to e-commerce was the primary reason for the record number of retail filings in 2017. But e-commerce is not the only threat—36% also cited high debt loads as an equally significant pain point driving retail bankruptcies and another 11% said debt was the primary factor.
  • The industry earning the second spot on the most-likely-to-expect-distress list in this year’s survey is healthcare, including medical and pharmaceuticals companies, with 44% of those polled placing it among their top picks, up from 31% in last year’s survey. Meanwhile, 57% of respondents said that major healthcare reform, such as elimination or significant modification of the U.S. Affordable Care Act (aka “Obamacare”), could lead to an increase in restructurings in 2018.
  • The restaurant and foodservice industry came in third on the list, with 26% of respondents flagging it (up from 16% last year). The sector has not been ranked among the top three industries in this survey since 2012.
  • The power industry, including independent power producers (IPPs), could be feeling even more of the ongoing ripple effect of low energy prices, as 39% of respondents in this year’s survey said they expect more power-industry bankruptcies in 2018, while 50% said IPPs are likely to engage in large-scale M&A this year to reduce their fixed costs and another 42% said IPPs will likely undertake targeted buy-side M&A. Additionally, while only 20% of survey respondents picked the oil & gas industry as among those most likely to face distress this year (down from 57% in last year’s survey), the subsector where the experts expect to see the lion’s share of restructuring is offshore drilling, chosen by 38% of respondents (up from 32% a year ago). By comparison, oilfield services was chosen by 34%, down dramatically from last year’s 73%.
  • The troubled retail environment, including the closure of a massive number of stores, may create a ripple effect of its own this year, as commercial real estate placed fifth on the most-vulnerable list, chosen by 18% of respondents (up from 15% in last year’s survey).
  • On the municipal front, 71% of the restructuring experts identified Illinois as the U.S. entity most likely to be in the news for financial distress this year, followed by Connecticut (chosen by 37%). Outside the U.S., Venezuela was viewed as the likely No. 1 hot spot for sovereign restructuring activity in 2018, chosen by a landslide vote of 85% of the experts.
  • When asked about the possible effects of corporate tax reform on restructuring activity, the responses were essentially a wash: 24% said they thought it would lead to an increase in restructurings in 2018, but 41% forecast a reduction and 35% said no impact.
  • Finally, overall 50% of the experts said they expect more restructurings in the U.S. this year (up from 49% who said that a year ago), while 39% said they think the number will stay the same as in 2017 (up from 29% in last year’s survey).

Lisa Donahue, global leader of the turnaround and restructuring practice at AlixPartners and a managing director at the firm, said, “These survey results indicate 2018 may be a very busy year in restructuring, be it yet more distress in retail or the ripple effects in industries like commercial real estate. We may see ‘Energy 2.0’ as distress in the energy industry spreads deeper into other sectors, including independent power producers. Deal in some wild cards like potential major healthcare reform and greater municipal distress in the U.S., and this may be a year in which restructuring experts are more valued than ever.”

The AlixPartners survey was conducted online Nov. 29 to Dec. 15, 2017, and polled 216 high-level corporate-restructuring professionals (attorneys, investment bankers, lenders, financial advisors, hedge-fund executives, private-equity executives) in the U.S.