Drying Liquidity, Looming Maturities in Tense Geopolitical Environment to Drive Restructuring Uptick in 2024 After Slow Burning 2023; More ‘Holistic’ Workouts Expected
After years of “waiting for the wave,” 2024 might be the time when activity in the restructuring market may finally pick up. Wars in Ukraine and the Middle East, U.S. elections and weakening Chinese growth paint a testing picture for the world economy. Well-known challenges such as higher-for-longer interest rates, near-zero economic growth in Europe and a cost-of-living squeeze entering its third calendar year all add to the possibility of an animated year on the distressed debt front, despite the current strength of the high-yield bond market.
Last year, restructuring negotiations often revolved around the size of the new money check sponsors had to write for lenders to agree to amend-and-extend deals. Shareholders no longer able to reinvest were forced to hand over the keys to creditors, resulting in a rise in debt-for-equity swaps.
The companies that avoided operational issues still had access to debt capital markets, but with key interest rates staying elevated, the price often doubled compared with cheap pre-pandemic debt.
“Looking ahead, the number of structures facing debt maturities in the next couple of years is significantly higher than last year. Many cap stacks, which would previously have achieved a refinancing or pretty easy amend and extend, will find such pure balance sheet solutions harder to come by. More holistic restructurings, including operational restructurings, will be required to bring interest costs and leverage levels to a sustainable quantum,” Helena Potts, financial restructuring partner at Paul Hastings told Reorg.
According to various data providers, including Reorg’s own data, there are approximately €76.5 billion of high-yield bonds maturing in 2024 and 2025. Although the maturity wall is weighted toward 2025, there is still significant work to be done on the €24.5 billion of notes due in 2024.
Potts added that in 2023 companies faced a series of interest rate hikes, and as yet, those with significant reserves have not felt too challenged by the impact on their cash balances. But cash reserves are becoming more constrained, particularly in the mid-market sector. “Across all capital structures there is an absence of early warning signals for lenders and this can lead to situations becoming sub-optimal for all stakeholders, as there is not sufficient time to find rescue packages where the liquidity road just runs out,” she said.
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