Restructuring trends in a shrinking world

October 04, 2018

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by Ed Macnamara Partner

Email +44 (0)20 7804 1748

In 1900, John W. Atkins, the manager at International Ocean Telegraph Company (IOTC), made the first international telephone call from Florida in the US to Havana, Cuba. Since then, the world has been getting increasingly smaller and markets which operated independently for hundreds of years are now inexorably connected. When the American subprime mortgage market crashed, causing a banking crisis in 2008, the effects weren’t just felt in America: the event is remembered in history as the global financial crisis.

Yet each market can still hold the traditions and legislations of the past; local factors mix with global ones to create the conditions of individual economies and therefore of individual restructuring landscapes. This Autumn, PwC Business Recovery Service teams from across the globe examined their own markets. We then placed the findings side by side to see what trends emerged. For all the divisive language in modern geopolitics, there were signs, even in analyses of restructuring markets, that there is more that unites us than that divides us.

Doing business across multiple nations might seem to add risk (and often it does) but perhaps there is more risk in not capitalising upon the opportunity that exists outside your own borders. Being part of such a global firm, it is important that our colleagues, clients, and contacts understand the global view as we do. Almost all of our latest deals have an international flavour; staying global and staying local has never been more important and that’s why the outcomes of our research are so beneficial.

Restructuring Trends: A Global View, which can be viewed and downloaded in full, found eight key trends which linked countries from all corners of the globe.

Changes to insolvency and restructuring regulations
One of the biggest themes in the global restructuring market is the number of countries that are reforming their legal frameworks against which non-performing credits can be restructured. In some countries that have historically been borrower friendly (e.g. India), legislation is changing and giving more power to creditors. In other countries that have historically had blunt insolvency tools, the restructuring regime is being developed to allow for more turnaround and recovery, with new legislation often being based on a combination of UK Insolvency Law and US Chapter 11 provisions.

Focus on excessive non-performing loan (NPL) levels in banks
Levels of non-performing loans (NPLs) have remained high across developed and emerging markets. Many countries have introduced legislation and regulation to address this, with regulators setting deleveraging targets.

A map of Non-Performing Loan levels across Europe showing Central and Eastern Europe, Greece and Portugal have especially high percentages

Currency depreciation against the USD
There has been a rise in the prevalence of USD borrowings since the global financial crisis of 2008. As the US Federal Reserve tightens monetary policy, the relative value of the USD is increasing, leading to devaluation of many currencies against it. Most immediately this impacts global trade balances and the relative performance of exporters and importers in different countries. It is a particular challenge, however, for companies that have issued USD debt and rely on local currency revenues.

Global trade policies and tariffs
The tension between US and its neighbouring countries, as well as some of its biggest trade partners like China and the EU has caused concern in sectors and economies directly and indirectly. Stock markets in the main affected areas dropped notably when the US announced additional tariffs worth $200bn on Chinese products, only days after bringing levies on $34bn worth of Chinese goods. 

Asian stock market performance following tariffs announced by USA on 19 June 2018

Retail disruption
The impact of online retail is being felt around the world, with bricks and mortar retailers suffering the consequences. Customers have embraced online shopping and payment technologies, shifting more transaction flow to platforms. Not only are traditional retailers suffering from large store portfolios and high fixed costs (e.g. rent and business rates), but their product offering can be less agile than the most innovative tech based retailers.

Shipping and Offshore
The tanker market remains weak as the supply of vessels (as well as the large orderbook of new vessels under construction) continues to outstrip demand. The containership market remains uncertain pending the trading patterns the new liner alliance develop, and the impact these will have on the tonnage providers.

Construction and capital intensive sectors in emerging markets
Emerging market economies (EMEs) that have enjoyed domestic economic growth over recent years are seeing growth slow under pressure from local currency depreciation and lower government spending. These have had a particularly adverse impact on capital intensive sectors such as construction, infrastructure, manufacturing and steel.

Trends in debt documentation
Over the last 12 months, there has been a marked increase in borrower / sponsor friendly debt documentation in new debt deals (e.g. cov-lite, cov-loose, wide permitted baskets, “J Crew clause”, whitelists). This has been driven by excess liquidity competing for a limited number of deals. There has been a convergence between the terms seen on high yield bonds and leveraged loans, with Europe increasingly adopting the looser documentation seen in the US.

Graph showing percentage of European debt that is Cov-lite by year

The trends explored here paint a picture of a financial world coming to terms with the pace of change across multiple industries and geographies. Disruption, both to traditional business models and legislative frameworks, is forcing creditors and borrowers to adapt, especially in emerging economies.

Read the complete report - Restructuring Trends - a global view for a fuller understanding of how these intercontinental trends interact with each other.

I’d be interested in your views on the most influential trend - what do we need to be mindful of for 2019?

by Ed Macnamara Partner

Email +44 (0)20 7804 1748