Resilience in the face of uncertainty: year in review and restructuring outlook for 2017

Very few predicted the shocks that reshaped the political landscape in 2016 and even fewer that the debt markets would remain so remarkably resilient in the face of such upheaval. Whilst the overall European default rate remained relatively low, there were areas of significant restructuring activity in 2016 including the oil and gas (in particular exploration and production and oil field services), mining and waste sectors. Central bank policy and lenders hungry to put money to work are likely to continue to support borrower-friendly market conditions, but political uncertainty is far from over. 

The crystal ball question - what will 2017 bring?
Whilst default rates are expected to remain relatively low, uncertainty caused by the continued Brexit negotiations and upcoming French, German and Dutch elections in 2017 may feed through to consumer and business confidence. This could create difficulties for a wider range of sectors including:

Oil and gas - Unsurprisingly, we continue to expect restructuring activity in this sector. Oil field services companies in particular will continue to be affected by the reduced level of offshore capex, which impacts their revenues in a material way. A number of these companies are heavily geared, giving them little room for manoeuvre.

Retail - UK retailers are facing the twin headwinds of foreign exchange hedges rolling off at the end of the year and the prospect of rising inflation impacting consumer demand. We expect weaker players will suffer through the Christmas trading period and into spring.

Across Europe, relatively soft macroeconomic demand has led to pressure on retailers. The depreciation of the Euro against the dollar over the last year has also increased import costs. A number of the larger players are largely bond funded and so it may take time for them to become restructuring situations because of the lack of covenants. Nonetheless, it is a sector where we expect activity over the next 12-24 months and a shock result in the French general election could accelerate this.

Construction suppliers/building products - 2017 is also expected to be a tough year for the construction sector, principally driven by Brexit-related uncertainty and cost increases across the supply chain. The infrastructure pipeline appears relatively robust with a number of large projects scheduled for 2017 and beyond. However, project delays and concentration on a small number of large contracts can present challenges for companies operating within the space.

Commercial construction is expected to face a more challenging outlook, with more subdued business confidence resulting in some new projects being put on hold, particularly within the office and retail sectors. This weaker activity is expected to have a knock on effect throughout the supply chain, with building products suppliers facing the prospect of weaker demand in 2017.

While the UK's significant supply-demand imbalance in the housing sector should provide an underlying level of demand for new housing, weaker consumer confidence is expected to impact housing sales in the short to medium term. Limited house price growth in 2017 should help to reduce affordability concerns, although is likely to impact housebuilders’ financial performance during 2017.

Shipping - Dry bulk and container segments in particular are suffering from acute over-capacity and downward pressure on freight rates, whilst low oil prices and exploration and production capex continue to impact offshore activities in the oil and gas segment. Many stakeholders continue to ‘kick the can down the road’ rather than push to fix problems. Banks are continuing to look to reduce their exposure to the sector, which is reducing available liquidity and distressed investors are entering the market.

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Duncan Turner | Partner, Financial Advisory
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Andy Clayton | Senior Manager, Financial Advisory
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