RESTRUCTURING TRENDS: A GLOBAL VIEW - SEPTEMBER 2018 - PWC UK
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Restructuring Trends:
A Global View
September 2018
www.pwc.com
Contents Restructuring Trends: A Global View 4 Key Themes 5 Themes by countries and regions 8 Australia 10 Belgium 12 Brazil 13 Canada 14 Cayman and BVI 16 Central & Eastern Europe 17 China 18 Germany 19 Ghana 20 Greece 21 India 22 Italy 24 Japan 25 Kenya and the East Africa Region 26 The Netherlands 28 Nigeria 29 Singapore 30 South Africa 31 South Korea 32 Spain 33 Turkey 34 USA 36
Restructuring Trends:
A Global View
Today’s business environment is Indeed, as the world gets smaller, experts and situation specialists,
truly global but in local markets, it is more important than ever to any of our teams across the globe
be aware of the global trends and to can draw on the combined skills,
specific regulation, legislation, knowledge, and technology of our full
understand the potential impacts of
politics, demographics and operating in a global marketplace. network to provide a complete service
culture have a material impact offering that only PwC can deliver.
We know that local knowledge goes
on how restructurings and a long way and that only relevant, Each country has its own economic,
insolvencies play out. targeted advice is valuable to our political and regulatory realities that
Long thought of as one of the clients. Our local teams draw on our are critical to a successful restructuring,
world’s leading restructuring extensive network of restructuring, but there are certain key themes that
hubs, the UK’s dominance is refinancing, and insolvency can be seen across the world in
professionals, creating an award- international trade and finance,
increasingly being challenged winning service that is greater than regulation and sector-specific
by other countries in the the sum of its parts. With immediate issues (retail, shipping, construction
global restructuring market. access to a world-class pool of sector and infrastructure).
Through this global view,
we have asked our local
restructuring teams from
around the world to share
their market insights and how
these are affecting companies,
sectors and economies, both in
the UK and more generally
across the globe.
PwC territory sites
Covered in this report
4 Restructuring Trends
Key themes
Changes to insolvency and Focus on excessive NPL levels Currency depreciation
restructuring regulations in banks around the world against the USD
One of the biggest themes in the Levels of non-performing loans There has been a rise in the prevalence
global restructuring market is (NPLs) have remained high across of USD borrowings since the global
the number of countries that are developed and emerging markets. financial crisis of 2008. As the US
reforming their legal frameworks Many countries have introduced Federal Reserve tightens monetary
against which non-performing legislation and regulation to policy, the value of the dollar is
credits can be restructured. address this, with regulators increasing, leading to devaluation
setting deleveraging targets. of many currencies against USD.
In some countries that have historically
been borrower friendly (e.g. India), The introduction of Basel III, Most immediately this impacts
legislation is changing and giving more which increases the capital adequacy global trade balances and the
power to creditors. In other countries requirements on banks, increases the relative performance of exporters
that have historically had blunt cost of holding NPLs. Meanwhile, and importers in different countries.
insolvency tools, the restructuring the introduction of IFRS 9, as well It is a particular challenge, however,
regime is being developed to allow as actions by some governments, for companies that have issued USD
for more turnaround and recovery, are forcing banks to recognised NPLs debt and rely on local currency
with new legislation often being earlier, resulting in higher provisioning. revenues. In order to be able to
based on a combination of UK service debts, many are focusing on
The requirement for banks to
Insolvency Law and US Chapter operational improvements, working
recognise NPLs, provide for them
11 provisions. capital optimisation or seeking to
and allocate more capital, combined
restructure debts.
The UK has traditionally been a world with increasing liquidity in secondary
centre for global restructuring, due to debt markets, is leading to credit Although a broad range of developed
its strong insolvency framework and funds acquiring NPLs earlier and, and less developed markets have been
restructuring flexibility (e.g. Scheme increasingly, providing rescue affected, currency movements have
of Arrangement). Whilst further financing. As banks are offloading been exacerbated in certain countries
reforms have recently been announced NPLs they are decreasing the size of due to local political and economic
and will help to sustain the UK as a their workout teams and leaving the factors, notably Turkey (where the Lira
leading restructuring regime, credit funds to lead restructurings. has devalued by 49% against the USD
the implications of Brexit create The result of this is a change in over the last year) as well as Venezuela,
uncertainty as to how cross-border stakeholder behaviours, with credit Russia, India, Brazil and Argentina.
restructurings might be implemented. funds increasingly driving the agenda
in distressed situations.
The Netherlands is fast tracking
legislation to allow cross-class
cramdown, DIP financing and
release of 3rd party guarantees.
Dutch schemes will automatically Devaluation of selected world currencies against
benefit from EU recognition under
European Insolvency Regulation
the USD (indexed at 100 on 1 August 2017)
whilst the position for English
130
schemes remains unclear.
125
Further afield, Singapore is also seeking 120
Value in USD
to become a global restructuring hub 115
with more borrower friendly options 110
and global reach provisions. 105
100
95
90
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Russian Rouble Indian Rupee Brazilian Real
Australian Dollar Ghanian Cedi Canadian Dollar
Source: Eikon – Thomson Reuters
A Global View 5
Global trade policies and
tariffs – US trade policy Asian stock market performance following
and Brexit
The tension between US and its tariffs announced by USA on 19th June 2018
neighbouring countries, as well as
some of its biggest trade partners like
Percentage movement against June 1 position
China and the EU has caused concern
4%
in sectors and economies directly and 2%
indirectly. Stock markets in the main 0%
affected areas dropped notably when (2%)
the US announced additional tariffs (4%)
worth $200bn on Chinese products, (6%)
(14%)
only days after bringing levies on (10%)
$34bn worth of Chinese goods. (12%)
(14%)
The direct impact of these global
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trade tensions is hard to quantify;
it is difficult to speculate with
any accuracy if rising prices, SSE Composite (Shanghai) FTSE STI (Singapore)
which typically decrease demand, Kospi (Korea) Hang Seng (HK)
will cause a drag in general growth.
Source: Eikon – Thomson Reuters
Global supply chains mean that the
impact of tariffs could be multiplied
as components cross borders
multiple times. The indirect impact UK insolvency legislation and payment technologies, shifting
is potentially more extensive. practice is regarded as world class, more transaction flow to platforms.
Business confidence declines under with initiatives in recent years to
Not only are traditional retailers
deteriorating financial conditions. streamline insolvency processes and
suffering from large store portfolios
A sustained negative impact on prioritise business rescue – indeed the
and high fixed costs (e.g. rent and
equity prices and widening credit UK government recently announcing
business rates), but their product
spreads would likely adversely its intention to significantly change
offering is also far behind the
impact business and household the restructuring regime with the
innovators. Increasingly, simply
spending. Furthermore, a worsening introduction of restructuring
having an online presence is not
of sentiment (especially in tariff- moratoria and plans. Brexit raises
enough as retailers compete to make
affected sectors) could cause much uncertainty over the status
the online and offline experience as
companies to scale back on investment of the UK’s insolvency regime and
seamless as possible. Those who
and reduce capital expenditure, whether automatic recognition across
cannot keep up are suffering from
further impairing global growth. the EU will prevail. The timing of
declining market share and a
Brexit coincides with significant focus
Beyond the well-documented economic dwindling value proposition.
by many EU members on harmonising
impact already caused by the prospect
insolvency and restructuring Although in some countries retailers
of Brexit, particularly due to the
regulations across member countries have found temporary fixes to
depreciation of Sterling over the last
such that there risks damage to the manage costs, fundamental shifts
two years, investors’ confidence is
UK’s reputation as a “hub” for in customer behaviour continue to
suffering from the political uncertainty
complex, cross-border restructurings. drive restructuring activities and
around the final form of Brexit.
insolvencies in the sector across
Retail disruption the globe.
The impact of online retail is being
felt around the world, with bricks Read more about challenges faced
and mortar retailers suffering the by UK retail stores in our recent
consequences. Customers have Restructuring Trends: Trouble in store
embraced online shopping and – how can retailers deal with the
headwinds?
6 Restructuring Trends
Shipping and Offshore Construction and capital Trends in debt
The tanker market remains weak as intensive sectors in emerging documentation
the supply of vessels (as well as the markets
large orderbook of new vessels under Over the last 12 months, there has been
Emerging market economies (EMEs) a marked increase in borrower/sponsor
construction) continues to outstrip that have enjoyed domestic economic
demand. The containership market friendly debt documentation in new
growth over recent years are seeing debt deals (e.g. cov-lite, cov-loose,
remains uncertain pending the growth slow under pressure from
trading patterns the new liner wide permitted baskets, “J Crew
local currency depreciation and lower clause”, whitelists). This has been
alliance develop, and the impact these government spending. These have had
will have on the tonnage providers. driven by excess liquidity competing
a particularly adverse impact on capital for a limited number of deals.
The recent oil price recovery to low intensive sectors such as construction,
USD 70s did not translate into a similar infrastructure, manufacturing There has been a convergence
improvement in the offshore sector. and steel. between the terms seen on high yield
Whilst the mid-water drilling segment bonds and leveraged loans, with
In certain markets, the construction Europe increasingly adopting the
shows signs of slow recovery, the sector is particularly at risk because
deepwater drilling remains volatile. looser documentation seen in the US.
of rising building materials costs and
The offshore support vessel weakening real estate prices. The use As an illustration of this, cov-lite
sector remains weak due to large of fixed rate contracts increases the volumes now account for 78% of
overcapacity of vessels. Several risk of underperforming contracts, outstanding leveraged loans in
companies are about to start a 2nd with projects overrunning (both in Europe according to S&P.
(or 3rd) round of restructuring. time and cost), putting pressure on Lenders in these credits have arguably
already thin margins. lost essential lender protection.
Read more about shipping and
offshore in our recent Restructuring Companies in these at-risk sectors The lack of triggers will start to
Trends: Keeping off the rocks? have previously spent considerable impact the flow of restructurings
Navigating restructuring in shipping amounts of capex on expanding their unless borrowers proactively
& offshore capacity, with a large proportion approach lenders for help.
of the investment funded through In the last 3 months, a number of
raising USD-denominated debt. investors have started to push back
As economic growth has slowed, on loose documentation, although
these companies have not been able not yet sufficiently to change the
to realise the expected revenue and underlying trend.
profit. Recent USD appreciation
caused by the Federal Reserve Read more about recent debt market
tightening their monetary policy development in documentation in
has also put extra pressure on our recent Restructuring Trends:
these companies’ ability to Debt market conditions continue to
service the debt. favour borrowers: what comes next?
Percentage of European institutional debt
that is Cov-Lite
80%
70%
Share of institutional debt
60%
50%
40%
30%
20%
10%
0%
2010 2011 2012 2013 2014 2015 2016 2017
Source: S&P Global 2018
A Global View 7
Themes by countries
and regions
Regulation Banks and Trade policy Devaluation Retail Shipping Construction Debt
NPLs (US, Brexit) vs. USD & transport markets
Australia
Belgium
Brazil
Canada
Cayman and BVI
CEE
China
Germany
Ghana
Greece
India
Italy
Japan
Kenya and East Africa
The Netherlands
Nigeria
Singapore
South Africa
South Korea
Spain
Turkey
USA
8 Restructuring Trends
A Global View 9
Commission that is currently
Australia underway into the Financial Services
industry. This has seen continued high
profile media and public interest into
lending behaviours, increasing
Australia’s economy could be characterised as being in a ‘holding- pressures on Australia’s traditional
pattern’. On one hand, modest GDP and employment growth, ‘Big 4’ Banks regarding not only
a decreasing budget deficit, and record low interest rates should enforcement of impaired assets,
be bolstering business, lender and consumer confidence. but also front end lending and the
provision of financial advice in the
However, uncertainty over political leadership, broader geopolitical wealth management sector. It remains
headwinds and stalled action on key nation-building initiatives such to be seen if there is regulatory change
as energy, corporate tax and infrastructure has meant that the proposed as a result of this commission.
Australian economy is in a holding pattern. If Australia is to remain
Disruption now: the rise of
an attractive destination for both domestic and inbound investment;
non banking financial
there will need to be structural economic policy changes.
institutions
A trend in the Australian market has
Why we need to talk about Australia’s stalling consumer been the emergence of non-banking
lending and confidence spending reflects the general financial institutions − including
Regardless of the pace of economic confidence level. Real-wage growth second and third tier lenders, private
growth in the short term, Australian has been hampered by the personal equity, superannuation funds and
households are now reckoning with tax ‘bracket-creep’ phenomenon, hedge funds as alternative sources of
the consequences of three decades which has seen consumers less capital. These sources are traditionally
of credit-led asset price growth and confident with their discretionary more open to different risk profiles
leverage. Mortgage originations spending. This confidence can be and alternate lending structures
continue to slow, as they must, observed in the business lending (e.g. mezzanine lending). An example
to bring household leverage down market. So far in 2018, business of this can be seen in the inbound
towards levels sustainable in different credit growth has once again fallen residential buyer market; where the
interest rate environments. Even if below the growth in nominal GDP, traditional lending market − generally
the Australian official interest rate something that has happened only major banks - has been displaced in
continues to remain low, as the a few times in the past generally favour of alternative sources of capital,
US economy strengthens, Australian following major downturns – such as PE-fund backed residential
domestic major banks will be forced as shown in the below diagram. lending platforms.
to correct their lending rates as a This trend is unsurprising given the This is a relatively new feature in
consequence of offshore increased public scrutiny and long the corporate environment, and it is
funding sources. lead time into the Australian Royal difficult to predict how these alternate
Exhibit 4: Business lending growth once again lower than nominal GDP
Business lending growth minus nominal GDP growth, Australia
20%
15%
10%
5%
0%
01-03-1988
01-03-1989
01-03-1990
01-03-1991
01-03-1992
01-03-1993
01-03-1994
01-03-1995
01-03-1996
01-03-1997
01-03-1998
01-03-1999
01-03-2000
01-03-1988
01-03-2002
01-03-2003
01-03-2004
01-03-2005
01-03-2006
01-03-2007
01-03-2008
01-03-2009
01-03-2010
01-03-2011
01-03-2012
01-03-2013
01-03-2014
01-03-2015
01-03-2016
01-03-2017
01-03-2018
(5%)
(10%)
Source: S&P Global 2018
10 Restructuring Trendssources of capital will play out in
the distressed asset cycle or on exit. Illustrative Safe Harbour Model
Traditional sources of capital in these
instances, such as major banks, An analysis of the Australian Safe Harbour model can be seen below.
tend to follow a more predictable Solvent
pattern on exit − given the increased Restructure
risk appetite of these non-banking Start to
suspect (Better outcome
lenders; it could be assumed this may insolvency Achieved) Insolvent
mean more assertive exit terms. Underperformance
Restructure
A place in the global market: (Better outcome
Safe Harbour
challenge and opportunity Distress Achieved)
A
While Australia’s headline corporate
tax rate is a challenge to international
Insolvency Benchmark (Worse outcome
competitiveness, the stable legal (likely range)
B Achieved)
system, proximity to Asia and its
consumer base, and well-regarded Illustrative example: No longer
place in the global market continues i) Old rules: Potential personal liability under scenarios a better
outcome
to see it as an attractive investment 2 & 3 from point A
ii) New rules: Potential personal liability only scenario 3
destination. Key attractors of from point B (assuming all Safe Harbour rules are followed)
investment include infrastructure, *Insolvency appointment
property, and the large resource
base, including mining services
(particularly in transportable assets).
onerous obligations on Board the contractor entering into
In the longer term, Australia is
directors for avoiding insolvent insolvency. As a consequence,
vulnerable to the current global tax
trading, including possible civil the impact of a formal insolvency
and trade debate. The US is leading
and criminal liabilities. This year or any contract based company
the way on corporate tax cuts, and
a ‘safe harbour’ regime for directors could be devastating - with these
providing avenues of greater
of Australian companies was clauses now void, this should enable
competition for investment flows.
introduced, following a significant more restructuring opportunities,
While the Trump administration
government review of Australian as contracting businesses will be
was not successful in implementing
insolvency laws. The new laws able to use all available regimes
a value-added tax scheme, the tariffs
provide a ‘safe harbour’ for director (both informal and formal) to effect
being implemented could be argued
personal liability for stressed and a restructure, without the fear of the
as playing the same role in terms of
distressed corporates, provided underlying business being decimated.
increasing indirect taxation revenues
that they are working with an While this a positive move for the
at the border. As a trade-reliant
appropriately qualified professional restructuring industry in Australia,
nation and the US as one of our
and meet other prescribed it only applies to new contracts
largest trading partners, this will
requirements. This will spur further entered into after 1 July 2018 and
undoubtedly have significant impacts.
opportunity in the operational and further, some forms of contracts
An evolving regulatory financial restructuring markets. (for example financial product
landscape contracts) are exempt
The other material change flowing
Regulatory change has impacted from the review of the insolvency The combination of regulatory and
the restructuring landscape laws has seen the voiding of ‘ipso legislative changes against the current
fundamentally over the past 12 facto’ clauses in the context of a macroeconomic landscape will pose
months, and will continue to have formal insolvency − ipso facto clauses both challenge and opportunity for
far reaching effects. Australia has provide contract counterparties with the Australian restructuring industry.
traditionally had some of the most the ability to terminate contracts upon
14 78.79 18 82.5 1 8 11
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
A Global View 11Belgium
Companies in Belgium, like the rest of Europe, are facing challenges
stemming from uncertainty around Brexit and what the future of the
eurozone could look. Concerns about an overheating M&A market,
combined with historically low interest rates and a rise in cov-lite
debt structures are leading to cautious sentiment across all sectors.
The retail, oil & gas and price crash - although a slow
transportation sectors are rebound to prices seems to have
calmed the waters, investment and
amongst those experiencing capital expenditure programmes
relatively turbulent are yet to reflect this.
conditions in Belgium.
The shipping sector has been battling
The digitisation of the shopping strong headwinds and these seem to
experience continues to disrupt be mounting as uncertainty over
traditional business models, US trade policies presents fresh
posing a threat to legacy retailers. challenges regarding the future
Some oil & gas companies are still of international trade and logistics.
reeling from the effects of the oil
52 81.46 11 84.6 0.9 3.5 11.5
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
12 Restructuring Trendscompanies are expected to continue
to domestically refinance their
Brazil debt and begin to fund new
expansion projects.
Aside from a more benign economic
Brazil is still recovering from the recession of 2015-16 and the environment, an amendment of the
restructuring and refinancing markets are active. With modest Brazilian Bankruptcy Law is being
growth expected through 2019, credit availability and interest considered, which would be a
rates are getting back to pre-crisis levels. This will likely lead to meaningful change to the regulatory
more companies looking to refinance their debt in the hope of landscape. The proposed change
involves relaxing the law so that
funding expansion. Like other more mature emerging markets, companies with high levels of debt
Brazil’s transportation and construction sectors are experiencing can sell healthy assets yet avoid
the highest levels of distress. transferring the credit risk connected
to them. The hope is that this
modification would give companies
Larger corporations have those smaller companies with better a better chance of recovering from
tapped into foreign low- credit profiles being able to refinance distressed situations. The current
their debt domestically. laws have been criticised for their
interest rate markets
During 2015 and 2016 Brazil However, financial leverage and bureaucracy and low success rate,
experienced one of the worst recessions filings for judicial recovery have with only 25% of companies
in its history. The combination of sluggish remained high due to the slow pace successfully emerging from the
economic growth, rampant inflation and of the economic recovery combined bankruptcy procedure.
surging interest rates caused a sharp with a reduction in banks’ risk The levels of non performing loans
increase in overall leverage. appetite. The current devaluation in Brazil have been steadily rising
of the Brazilian Real is also in the past years, with a recent
During the recession, the largest contributing to the increased
corporations took advantage of the trend to stabilisation given the more
level (in local currency) of debt restrictive credit policies adopted
low interest rate environment in the denominated in foreign currency.
US and Europe to refinance their debt as a result of the economic downturn.
For companies with revenues in The short-term estimates indicate a
with cheaper foreign currency debt. local currency, debt service is stabilisation of both credit balances
In general, smaller companies were becoming more challenging as the and the levels of credit in default
unable to tap into capital markets and Real depreciates. Based on the until economic growth effectively
experienced a severe credit crunch, Brazilian Central Bank research, resumes. The estimated delinquency
which was exacerbated by the reduction transportation, construction and levels remain stable at 3%-4% of the
of subsidised loans from the Brazilian infrastructure are the sectors with total loan balance in the National
Development Bank. The number of the highest concentration of distressed Financial System.
company filings for judicial recovery assets, being particularly capital
increased by 120% in comparison to intensive and leveraged businesses. As the secondary market for NPL is
pre-crisis levels. still developing in Brazil, financial
The Brazilian economy is institutions have been focusing on
Expansionary fiscal policies on the brink of sustained selling their older loans (5-10 years
have helped domestically recovery past due) before moving on to newer
focused companies although PwC estimates real economic loans, nonetheless adopting the
growth in Brazil to be a modest sale of NPL as a recurring strategy.
leverage levels remain high Additionally, retail and education
Starting from 2017 the Central Bank 1.8% in 2018 and 2.5% in 2019
(PwC economic projections − August are some of the sectors structuring
of Brazil lowered interest rates to NPL transactions with a focus on
stimulate the economy resulting in 2018). With tightening credit spreads
and interest rates at pre-crisis levels, improving their core operations.
125 47.46 80 12.7 4 12 13
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
A Global View 13The real estate market in some
regions (notably the commercial
Canada market in Alberta) is affected by
significant vacancies resulting from
the downsizing which took place after
Economic growth has been The Conference Board of Canada, the downturn in the oil sector of the
slowing driven by consumer an economic think tank, notes that mid 2010s; options for stakeholders
“high debt levels, rising interest in that sector are not helped by limited
spending and fears over US rates, and falling house prices are growth in the region. Similar pressure
trade policy leading to a pullback in the pace is being seen in the construction
The Canadian economy has performed of consumer spending and overall industry in some regions.
relatively well over the past couple of economic growth. The economy grew
years and significant liquidity has Most other recent restructuring filings
(at an annualised rate of) just 1.3 per
been available to refinance positions have been isolated cases not involving
cent in the first quarter (of 2018) as
where lenders see risk. As a result, systemic issues in a particular sector.
consumer spending eased, the trade
the Canadian restructuring market The availability of liquidity from a
sector continued to perform poorly,
has been relatively quiet for the last variety of lenders, distressed funds
and the housing sector weakened,
18 months, but there are some signs and other alternative lenders has
reflecting recent policy changes.”
of potential headwinds to come. facilitated many refinancings of
Foreign competition companies encountering challenges.
Economic growth in Canada ran
at an annualised rate of 4.2% in increases sector threats A trial of uncertainty ahead
the first half of 2017, following Lenders are continuing to monitor The Conference Board of Canada
favourable trends in commodity exposures in the retail sector, has voiced several concerns about the
prices, investments in infrastructure, which has been significantly Canadian economy, which will affect
and general consumer optimism. disrupted by innovation and performance over the next few years,
The growth rate slid to an average competition (largely from American including record levels of household
of 1.6% in the second half of the retailers). Toys R Us Canada was sold debt that will constrain consumer
year (2.6% annualised), and this to Fairfax through proceedings earlier spending, the risk of interest rate
reduced trend is expected to in 2018; Sears Canada is currently increases, and constraints on export
continue through 2018. completing its liquidation process growth including as a result of
under the Companies’ Creditors possible trade wars.
Uncertainty over the renegotiation Arrangement Act (CCAA).
of the North American Free Trade Business confidence as tracked by
Agreement (NAFTA) and the notion The oil and gas sector in western the Conference Board has started
of a trade war threaten both the Canada is drawing increasing to become more pessimistic of late,
export market as well as demand attention, as local commodity trending down from highs seen in
for investment in Canadian industry. prices continue to lag behind the 2017. They note that “businesses
The buoyant U.S. economy, helped by rest of the world due to transportation do not expect the rapid sales
tax cuts and consumer spending, is constraints and as foreign producers growth they saw in 2017 to continue.
substantially outperforming Canada increase their production of cheaper They are concerned about government
and is becoming more attractive for oil. We anticipate further oil and policy and about the availability of
investment, placing further pressure gas filings over the next 1-2 years, labour. They also report increased
on Canadian growth expectations. particularly in the gas sector. concern about the competitiveness of
the Canadian economy in the face of
U.S. tax cuts, a weak Canadian dollar,
“High debt levels, rising interest rates, and falling house and an uncertain future for NAFTA.”
prices are leading to a pullback in the pace of consumer Few economic pundits are looking
spending and overall economic growth. The economy beyond the next 1-2 years, given the
grew [at an annualised rate of] just 1.3 per cent in the range of uncertainty faced by the
Canadian economy. But concerns
first quarter [of 2018] as consumer spending eased, abound over the levels of investment
the trade sector continued to perform poorly, and the in equipment and other infrastructure
housing sector weakened, reflecting recent policy changes.” in Canada, which puts the economy’s
competitiveness at greater risk.
The Conference Board of Canada
14 Restructuring TrendsConsensual restructurings An increasing number of corporate be negotiated, without the
favoured over insolvency restructurings are being completed additional insolvency stigma
under corporation statutes rather of a CCAA proceeding.
proceedings than insolvency law. The Canada
Several pending decisions of
All of this comes amidst one of Business Corporations Act (CBCA)
the Canadian courts are expected
the slowest periods for formal (and similar provincial statutes)
to affect future proceedings.
restructuring proceedings in provides a mechanism for a plan
Among others, the Supreme Court
recent memory. As an indicator, of arrangement to be voted on by
of Canada’s decision in the Redwater
the number of new restructuring creditors and approved by the
case is expected shortly, which will
proceedings initiated under the Court (similar to a solvent scheme
decide whether to give priority to
Companies’ Creditors Arrangement of arrangement) to effect a
certain environmental and safety
Act (CCAA, akin to the Chapter 11 restructuring. Most recently,
obligations in restructuring
process in the U.S.) fell from 42 in the restructuring of Concordia
proceedings. A separate decision
2016 to 25 in 2017; to June 2018, International Corp., a Canadian
by the Supreme Court in the Canada
only a further 8 CCAA proceedings registered multinational,
v. Callidus case will address the effect
been commenced. was completed under the CBCA.
of a bankruptcy proceeding on the
This statute provides for a
deemed trust for unremitted GST/
consensual restructuring to
HST (value-added tax).
18 81.46 11 87.5 0.8 7 11
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
A Global View 15Cayman and BVI
Macroeconomic changes and We have observed a sector-agnostic For instance, Provisional Liquidations
rise in the number of defaults are increasingly being used to seek a
over-leverage are driving a
involving offshore dollar lending protective mechanism for restructuring
rise in defaults in collaboration with secured lenders
and can also be considered to be
In recent years, a weak US currency a function of over-leverage. − Mongolian Mining, Ocean Rig and
has fuelled a rise in offshore US most recently Abraaj, are prominent
dollar-denominated lending, We continue to observe certain Cayman Islands examples.
with emerging market economies key issues for lenders; these include
(EMEs) holding a record USD 6.3 imperfections in security nets, Funds are seeking full-service
trillion in 2017. A large proportion of structural subordination of offshore wind-down solutions
this debt was structured via Cayman debt as well as adverse impacts Significant advancements are also
Islands and BVI. on recoveries. occurring in these jurisdictions in
However, these enabling More sophisticated relation to the restructuring of hedge
macroeconomic tailwinds have funds, for which the Cayman Islands
mechanisms, such as is the principal offshore domicile.
reversed course, driven primarily by
Provisional Liquidations,
US monetary policy normalisation and Funds are increasingly looking to access
the subsequent appreciation of the are emerging
full-service wind-down solutions, often
dollar. This has impacted debt service While we expect EME deleveraging outside of a formal liquidation process,
capacity, particularly in cases where to continue in the near-term, more as a means of maximising asset
revenues are denominated in EME sophisticated restructuring realizations and returns of capital to
currencies, and increased rollover mechanisms are emerging from the investors. Secondary market liquidity
risk, putting existing lending Cayman Islands and BVI, providing strategies at the investor level are also
structures under pressure. stakeholders with more options. increasing in popularity.
The Cayman Islands and British Virgin Islands are British Overseas Territories and do not have their own data.
16 Restructuring TrendsCentral & Eastern Europe
Almost a decade after the financial crisis, the Central and Eastern European (CEE) market has stabilised
and is enjoying a period of growth. The restructuring landscape has changed; it has become dominated
by a small number of large-scale cases either rooted in the financial crisis or newly appearing in industries
undergoing transformation. Despite market growth, threats are becoming more tangible for CEE.
Brexit, restrictive US trade policy, overheating of the real estate market and an expected slow-down
of market growth all indicate that restructuring activity will increase in the coming years.
Ownership changes are seeking attractive and reasonably- in industries facing structural changes
creating investment valued targets and banks looking to or increasing export barriers such as
sell or refinance high-yielding steel and heavy machinery.
opportunities for corporates, distressed debt. These opportunities
funds and banks Retail distress is not necessarily a
have been the driving force for an
The CEE market is going through a common theme across Central and
increased focus on distressed M&A
Eastern Europe but certain retailers
“second round” of ownership changes and debt refinancing in recent years.
where creditor stakes or exposures in the Balkans are indeed struggling.
in newly restructured businesses are While new restructuring cases are There are more entrenched stressors
being put up for sale. This creates less frequent, they are usually in the construction sector, especially
opportunities for financial investors significant in size, attracting the large industrial projects, yet these are
looking for post-restructuring attention of multiple stakeholder still under the surface. We expect the
acquisitions, strategic investors groups. They typically originate issues to mount and start affecting the
market next year; indeed, one of the
largest construction companies is on
the verge of insolvency.
The Banking sector is
showing signs of recovery,
but stricter regulations
provide fresh challenges
The banking sector is recovering
from the financial crisis: the non-
performing loan (NPL) ratio has
been decreasing gradually following
economic recovery across CEE.
NPL transaction activity has been
significant only in some parts of the
region – NPL rates in Romania,
Key
Hungary, Croatia and Slovenia are
Under 2% at the higher end of the spectrum.
2-6% The banking sector, however, faces
6-10% new challenges as the European
Over 10% Central Bank, in conjunction with
local central banks, continues to
enforce new stricter regulations in
order to prevent excessive risk-taking.
27 77.71 22 63.1 3 15 14
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
A Global View 17China
Rising operational and market, damaging investor confidence term initiatives such as the Greater Bay
borrowing costs as well and adversely affecting consumer Area Initiative, which aims to increase
purchasing behavior. connectivity between cities in the
as credit tightening pose
Guangdong-Hong Kong-Macau region
challenges Shipping and commodities is expected to enhance mobility and
The first 6 months of 2018 were met sectors face the gravest facilitate business.
with several challenges for companies challenges in 2018, as strong
in Hong Kong and China. Higher labour Reducing overcapacity and
infrastructure development deleveraging has been set as a
costs and rising commercial real estate
prices have led to increased operational unleashes growth potential policy priority to address systemic
costs. These operational costs, in across the region risk as economic growth slows.
addition to escalating interest rates, There has been a wide range of Amended insolvency law
have resulted in higher borrowing sectors experiencing difficulty.
costs. The hiked interest rates mean Mining and commodities trading increases creditors’
Chinese companies of all sizes are companies continue to be impacted protection, streamlines
finding it harder to access offshore by the prolonged weakness in winding-up process and
credit which, combined with an commodity prices, and the shipping strengthens regulation under
onshore desire to curb leverage, industry is experiencing weak the winding-up regime
including a crackdown on shadow demand exacerbated by an
In February 2017, the Hong Kong
banking, has led to credit tightening over-supply of vessels in the market,
insolvency law was amended to
across the economy. with a consequential adverse impact
increase creditors’ protection,
on ports. The manufacturing sector,
As with other regions around the world, streamline the winding-up process
particularly those making electronic
companies that have failed to adapt to and strengthen regulation under the
products, are struggling to keep up
the rapid digital transformation taking winding-up regime. The Hong Kong
with rapidly changing technology
place globally are being rendered government is working on introducing
and digital transformation.
uncompetitive. Other trends impacting a formal corporate rescue regime
Bricks and mortar retailers have
corporates include a rise in cases of by implementing the Companies
also suffered as more consumers
misconduct and fraud as well as (Corporate Rescue) Bill. The Bill
turn to online shopping.
corporate bond defaults. was first revealed in 2001, and has
Although local Chinese firms are since then undergone many
The number of corporate bankruptcies
facing a more ambiguous global trade consultations and amendments.
in China has risen rapidly in recent
atmosphere, recent tension in Sino-US In the wake of insolvency law reforms
years with Court filings more than
trade relations has made the private in neighbouring countries, the Bill is
doubling from 2015 to end of 2017.
sector bullish on the progress of free back on the agenda for lawmakers
China-US trade tensions trade across the Asia Pacific region. who are hoping to remain competitive.
The escalation in the trade friction In particular, the Belt and Road The drafting of the Bill is currently in
between China and the US (the world’s initiatives have paved the road for progress with further developments
two largest economies) has precipitated greater connection between China expected in the next twelve to
the fall in China’s domestic stock and member countries. Other longer eighteen months.
78 55.82 56 36.9 1.7 22 11.5
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
18 Restructuring TrendsGermany
The German economy continues to run at full steam, with modest retail and consumer goods industries.
growth in the first quarter of 2018, and much greater traction by If these companies fail to transform
their respective business models in
the end of the second quarter.
order to compete more effectively,
they could rapidly face the need
to restructure or, in the worst
Trade rhetoric is causing Increased risk aversion by investors
even forced some borrowers to adjust cases, insolvency.
concerns for the future but
pricing or withdraw new issuances Regulatory changes seek to
conditions remain good for altogether. Nonetheless, for the time
Germany’s exporters being, a strong and solid German preserve value in insolvencies
Uncertainty around US foreign and economy is keeping any potential From a regulatory standpoint,
trade policies, driven primarily by effects of these uncertainties at bay. recently amended regulations for
the ongoing rhetoric on trade wars cross-border group insolvencies
with China, continues to send waves Major restructuring and insolvency and the envisaged pre-insolvency
of anxiety across export-focused situations continue to be driven restructuring framework will
industries. These concerns might primarily by company-specific factors, increase value preservation and
impact future investment decisions rather than wider systemic challenges. enhance restructuring solutions
but German exporters across sectors Looking ahead, besides geopolitical for both debtors and creditors.
are currently enjoying full order risks, disruptive trends from new This should enable Germany to
books and high levels of production. technologies and digitisation remain maintain its status as an attractive
the main threat to certain sectors, market for distressed opportunities.
While economic growth has lost some
pace, it still ranges well above long- particularly the automotive,
term average and continues to send
positive signals to the market.
Lenders are becoming more
cautious but borrower
friendly terms continue -
company specific issues to
drive restructuring activity
Capital market conditions remain
strong, with Germany still perceived
as a safe haven in the Eurozone and
investors continuing to deploy capital
to borrowers with attractive terms.
However, recent high-profile events,
such as the collapse of German
Schuldschein borrower Carillion
and the ongoing investigations into
the accounting irregularities of
Steinhoff, have resulted in a more
cautious attitude towards
international borrowers.
20 90.27 4 80.6 1.2 8 15
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
A Global View 19a culture of rescue over bankruptcy.
The bill is expected to put structure
Ghana around issues such as cross-border
insolvency and set out the duties of
insolvency practitioners and the
A few key pieces of 3. Banks and Specialised Deposit- insolvency service among others.
legislation currently govern Taking Institutions Act, 2016,
Act 930 A rocky road ahead
restructuring and insolvency Although the new bill is expected to
activity in Ghana This Act gives the Bank of Ghana the add stability, short-term challenges
The regulatory landscape in Ghana mandate to place an ailing bank into are still present. In 2016, nine banks
is experiencing material developments receivership or administration. were identified to be undercapitalised
after the failure of key Ghanaian The current legislation on insolvency after an asset quality review exercise
institutions. The fractured legal allows a creditor to file for the carried out by Bank of Ghana (BoG)
backdrop has meant the distress, liquidation of a corporate entity after revealed that they had a capital
and in some cases collapse, of several 21 days of failing to meet liabilities adequacy ratio of 4.75. In August 2017,
high-profile companies has led to and financial obligations as they UT Bank Ghana Limited and Capital
turmoil. This is expected to improve fall due. Bank Ghana Limited went into
under a proposed new Corporate Receivership after being declared
Insolvency Bill. Although tighter regulation of local insolvent by BoG, followed by
banks is needed to create long-term Unibank Ghana Limited in
Confusion is caused by the fact that the stability, there is appetite for March 2018.
current restructuring environment is improvement. Pessimists may say
based on three separate insolvency laws: this is too little too late, but bodies These sorts of insolvencies in the
like the Ghana Association of banking sector are symptomatic of the
1. Bodies Corporate Act 1963,
Restructuring and Insolvency Advisors challenges faced by banks throughout
Act 180
(GARIA) are trying to effect change by the country and across sub-Saharan
In accordance with Section 7 of the advocating for the speedy passage of Africa. Banks do not typically carry
Act, the Registrar of Companies is the the Corporate Insolvency Bill, which is out reviews of credits to identify
Official Liquidator (OL) in Ghana. currently sat before Cabinet. issues until problems have become
In addition to two state banks which too pervasive and difficult to mitigate.
collapsed 2000, the country’s major The aim of the bill is to protect
airline has also been liquidated by companies from entering into
the OL. premature liquidation and embed
2. Companies Act 1963, Act 179
A Receiver and Manager may be
appointed by a court or out of court
subject to Section 241 of Act 179.
The inability of one of Ghana’s biggest
commodity trading companies in 2016
to meet its financial obligations due
to the issue of cross securitisation
almost crippled the operations of
about twenty-six local banks in the
country. The combined debt is
c.USD 250 million.
120 24.77 158 22.8 1.9 22 4
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
20 Restructuring TrendsGreece
Following an eight-year
recession (2009-2016),
the Greek economy is beginning
to show its first signs of
recovery, with GDP growth for
2017-2018 and a steady decline
in the unemployment rate.
We estimate real economic
growth in Greece to be 2.0%
in 2018 and 2.1% in 2019
(PwC economic projections -
August 2018).
During the crisis, there was a
deterioration in performance
across all sectors, particularly
capital intensive sectors,
where significant amounts Greek companies grapple A stable legal framework
of capital expenditure were with high leverage, low combined with stricter
undertaken during the pre- liquidity and limited access targets for banks could spur
crisis period. to funding a new wave of restructurings
Construction, real estate The legal framework
(commercial and residential), (e.g. rehabilitation and special
industrial manufacturing and administration) remains largely
retail sectors continue to face unchanged and has been successfully
strong headwinds, spurring a tested in practice. The execution of
series of financial and operational a few high-profile restructurings
restructurings as well as consolidation (such as the successful rehabilitation
across the market. Overall, companies of the largest Greek retailer and a
operating in Greece continue to be well-established oil storage/retail
plagued by high leverage levels, company) as well as strict targets
low liquidity and very limited access and deadlines set by the Single
to new financing. Over the last Supervisory Mechanism (SSM)
12 months, although the market for Greek banks, could all pave the
conditions remain challenging, way for further restructurings in the
there seems to be a marked increase near future. The outlook remains
in appetite for troubled assets. relatively positive, as Greek companies
A secondary market for NPLs has continue to focus on securing liquidity,
emerged, as Greek banks seek to expanding operations and returning
limit their downside exposure to profitability.
through the disposal of NPL
portfolios to international investors.
67 55.59 57 33.6 3.5 9 12
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
A Global View 21India
Business leaders are optimistic about the future prospects of the for the Indian economy. Not only
Indian economy. Disciplined and well-governed companies are would it help banks release capital
that is locked-in on non-performing
doing extremely well with earnings at historic highs. The new
loans (NPLs), it will also instill credit
Insolvency and Bankruptcy Code (IBC) has been warmly welcomed discipline among bank officials.
and although certain sectors struggle more than others, the prospect
of dealing with distress in a more professionalised and efficient High leverage levels and costs
manner is providing confidence to lenders and debtors alike. of capital, regulatory changes
as well as demand-supply
imbalances are amongst
Significant currency Resolution of debt has been one of the
key priorities of the Ministry of the key factors resulting
devaluation versus the USD
Finance and Reserve Bank of India in distress
The INR has depreciated significantly.
(RBI) with focus on following points: The issue of overleveraging across
It was around Rs 63.38/USD on
multiple industries had worsened
January 1, 2018 and has fallen today • Building a resilient stressed assets due to time/cost overruns. Due to
to an all time time low of Rs 70.08/ recovery and resolution framework the higher cost of funds, Indian
USD. The rupee is down nearly 10%
• Revision of supervisory review Rupee (INR) denominated debt
in 2018 and has fallen 2.4% since
framework in the form of risk funds can only be serviced through
the beginning of this month.
based supervision high EBITDA margin industries.
New Bankruptcy Code Infrastructure projects and
• Increased focus on liquidity risks commodity-based businesses
streamlines corporate and counterparty credit risks are low margin, which have
insolvency process, resulting been uncompetitive in the face
• Increased focus on governance,
in quicker resolution of including cyber governance. of global competition.
stressed businesses
The IBC consolidates multiple prior The power sector is especially
The Insolvency and Bankruptcy affected by the frequent changes
schemes, focuses on time bound
Code (IBC), 2016 has been a significant in the regulatory framework and
resolution and maximisation of value.
reform in the country as it focuses government policies as they face
Cases have to be resolved within
on quicker resolution of stressed
180/270 days, failing which the challenges transitioning from
businesses. It is a welcome overhaul assured return on equity Power
corporate debtor will have to
of the existing framework dealing Purchase Agreements (PPAs) to
undergo liquidation. IBC has also
with insolvency of corporates, competitively bidding for power
been instrumental in consolidating
individuals, partnerships and supply. The de-allocation of captive
multiple debt resolution and recovery
other entities. coal mines retrospectively continues
platforms, giving creditors clarity over
Some of the key tools that lenders had several details such as the manner of to severely disrupt base project
been using in the past were Corporate distribution of recovery proceeds. assumption pyramids.
Debt Restructuring (CDR), Strategic With very limited prior exposure to
Following the introduction of IBC,
Debt Restructuring (SDR) and Scheme executing large projects, lenders and
India’s position on the World Bank
for Sustainable Structuring of Stressed developers funded infrastructure
rankings of countries ability to
Assets (S4A) among others. Each of projects at unsustainably high debt
handle insolvency cases improved
these mechanisms had its own process to equity ratios, increasing the risk
by 33 places. This jump contributed
of dealing with stressed assets but also
significantly in India’s ease of doing of default on such deals. In addition,
had certain drawbacks which made
business ranking by 30 places to join many large infrastructure projects
debt resolution a lengthy process.
the top 100 countries club. suffered from time and cost overruns
Different processes were regulated due to delays in land acquisition and
by different laws which sometimes While IBC has provided creditors obtaining environmental clearances.
conflicted with each other, there was with a new tool to manage their Slower than anticipated economic
no set timeline for completing the relationship with debtors, its impact growth continues to foster the demand-
process, and lenders had to work on reducing and avoiding bad debts supply mismatch currently facing the
closely with business owners who is as yet untested. However IBC has Indian economy.
remain in the control of the business the potential to be a game changer
during the resolution process.
22 Restructuring TrendsCertain sectors continue to grapple with unique challenges
against the backdrop of slower than expected growth and a
transforming regulatory environment
Steel Roads and Infrastructure
• Slowing economic growth leads • Long project gestation periods
to decline in domestic demand affect financing, block capital
investment
• Simultaneous on-streaming of
significant new capacity worsens • Delay in land acquisition and
demand-supply gap environment clearances
(~50% of stressed road projects)
• Cheap imports from China hit
domestic manufacturers • Regulatory price caps for airport
and road projects
• Regulators impose curbs on key
inputs – coal and iron ore – leading • Only a few private integrated
to drop in plant utilisation players who are unable to take
on additional projects
Power
• Long-term power sale opportunities Telecoms
dry up, leading to overcapacity • Telcos deploy massive capex to
build teledensity – leads to debt
• Impact is lower offtake/plant load
of USD 120bn (4x revenue)
factors impacting debt serviceability
• High spectrum bidding and usage
• Highly capital intensive,
fees add further financial burden
with increasing equipment costs
• Low Interconnect Usage Charges,
• Lack of fuel supply agreements and
compounded by the entry of
unviable tariffs due to increases in
low-priced Reliance Jio in Sep 2016
the cost of coal
• Price wars led to sharp tariff drops
• Distribution companies in poor
across operators, and inability to
financial health and are
service debt
renegotiating PPAs
• Inability of power plants to sell
power at cost-based tariffs
100 40.75 103 26.4 4.3 9 8.5
Ease of doing Resolving Resolving Recovery rate Time Cost Strength of Insolvency
business ranking Insolvency DTF Insolvency rank (cent on the dollar) (years) (% of estate) framework Index (0-16)
A Global View 23You can also read
