Liquid debt markets hit the brakes on restructurings

A strong market for refinancing and low interest rates have enabled most borrowers in Europe and the US to avoid bankruptcy and restructuring procedures

So far this year, fewer European and American businesses have encountered financial distress that required either bankruptcy or restructuring procedures than in the same period in 2020. This decline occurred despite the ongoing economic impact of COVID-19.

According to Debtwire Par, US bankruptcy cases totaled 23 in April, down from 24 in March, and have trended lower year-on-year. In 2020, cases regularly exceeded 25 per month, climbing as high as 40 cases in July. Year-on-year US high yield bond and leveraged loan issuance earmarked for restructuring, meanwhile, halved from US$16.1 billion in Q1 2020 to US$7.9 billion.

In Western and Southern Europe, high yield bond and leveraged loan restructuring issuance edged marginally higher, from US$850 million in Q1 2020 to US$920 million in Q1 2021, but restructuring commencements fell month-on-month, from eight in March to six in April 2021. The April total is significantly lower when compared to the same period last year, which recorded 19 cases, according to Debtwire Par.

Liquidity buys time for borrowers

Active refinancing markets in both US and European markets have helped limit restructuring cases, as borrowers facing financial pressure have been able to tap leveraged loan and high yield investors to push out debt maturities and lower lending costs.

In Western and Southern Europe, leveraged loan and high yield bond issuance for refinancings, repricings and amendments was robust, more than doubling from US$32.3 billion in Q4 2020 to US$80.5 billion in Q1 2021—the highest quarterly total on Debtwire Par record since Q4 2017.

In the US, this issuance totaled US$387.5 billion in Q1 2021, more than double the US$141.3 billion posted in Q4 2020 and the highest quarterly total since Debtwire Par began recording this data in 2015.

Ongoing financial support from governments has also kept businesses afloat. In the US, for example, the Biden administration signed a new US$1.9 trillion COVID-19 relief package into law. The EU took a similar stance at the end of 2020, with a historic US$2.2 trillion budget and COVID-19 stimulus package.

Low interest rates and plentiful liquidity have eased the pressure on corporate balance sheets and allowed companies to stay afloat through COVID-19 lockdowns. As a result, high yield bond and leveraged loan default rates have remained below expectations despite the disruption caused to company trading and capital markets.

In Europe, ratings agency Fitch adjusted its bond and loan default forecasts for 2021 to 2% and 3.5%, respectively, from 2020 year-end default rates of 3.3% for bonds and 3.7% for loans.

In the US, default rates for leveraged loans and high yield bonds to the end of March 2021 came in at a relatively modest 3.9% and 4.9%, respectively, according to Fitch.

Pockets of distress emerge

Sector themes are evident among the relatively few bankruptcies and restructurings that have commenced this year.

Although oil prices have recovered from lows observed a year ago, the oil & gas and energy sectors have been a major source of restructuring activity through 2021. Among them, oil & gas firms, energy conglomerates and electric power companies account for just under a quarter (22%) of restructuring cases filed in the US in April.

Sectors like aviation (effectively shut down by COVID-19 restrictions) have been showing signs of distress for some time, as evidenced by Norwegian Air Shuttle’s Irish examinership, Norwegian reconstruction plan and US Chapter 15 bankruptcy filing (Chapter 15 allows US bankruptcy courts to recognize foreign bankruptcy proceedings). Norwegian had to slim down operations, shutter its long-haul business, raise new capital and arrange a debt-for-equity swap as part of a restructuring that allowed the carrier to exit bankruptcy.

In Europe, restructuring cases were more evenly distributed across sectors, with transportation and oil & gas the most prevalent, while media and energy conglomerates also saw restructuring cases.

A few financial services companies in Europe have also gone through high-profile bankruptcies in recent months. For example, German bank Greensill and payment processor Wirecard, also based in Germany, both entered local insolvency proceedings that required recognition in the US through Chapter 15 cases to protect their assets in the US.

Looking forward

While restructuring activity may seem muted at the moment, company balance sheets are carrying more debt as a result of emergency borrowing due to COVID-19.

Global debt has increased by US$24 trillion in the past year, reaching a record US$281 trillion and pushing the world’s debt-to-GDP ratio to 355%, according to the Institute of International Finance (IIF).

International companies and banks account for US$9.3 trillion of this additional debt burden, with governments and households making up the difference. The IIF expects indebtedness to increase through 2021.

The big unknown is whether company earnings will rebound strongly enough to service this higher debt burden as economies reopen and government support measures gradually wind down. The IIF has flagged that any premature reduction of government support measures alone could lead to sharp rises in bankruptcies and non-performing loans.

Restructuring volumes do not look likely to increase any time soon, but more bankruptcies and insolvencies could be waiting down the line.

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