What the experts of the “restructuring industry” see.
The US “restructuring industry” – the advisories, law firms, investment banks, lenders, private equity firms, hedge funds, and others that deal with troubled companies when they’re restructuring their debts either in bankruptcy our outside of bankruptcy – had been through some very lean years as the Fed’s easy money and yield-desperate investors were floating even the leakiest boats.
But in 2015, the industry began licking its chops. And in 2016, total commercial bankruptcy filings jumped 26% from a year earlier, according to the American Bankruptcy Institute. It was the first rise since 2010.
2016 was the “official rebound of the turnaround industry,” as Alix Partners, one of the big advisories in this industry, put it in its report, North American restructuring experts survey: a changing world. The year “will be remembered for some of the most impactful global events on record that not even the most well-informed experts could have predicted.” Hence, increased profit opportunities in 2017 for the restructuring industry.
Industry experts are now counting on a surge in companies that, buckling under their debts, will seek to “restructure” them either in bankruptcy court our outside of it, at the expense of their creditors and equity holders.
In its survey of restructuring experts – lawyers, investment bankers, lenders, hedge fund professionals, financial advisors, private equity professionals, claims agents, and others – Alix Partners found that 49% of the respondents expected US restructuring activity to increase further in 2017 while 29% expected activities to remain at the already elevated 2016 level.
Among the dominant macroeconomic factors that could impact US companies (respondents could list several): 90% listed the slowdown in China and 85% “global sovereign instability.”
“Where are the likely pockets of distress in 2017?”
The energy sector had been in the top position of expected restructuring activities in 2015 and 2016. But for 2017, the experts – perhaps reminiscing about how much money they could have made with oil at $30 a barrel instead of over $50 – lowered the sector into second spot behind retail. And then there’s a surprising sector to move into third position: healthcare. Note, experts could select up to three sectors (chart by Alix Partners):
In one of my more infamous typos, I’ve called brick-and-mortar retailers “brick-and-mortal.” It wasn’t far off.
We’ve been waiting for Sears Holding, the big whale, to wash up on the beach. And just today, Eastern Outfitters, the parent of Bob’s Stores and Eastern Mountain Sports, filed for bankruptcy protection. Like so many failed brick-and-mortar retailers, it is owned by a private equity firm. On January 17, Limited stores filed for bankruptcy.
And in 2016, there was a whole slew retailer bankruptcies, including:
- American Apparel (November 2016), for the second time
- Claire Stores (July 2016)
- Aeropostale (May 2016)
- Fairway Group Holdings, parent of New York food retailer Fairway Market with 18 stores (May 2016)
- Vestis Retail Group, the operator of above mentioned sporting goods retailers Eastern Mountain Sports, Bob’s Stores, and Sport Chalet (April 2016)
- Pacific Sunwear of California (April 2016)
- Sports Authority (March 2016), which, after restructuring was abandoned, was liquidated messily.
- Hancock Fabrics, for the second time (February 2016)
- Wet Seal, teen fashion retailer (January 2016)
So in 2017, retailers should be even more fruitful for the restructuring industry. Alix Partners sees some particular challenges for teetering retailers:
Retail’s cost base is structurally difficult to adjust because of the industry’s large real estate footprint. Once a retailer gets into trouble, it becomes more difficult for that retailer to recover than it is for most other businesses. Our November 2015 retail bankruptcy study revealed that 55% of retail bankruptcies have ended in liquidation since 2005.
The oil & gas sector has moved down a notch as supplier of restructuring candidates, with 27% of the experts predicting that the sector will “stabilize” in 2017, and with new money flowing back into the sector, “the worst may have passed.” But still, 55% of the respondents do not expect a turning point until 2018,
And in third position on the above list of distress and restructuring opportunities in 2017, healthcare. There’s a new reason. The report:
The incoming US president’s campaign platform of repealing and replacing the Affordable Care Act is creating enormous uncertainty in the insurance, pharmaceutical, and healthcare services sectors. Complex reimbursement regulations and other regulations – the basis of the industry’s business models – are all potentially subject to change.
Many state-level insurance exchanges have already failed or are severely distressed, but opportunities may open up for new models and start-ups in the insurance sector. Similarly, more consumer-directed healthcare consumption could also expose inefficient providers and hasten their declines.
And outside the US?
The experts see even more opportunities for the restructuring industry globally: 57% expect restructuring activity outside the US to increase, and 40% expect it to remain at the level of 2016.
Oil & gas is still in first position for 2017 restructuring opportunities globally, followed by the maritime and shipping industry, the great model having been the Hanjin bankruptcy last August and the mayhem that followed. Alix Partners predicts that “the real pain in 2017 will be felt by tonnage providers in containers, dry bulk, tankers, and offshore supply that are facing limited demand for their vessels.”
Also note that 32% of the experts have their eyes on sovereign debt as a restructuring opportunity, in fourth position (chart by Alix Partners):
The experts figure that beyond the US, the UK will see the most restructuring activity in 2017, based on the dynamics of Brexit, followed by Italy, China, and Brazil.
The misery of those struggling sectors in 2017 in the US and globally – and the pain for bondholders, other creditors, stockholders, and employees – should make it a year brimming with opportunities for the restructuring industry. Because there are always opportunities somewhere.
And here’s a red flag that’ll be highlighted only afterwards as a turning point. Read… Consumer Bankruptcies Rise for the First Time since 2010
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Always a pleasure to read, as much as an exercise in learning !
As a gloom and doomer by avocation, I always wonder when I read such things as this post, what the article might say in the face of the coming doom — to wit the collapse of foolish USA consumerism,, which for me always means debt enabled consumerism — what happens when the spending stops ?
How might the list of “Sectors in the USA likely to face distress” present when the coming “greater depression” ushers in a period of “much lesser spending” ?
Debt has been the supporting pillar of the Obama recovery, that which his supporters have errantly called expansion. When the expansion of debt stops, expansion stops, economic collapse results.
As von Mises predicted so very long ago.
Too bad each generation must learn this anew.
SnowieGeorgie
Von Mises grew up in an era where there was no transparency and insights into bank lending on a day to day basis. So when cascading bank failures started, there wasn’t a mechanism to stop them.
That time has passed. The federal reserve has the ability to stop them, witness the Great Recession did not become the Great Depression II, which is what it would have been in Von Mises day.
So “the system” is much more stable today, but deeply unfair. Because there is no checks upon the often fraudulent business practices of elite bankers. They just get richer while the rest of us struggle.
So I am confident there won’t be an economic collapse. What there will be is ever increasing division amongst the masses, and ever greater frustration as the masses realize how powerless they really are.
Oh, sorry, didn’t know you were roped into the Hayek thing.
Here’s the difference: Banking collapses happen because cascading failure of interdependencies happen faster than the judicial system can reorganize bankrupt institutions and individuals. That was the problem in the old days.
Today, the Fed can provide liquidity to banks to get them through the worst of it, and give the system time to deal with the necessary bankruptcies. That’s the upside of not having a gold backed monetary system and modern computer systems.
What the fed did was exchange cash for damaged, illiquid assets so that banks could meet their obligations and used market ops to reduce the FFR to ensure banks could get money as needed. It worked. And always can because the Fed has infinite resources (something Von Mises could have never conceived of).
Now, I disagree that the Fed necessarily kicked the can, but I do agree that the Fed has left a lot of zombie borrowers and banks afloat. And these people and organizations need to be run the bankruptcy treadmill to free up resources. Obama would never have done that, maybe Trump will (though I’m not holding my breath).
Kent I disagree fully that us masses are powerless History tells us otherwise
Well, you have to consider the circumstances that would cause you to march with people of other races, classes, religions and political parties. As long as the people can be divided, they are powerless.
Agree; the FED and other central banks may produce the impression of more stability in the short run because they are papering over all the problems, and none of the financial criminals and clueless speculators that would normally go bankrupt have to pay the price. “See, no problem! Home prices / stocks etc. will rise for ever! Just trust the FED!”
But in the longer run it strongly increases instability, the problems have become far too big to solve. When this bubble pops, it might take the whole worldwide financial system with it (I don’t think they will ever stop printing, crack-up boom is the most likely outcome).
I agree, and the Fed is a private, repeat private, banking cartel.
Our Founders, through Alexander Hamilton, did establish a 20 year charter for the ‘First Bank of the United States’ in 1791. Congress wisely chose not to renew the charter in 1811, and in the next year, Britain declared war on the USA. In 1816, Congress again established a 20 year charter for the ‘Second Bank of the United States’, but when it expired, Congress, led by President Jackson, did not renew the charter.
One hundred and four years ago, the Fed was created, but without any time constraints, and President Wilson gave the keys to controlling our nation’s fiat currency to the global banking cartel that is manipulating our economy.
I reckon that was a fuc#ed up turn of events, and the dollar should be controlled 100% by the US Treasury. If Treasury was in control, theoretically speaking, the citizens could institute changes every 4 years.
President Trump did request to have a large portrait of Andrew Jackson displayed in the Oval Office, but I won’t hold my breath waiting for him to sign an Executive Order that would return control to his authority under Treasury.
“Von Mises grew up in an era where there was no transparency and insights into bank lending on a day to day basis. So when cascading bank failures started, there wasn’t a mechanism to stop them.”
Nope, missed. Bank examiners knew very well what was going on.
“Here’s the difference: Banking collapses happen because cascading failure of interdependencies happen faster than the judicial system can reorganize bankrupt institutions and individuals. That was the problem in the old days.”
Missed again. The credit freeze is asymmetrical. The victims are always known in advance. None of it is ‘organic’, nor accidental.
Kent, if you don’t think the American people cannot come together with stunning suddenness, I suggest you read up on what happened in the U.S. in the days after Pearl Harbor.
Revolutionary situations create their own dynamic and often seem to appear out of nowhere though the forces behind them have been building up for many years. As Trotsky said, ” A revolution seems impossible until the day finally comes when it seems inevitable.”
As I think. it would start with massive demonstrations in all major cities over intolerable economic circumstances , massive unemployment, homelessness and actual starvation. At this point if the government takes action to ameliorate things and introduce reforms, the situation can be defused. Something like this happened with FDR. But if government troops fire on and kill demonstrators on a large scale, then an irreversible revolutionary step has been taken and all hell will break loose. The American people, especially the working class are very well armed. Arms caches will be broken into and strong places taken. The police everywhere will be overwhelmed and the rank and file officers will soon join the rebels with whom they have pretty much everything in common. Unity will be enforced with an iron hand. Openly opposing the insurrection will put your life in grave danger; even being insufficiently enthusiastic will be dangerous. Millions of people will gather together and march on Washington armed to the teeth. The Armed forces will be summoned but the enlisted men will refuse to fire on the American people. The military will split on class lines and the rank and file will join the revolution while the officers flee for their lives. Once this army of the people reaches Washington, Congress and the President and anyone in line will be forced to resign or face certain death. I am not sure how it goes on from there but I am sure the original revolution will be a main model for the new society.
Personally I think there has to be a collapse. We have reached peak everything including stupidity and arrogance. To little real investment opportunity and way to much risk taking just to survive.
This will not end well
The consumer hasn’t given up spending as much as the retailer has given up at controlling costs?
Relatively impossible to control costs when everything is leveraged.
Cheap money leads to malinvestment. The same syndrome that made the early 2000s housing boom possible. So now we deal with the results of too low for too long. And judging from the article, a lot of sectors got in on the action.
sure, if I look around in my country it is really difficult to come up with significant sectors of the economy that are doing well and that do NOT depend on the Ctrl-P of central banks and governments (endless subsidies etc.). Most that is left is financialized economic activity, zombie companies and government spending (most of it totally useless, just to cater to all the entitlements of the public).
If the easy money ever runs out, the economy will crater; there will be almost nothing left.
I’ve always wondered which crisis would materialise first: the financial depression, nuclear war, or the environmental collapse. Perhaps if we wait long enough, they shall all come at once!
There is a company that has prospered from this, and their stock is up almost 40% in the last year. Houlihan Lokey Inc.; ticker symbol HLI.
Debt restructuring in Europe won’t see an upturn until the ECB stops pressuring rates below zero. Lots of big zombie companies are thriving here thanks to cheaper than free money from the ECB. Draghi does a great job in keeping all the malinvestment out of sight ;-(
For smaller retailers it is often a slow grind: you can see some of them moving to cheaper premises from time to time – which is easy because more and more stores are abandoned and at least for a limited time even the best locations can be cheap now. But lower rent doesn’t mean more profits, because sales and margins have been under pressure for years except in sectors with strong government subsidies like healthcare, elderly care, many activities tied to the housing market and ‘green energy’ (unfortunately those are often scams).
Maritime/shipping isn’t exactly a distress candidate over here, on the contrary. They are mostly building ships for the 0,001% ($ 100 million yachts etc.) and business is thriving like never before. If those companies go bankrupt that would be a sure sign that the e-con-omy is finally getting back some sanity.
It surprises me that not all experts are flocking to sovereign debt restructuring: there are huge opportunities there and the bill always gets paid (by the taxpayers). Or is this business sector somehow the private domain of Goldman Sachs?
Well, Carl Incon, John Snow, Dan Quayle, and assorted “private equity” raiders should make a killing…again. Look what happened to Anchor-Hocking…Lancaster never recovered and has one of the highest drug problems in the nation. Look what happened to Eastern Airlines, took Miami 25 years to recover…MIAMI for heavens sake.
Lets just scrape and burn what is Left of America and give these guys all the money and get it over with.
The human specie has reached a lot of limits. A lot of countries don’t manufacture anything and relies on housing bubble to keep dead economies alive. It also seems that we reach a limit in term of technological innovations. Not new innovation are happening. Look at the failure of google classes and failure of 3D virtual reality. 3D innovation seem to have stop to a halt. Too many people on earth creating natural resources depletion. SO no surprise of seeing a bankrupts economic system is grinding to an halt.
Loot at Shenzhen district. You will see there is no new innovations coming out. Only modifying what is already existing.
https://www.youtube.com/watch?v=SGJ5cZnoodY
Told the same stuff to Dobbs nightly when he was still slumming CNN.
You could see it coming a dozen years ago much like how it looks now right before gravity devastation commences!
I disagree about VR(virtual reality) being a dud. This Xmas saw a big increase in the number of sets sold. While the software is still very limited, it is a great way to expand tourism, retailing and especially entertainment. I see it as the next big thing.
I read a cool article the other day about a Mexican doctor who is using VR as an anesthetic replacement (too little supply / too expensive). A patient went on a virtual tour of Machu Pichu while she had some piece of cartilage removed from her leg– it required a large incision and the only thing that was used was local anesthetic and she said she barely noticed anything at all.
Pretty cool.
Very believable
Distraction is always quite a good antidote for pain.
Maybe not a complete antidote in all cases, but very helpful in most. Watch a movie, go for a walk ( if possible ) listen to music, whatever works for a person.
Distract yourself from your pain and you’ll be glad you did.
SnowieGeorgie
I agree with your observation, but I don’t think the lack of innovation is due to any hard limits. It is due to an economy and political system that rewards parasites and con artists instead of innovators and risk takers.
Important innovations both in science and technology often come in waves (lasting many decades). And often a crisis/depression is necessary to give new technologies a chance against the established industry molochs that kill all innovation together with their friends in the government. I see much of the same in science, there were never more scientific publications but most of it is crap, “fake science”, only serving the existing dogma and financial interests behind the scenes.
We haven’t had a real economic purge for many years; it’s about time, it will be very healthy except for most of the parasites that need to be flushed out of the system. There are many radical concepts waiting for their chance to change the world but in the current conditions they don’t stand a chance.
You want to see limits? Visit India.
Then watch Peak Prosperity (the video) by Martensen
Once things get to this point doubling happens in a heartbeat
Long-pending economic crisis due to idiotic central bank and government actions to be blamed on Trump, Brexit, anti-EU and populist/nationalist movements in general in 3, 2, 1…
Watch for it.
Sorry, a little late.
We, of course, can only blame Trump, Brexit, and anti-EU populist/nationalist movements for all these bankruptcies!
The blame goes to heritage and tradition.
Ignorance is part of our social culture
Only a few are really capable of seeing outside the box they were born in and they are almost always outcasts constantly ridiculed.
Restructuring my help the little guy but to help my blue box employer a strategic redirection will be required?
Its a retail wasteland and its more than a couple or even several large tracts of land, we are talking 100’s of stores?
Roller disco or indoor electric go-kart franchises; we will have the space.
People should spend less time with machines and more time with family. Life is too short to waste.
Please free hank Paulson!!!
Apple is tech something plus a lot of brick & mortar.
Amazon is tech something plus brick, weather it is 100 yards,
or 100 miles away from you.
Xfiniti, AT&T, Verison are tech something plus brick to sign
you on monthly rent. To be closer to the consumer.
Walmart, on the other hand, is retail something plus tech.
So are most other retailers like Macy’s etc…
The double system is very expensive, unproductive and
unprofitable in the long run.
They all revert to the mean. Total retail might contract.
Cheaper space, after a while, will attract more tech companies
in order to avoid cyber attacks that can shut down their orders
flow, or troubles with the shipping & delivery companies.
There will be a shrinkage in commercial RE, but the empty
space might be filled with new retailers, or it will be
used to convert them to new housing units, or something…