No Match Found
The emergence of macroeconomic headwinds in the second half of 2022 may signal bankruptcy and restructuring activity for 2023.
Rising interest rates, soaring inflation and a scale back of government support caused a slowdown in market activity and consumer demand in 2022. These disrupting forces have already impacted various companies with complex, global supply chains, high degrees of operating leverage and inflexible pricing arrangements with customers.
As focus shifts toward capital preservation and cash flow efficiency, a challenging and higher cost borrowing environment and decline in market liquidity are likely to fuel a broad-based increase in bankruptcies and financial and operational restructuring activity in the near term.
Chapter 11 bankruptcies declined slightly in 2022, which had the lowest levels in more than a decade. That trend was less pronounced among larger companies where activity actually ticked up in the later months of 2022.
Despite the reduced number of filings in 2022, the second half started to see a pickup relative to the same period in 2021, with December being the busiest month for filings all year. Based on the studies, this trend is expected to continue into 2023.
Higher interest rates as a result of the Fed’s monetary tightening and the scaling back of stimulus programs. These changes in various instances created an unfavorable borrowing environment and may have a negative impact on consumer spending.
Increased inflationary pressures caused by continued supply chain disruptions, geopolitical unrest, rising wages and higher energy prices. These factors often increase financial stress at companies that are unable to pass along cost increases to customers or significantly improve their own cost structures.
A tightening in credit markets. Leveraged loan and high-yield bond issuances declined 45% and 78% year-over-year, respectively, and yields have more than doubled as a result of the increased interest rate environment. Moving into 2023, more challenging financial conditions will likely require that companies pay more to raise or refinance debt. For the less solvent, prohibitive funding costs or a shunning of risk can heighten focus on the implications of ratings downgrades and credit losses.
While down from 2021 levels, the real estate, retail and consumer sectors again dominated restructuring activity in 2022, together accounting for 48% of Chapter 11 filings volume. Financial services had the most billion-dollar cases.
The pace of healthcare Chapter 11s picked up particularly in the latter half of 2022, potentially signaling more distress in the sector heading into 2023.
The financial services and healthcare sectors combined accounted for seven of the ten largest Chapter 11 filings in 2022. Taken as a whole, the top ten accounted for $82 billion in liabilities, up from last year's $32.5 billion. One reason for the increase: The top two 2022 filings comprise a combined $48 billion in liabilities.
A number of macroeconomic factors emerged in 2022 that have resulted in various shifts in consumer behavior, unfavorable borrowing conditions and operational challenges due to rising costs. Market liquidity has declined and quieted M&A markets are forcing companies to realign their cost structures and focus on capital preservation and organic cash flow generation, according to PwC analysis of Refinitive, LCD and FRED data.
As these macroeconomic conditions persist into 2023, we can expect to see a sizable increase in restructuring activity as borrowers run out of levers to pull and lenders choose not to extend further accommodations.
As 2023 unfolds, we are monitoring a number of sectors we think might face the heaviest challenges.
The automotive industry may be in for a drastic technological disruption over the course of the next decade with the move toward electric vehicles (EV). Along with longer-term headwinds, auto suppliers also face near-term operational challenges related to the semiconductor chip shortage affecting light-vehicle production globally, margin contraction due to inflationary cost pressures and increased capital costs resulting from rising interest rates. Tier 1 suppliers in particular are facing the squeeze from original equipment manufacturers’ (OEM) cost pressures, additional technical requirements, lack of accurate platform volume forecasts, shortage of labor, supply chain issues and increasing capital costs. OEM’s have been generally reactive to distress within their tier 1 supplier base. To assure continuity of supply, car manufacturers have been providing pricing and liquidity accommodations only after their suppliers show critical financial distress. We expect this trend of reactive accommodations to continue into 2023 until some of the underlying macroeconomic triggers stabilize.
The sector is facing margin pressures from rising costs driven by inflation and inventory/supply challenges along with declining consumer sentiment and spending on nonessential goods and services. While a return to normalized inventory levels and alleviation of supply chain backlogs can help improve margins, elasticity of price increases and the ability to pass them along to the end consumer remains unclear. Inflationary pressures from labor force shortages, rising commodity prices, and higher packaging and freight costs are likely to remain — which will likely continue to pressure profitability.
We expect continuing restructuring activity throughout FY23. Crypto winter’s hit to asset prices and the fall of certain large crypto natives have often undermined what every financial system depends on: trust. Until trust can be reestablished, digital assets will likely fail to reach their potential and won’t likely offer profitable value to certain businesses.
As the temporary safety net measures of governmental support provided during the pandemic recede, healthcare organizations are confronting increased reliance on third-party systems and service providers, cost pressures and an increasingly complex, evolving regulatory environment. Supply chain issues and labor shortages are likely to challenge providers financially. For example, prices for personal protective equipment (PPE), infrastructure and staffing (such as nursing) have risen. The senior care subsector is also likely to be challenged as the trend of seniors looking to home health and other alternatives versus traditional assisted living facilities continues from the fallout from the pandemic.
Companies with complex, global supply chains and inflexible pricing arrangements will likely continue to face challenges in FY23. A persistent market environment of inflation, rising energy costs and heightened geopolitical risk can have an impact on a broad swath of companies as well as their available strategic options.
The pharmaceuticals and life sciences industry faced a challenging year of record low IPOs, retrenchment of venture funding and falling share prices that are not expected to reverse in the near term. While desirable assets and promising sciences can continue to help attract investors and market premiums — and there will likely be winners and losers in M&A — higher risk sectors such as biotech with early-stage compounds will find fundraising opportunities more challenging. In the medtech sector, which just experienced one of its most difficult years in terms of capital market performance, some companies will likely be challenged as they deal with macro headwinds from supply chain uncertainty and the slower rate of medical device approvals by the Food and Drug Administration (FDA).
In any period of economic uncertainty there are both real estate winners and losers. We expect that newly constructed and redeveloped assets will likely win out, while older and undeveloped assets experience headwinds. However, these headwinds repeatedly provide the impetus for innovative ways to help redefine and repurpose under-performing assets.
For instance, one developer recently pivoted a New York City residential project into a plan to build a convention and entertainment district. The ability of landlords to pivot in this way secures future relevance of their assets and can also help provide economic stimulus for tenants, including those operating within the hospitality and retail sectors. The early consideration of alternatives — such as redevelopment — can be key to helping real estate firms weather volatile market conditions.
Turnaround and Restructuring Leader, PwC US
Partner, PwC US