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2022 Restructuring Outlook

With market liquidity driving M&A to record levels, bankruptcy and restructuring activity likely will be limited.

Watch the 2022 Restructuring Outlook Feb 8th webcast.

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Easy access to low-cost capital, record high valuations and strong consumer demand are expected to keep restructuring activity low in 2022. The flood of liquidity from direct government support of businesses and the Fed’s monetary policy over the last two years resulted in fewer bankruptcies in 2021 and continue to have a long tail. Private equity dry powder and the capital raised from the soaring number of special purpose acquisition company (SPAC) IPOs are key contributors to the current level of unprecedented M&A activity, which has helped limit restructuring activity. We expect that trend to continue, particularly related to SPACs as their investment windows start closing in 2022.

That’s not to say businesses aren’t facing challenges. Rising raw material costs, supply chain disruption, labor shortages and continued uncertainty from COVID-19 variants are all making this asymmetric recovery difficult to navigate. We expect these challenges will likely lead to pockets of increasing financial distress in 2022. But absent a currently unforeseen catalyst, we don't see a broad-based increase in bankruptcies and restructuring activity in the near term.

2021 in review

Many factors contributed to the sharp decline in bankruptcies

Interest rates and favorable borrowing environment

Low interest rates and a favorable borrowing environment as a result of the Fed’s supportive monetary policy and various asset purchasing programs.

Direct government support

Substantial direct government support through the various COVID-19 relief packages accounting for more than

M&A activity

Record setting M&A activity with deal volumes increasing

Consumer demand

Strong consumer demand driven by consumers who benefited from direct government support, rising wages and constrained spending in 2020.

Another reason for the subdued activity is that the shock from the pandemic essentially pulled restructurings that would have taken place in 2021 forward into 2020. 

The real estate and retail and consumer sectors again dominated activity in 2021, accounting for a combined 53% of the Chapter 11 filings, while healthcare displaced energy in the third spot as commodity prices increased and volatility eased.

The energy and utility sectors combined accounted for four of the ten largest Chapter 11 filings in 2021, including Seadrill Limited, which was 2021’s largest Chapter 11 filing at $7.5 billion. But taken as a whole, the top ten accounted for only $32.5 billion in liabilities as compared to $95.6 billion in 2020, which is a 66% drop year over year.

2022 outlook and sectors to watch

The pandemic brought unprecedented operating disruption to companies and accelerated fundamental shifts in consumer behavior. Direct government stimulus and unprecedented access to capital have assisted companies in managing these forces to date.

Market conditions are providing companies with liquidity and flexibility to bridge through this disruption, but many companies will need to address these fundamental shifts over the longer term through operational transformation and strategic realignments. We think much of that transformation and realignment work remains in front of us, as many companies have been in survival mode over the last two years and haven’t yet turned their focus toward longer-term growth and recovery.

The good news for companies is that the impact of the government’s overwhelming support initiatives should continue to foster a low-cost borrowing environment and active M&A market in the quarters to come. However, in the medium term as government support is scaled back, we expect to see modest increases in restructuring activity.

As 2022 unfolds, we are monitoring a number of sectors we think could be challenged by some of these disruptive forces.

Auto suppliers are facing near-term operational headwinds related to the semiconductor chip shortage affecting light-vehicle production globally. They’re also navigating margin contraction due to inflationary commodity cost pressures and higher factory wages. The prices of iron, steel and plastic resins have all risen substantially. Resin prices are particularly challenging as they’re difficult to index and pass through to OEMs.

As Medicare advances and accelerated payments are repaid and other government support subsidies end, we expect liquidity challenges at some providers will grow, particularly among rural hospitals that lack scale and increasingly struggle to attract clinical talent. Senior living as a category will continue to be challenged as demand has fallen short of the supply boom over the last decade. The fallout from the pandemic has exacerbated this trend as seniors are looking to home health and other alternatives versus traditional assisted living facilities.

Retail will continue to benefit from strong underlying consumer spending, but companies that didn’t act quickly to mitigate supply chain disruption may have found themselves unprepared for the critical holiday season and beyond. In October 2021, retail inventories fell to their lowest level in more than 25 years, and supply chain disruption from COVID-19 and its emerging variants is a key contributor to that trend that could continue into 2022. Higher wages associated with the tight labor market and increasing logistics costs are also pressuring retailers. These forces may keep retail and consumer businesses in the top three most-distressed sectors in 2022 for the 12th year in a row.

Real estate as a sector has seen a strong recovery across most categories. Consequently, in 2022 we expect distressed real estate activity to be concentrated in single-asset or smaller, thinly capitalized holding companies, similar to what we observed in 2020 and 2021. Longer-term, the net impact from COVID-19 on the sector is still to be determined. We are closely watching the office space category, which is being reshaped by remote work trends, to see how changing demand affects the landscape.

Emerging risks from new COVID-19 variants are clouding the recovery timeline for travel and leisure operators. Companies in these sectors face yet another round of government travel advisories, air travel disruptions, border closures, increased testing requirements for travel and a pullback in business travel and events. These forces are hurting international travel operators the most. While the sector overall has proven to be largely resilient over the past 18 months, recent market volatility has highlighted the continued uncertainty that COVID-19 has on the industry and its recovery expectations. Additional COVID-19 disruption could force companies to revisit their recovery plans and funding needs to adapt to this ever-changing landscape.

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Steven Fleming

Turnaround and Restructuring Leader, PwC US

David Tyburski

Partner, PwC US

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