With market liquidity driving M&A to record levels, bankruptcy and restructuring activity likely will be limited.
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.
Low interest rates and a favorable borrowing environment as a result of the Fed’s supportive monetary policy and various asset purchasing programs.
Substantial direct government support through the various COVID-19 relief packages accounting for more than
Record setting M&A activity with deal volumes increasing
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.
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.
Turnaround and Restructuring Leader, PwC US
Partner, PwC US