The Examiners: Carol Flaton on the Outlook for Corporate Restructuri...

Interest rates that remain near zero and debt maturities that have been pushed out to 2017 and 2018 have helped drive Chapter 11 filings to historic lows. Has this difficult environment put corporate restructuring on life support?

To an industry that is inherently cyclical, the monetary policies pursued over the past few years seem to have deferred the next cleansing cycle. But unless there has been a significant change in risk taking, there will certainly be one. It is also debatable whether this deferral will exacerbate the magnitude of that next cycle. We’ll just have to wait and see.

But that is not the only thing going on here. As all good capitalists will tell you, supply-and-demand dynamics abound in the restructuring market. After the highly profitable (for distressed investors and advisers alike) cycles of 2001-2004 and 2009-2011, more resources—financial and intellectual capital—are pursuing fewer distressed opportunities. While these efficient market forces may have reduced returns and profitability in the sector, they certainly have not eliminated the distressed industry. As long as companies continue to take risks to grow and provide returns to shareholders, there is some probability that things won’t go as planned and that a restructuring may ultimately be needed.  Even the presence of sophisticated investors with deep distressed experience—who have enabled more out-of-court resolutions and weakened the reliance on Chapter 11 filings as an industry barometer—has not done away with the need for restructurings.

While overall restructuring activity might look anemic by historical comparison, there are still plenty of vital signs. Companies with outmoded business models, shifting customer demographics, commodity reliance or heightened regulatory compliance, to name a few, are examples of situations where we are beginning to see restructurings. Even within the comfortable confines of a covenant-lite, long-dated capital structure, companies that cannot stabilize or set their operations on a growth trajectory run the risk of serial underperformance and running out of liquidity, ultimately never growing into their capital structure. With the runways afforded them by the current capital markets, these companies have the opportunity to effect operational turnarounds now and, if successful, avoid the otherwise-looming balance sheet restructurings.

Carol Flaton is a managing director of Zolfo Cooper, a global financial advisory and interim management firm, and is based in New York.