The Examiners: J. Scott Victor on the Outlook for Corporate Restruct...

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?

Corporate restructuring isn’t on life support, but Fed policy and the resultant low rate environment have induced a coma that has the restructuring industry wondering when it’s going to wake up. Chapter 11 filings are subject to several market forces but the volume of inexpensive capital and the increasing number of capital providers have had an impact by enabling corporate borrowers to access a liquid credit market. Borrowers have been able to refinance, curtail debt service and extend maturities through many sources, including banks, hedge funds, junk bond markets, publicly traded business development companies and indirectly through CLOs.

Restructuring activity stalled in recent years as corporate management teams repaired income statements by reducing costs. Rationalizing the cost structures throughout the recession allowed companies to remain profitable despite stagnant revenue in the economy overall. Banks have aggressively targeted their problem loan portfolios, leaving workout officers with fewer opportunities to engage restructuring professionals. This approach by the banks is good news for everyone else because it will eliminate the financial overhang that plagued Japan and Europe after their banks’ head-in-the-sand approach to prior recessions.

I don’t expect restructuring activity in the middle and large corporate market to bounce back for a while due to the far off maturity “wall” and my belief that the Fed will handle the inevitable increase in interest rates in a measured way. Any activity will be more weighted to the lower end of the market where liquidity issues and covenant breaches typically drive restructuring. Smaller companies are less able to withstand interest rate increases and may be forced to pursue restructuring options sooner. While rumors of the demise of corporate restructuring are greatly exaggerated, the outlook for the industry, including new Chapter 11 filings will remain unresponsive for the near term.

J. Scott Victor is a founding partner and managing director of investment banking firm SSG Capital Advisors LLC and a member of the Turnaround Management Association’s global board of trustees.