The Examiners: Perry Mandarino 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?

There’s no question that Chapter 11 filings have decreased substantially given the sustained favorable financing environment supported by the Federal Reserve’s accommodative monetary policies and subsequent healthy demand for corporate debt among investors. However, despite the decline in bankruptcy volume, corporate restructuring activity has remained healthy, especially in certain sectors like retail and health care. Management teams have more alternatives and market activity reflects an increased emphasis on attaining earlier and faster outcomes.

Stakeholders are looking to management teams to implement turnaround plans earlier.  They are demanding solutions to operational issues and they have very little patience for prolonged Chapter 11 processes. Rather, they are looking to implement plans that lead to concrete improvements in shorter time frames. Simply put, the economic owners are willing to pay for success, but not for process. As a result, restructuring activity has become more transactional in nature. I believe debt-to-equity conversions may continue to occur at a more rapid rate.  Traditional debt holders, who may not be natural owners, recognize the potential for value creation and are unwilling to allow junior creditors to share in the upside.

Lenders are also willing to provide extensions and covenant relief on debt payments and maturities as long as progress on the turnaround is evident. They are providing breathing room to companies commensurate with management’s ability to deliver solid business plans and tangible progress in achieving growth. At the end of the day, it’s all about finding the most effective paths to surfacing value and opening up liquidity in the market.

All of these activities point to a healthy but evolving market for corporate restructuring activity. Drawn out Chapter 11 cases littered with inertia are in the rear view mirror. Restructurings, in or out of court, can be utilized as an effective corporate finance tool to help achieve results and lay a foundation for growth.

Perry Mandarino is the U.S. Business Recovery Services leader for PricewaterhouseCoopers, based in New York.