Three Predictions For Turnaround and Restructuring Professionals
The last 18 months have been strange for workout lenders, bankruptcy attorneys, and turnaround and
restructuring professionals. Despite a global pandemic that brought significant shifts to entire industries and workplaces, commercial bankruptcy filings have been eerily low. At the time the global pandemic rocked the United States in March 2020, many bankruptcy professionals expected a “bankruptcy pandemic” to follow soon after.
That didn’t happen.
Instead, three federally-enacted life-saving support programs bolstered troubled businesses. These include the COVID stimulus fund programs, foreclosure moratoria, and relaxed banking regulations. These programs postponed the triggers that typically trip companies into filing bankruptcy. As we attempt to resume “life as normal” and these federal programs expire, many are asking what will happen to troubled businesses and the turnaround and restructuring community.
Here are my predictions:
- There will be a “surge and shelf” in insolvency cases. The COVID-enacted life-saving support programs only masked problems for many companies, and reconciliation of businesses’ debts will soon come due. I expect federal and state governments to continue to extend programs to soften the landing, however, these will only spread out a pent-up wave of activity – they won’t solve underlying problems. I expect to see a surge of new insolvency cases beginning Q1 2022, and a continuation of higher-than-normal turnaround and restructuring volume for the next two years.
- Lenders and borrowers will become more creative to resolve problems. The first remedies insolvent businesses tend to think of are traditional Chapter 11 or Chapter 7 bankruptcy filings. With a wave of new insolvency activity, we will see debtors and creditors exploring alternatives to bankruptcy including out-of-court workouts, state court receivership, and assignments for the benefit of creditors. I also expect many more subchapter V cases and pre-packaged chapter 11 filings.
- Asset sale values will fall. Given the wave of distressed assets hitting the market, recoverable values will decline. This will be exacerbated by inflation, higher corporate tax rates, and reduced market liquidity. This will result in poorer recoveries to creditors and will have downstream effects on the solvency of those creditors thereby compounding the problem. This gives rise to my prediction above that the wave of turnaround and restructuring volume will continue for at least two years.
So what’s a troubled company to do?
Company leaders that are asking how their companies will survive when relief programs expire should take proactive action. First, they should forecast cash to anticipate when shortfalls may occur and consider steps they can take now to mitigate those shortfalls. Second, they should retain the right professionals to help sooner than later. Third, with the professionals’ help (and on their advice for each unique situation) they should begin negotiating with creditors, suppliers, and landlords before missing payments and tripping covenants. Taking these three steps early almost always yields more favorable results.
If you or your clients are concerned about insolvency and are ready to take action to address the challenges ahead, contact Amplēo. Our team of turnaround and restructuring professionals will help you navigate a difficult path and help you make the right decisions for your business.