The expected spike in bankruptcies and restructuring cases is global.
The dramatic destructive effect of Covid-19 on the global economy has led to a sharp decline in mergers and acquisitions activity so far this year, in a trend that is expected to continue.
Similarly, the ongoing demand shock, supply disruptions and negative economic outlook have led to a decline in foreign direct investment, accelerating the steady decline of FDI flows over the past five years. OECD predicts that FDI flows will fall by more than 30% in 2020, even under the most optimistic scenario of successful public health and economic policies. Consequently, analysts predict a wave of bankruptcies and debt restructurings, especially among highly leveraged companies. From J. Crew to Hertz, many household names have already announced bankruptcy filings or debt restructurings. In the US, Chapter 11 filings, a legal corporate tool to restructure corporate debt, rose 26% in April from the previous month.
Financial institutions and other advisory firms are adjusting quickly to this new reality by shifting resources. While merger specialists have flourished in recent years, many restructuring teams have shrunk as a result of a decadelong economic boom and the lowest levels of bankruptcies since the peak of 2009. During that year, 91 large US public companies filed for bankruptcy.
Several leading international law firms, such as Latham and Watkins and DLA Piper, have expanded their restructuring teams during the pandemic in response to market demand. Chicago-based international firm Kirkland and Ellis recruited two retired bankruptcy specialists who previously worked for the firm to rebuild restructuring capabilities.
The expected spike in bankruptcies and restructuring cases is global. From the European Union to the Asia-Pacific region, corporate executives and advisors see a dramatic rise in restructuring and the need to allocate new internal and external resources to support it. The Euler Hermes Global Insolvency Index predicts a 19% increase in insolvencias compared to last year.
Distressed-debt buyout funds have already expressed a strong interest in Australia, as well. Recently announced deals include KKR’s $1.1 billion majority stake in Colonial, the wealth management unit of Commonwealth Bank of Australia. Leading risk management and financial advisory firms, such as Duff and Phelps, have announced the significant expansion of their restructuring group in the region. Among the target sectors are retail, hospitality, tourism, leisure, car dealerships and commercial real estate.