While liability management exercises (LMEs) have allowed companies to stave off bankruptcy, a majority of restructuring and turnaround professionals believe these maneuvers over the past 12 months did not provide the necessary runway to enact an operational overhaul, according to a survey by global consulting firm AlixPartners.
Of the roughly 700 respondents to the 19th Annual Turnaround and Transformation Survey, including lawyers, investment bankers, lenders, financial advisors and other industry executives, 54% said that over the past 12 months, LMEs did not grant sufficient time and flexibility to resolve fundamental issues, while 43% argued LMEs provided a temporary runway to improve operations and the remaining 3% believed LMEs provide a “permanent fix.”
“There is speed incorporated in LMEs — a desire to do things with as little friction as possible,” said Eric Koza, co-head of the turnaround and restructuring services practice of the Americas at AlixPartners. “In many of these cases, LMEs get done without a focus on the left-hand side of the balance sheet and a focus only on the right-hand side of the balance sheet.”
“We think in order to provide a bridge to somewhere versus a bridge to a near-term restructuring, you must fix the business and the assets in combination with an LME,” Koza added, attributing the preponderance of LMEs to management teams who were accustomed to a world with “very low to almost zero interest rates.”
AlixPartners believes this current cycle of distressed and restructuring activity will last 2-3 years, Koza said. Survey respondents said this cycle was caused by the availability or cost of capital (33% chose this as the top factor driving distress), geopolitical disruption (25%) and inflation (15%).
Turning to other timely topics, respondents noted the rapid advances of artificial intelligence, with 62% of participants saying this new technology could aid distressed companies.
“If sponsors believe the business has a future, one that can capitalize on the benefits of AI and the change in the business model going forward, capital is going to be available,” Koza said.
Focusing on industries, respondents were also asked to pick three sectors most likely to face distress in 2024, with the top three being commercial real estate (57%), retail (41%) and automotive (34%).
Featured image: Peter Dazeley/Getty Images
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