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Restructuring market rolls up its sleeves
Challenges facing the energy, shipping, and retail industries
The restructuring market has been tumultuous during 2016. This year saw many filings within the oil & gas sector, as well as several high profile shipping and retail filings. Through the next six to 12 months, continued activity is expected in the energy, shipping, and retail industries as we face uncertainty related to global markets, political changes, and technological disruption.
Restructuring market rolls up its sleeves
By Kirk Blair, national leader, Corporate Restructuring Group, Deloitte Financial Advisory Services LLP
Changing global economic conditions and geopolitical landscapes will no doubt have an impact on many sectors.
The restructuring market experienced a “rough and tumble” first half of 2016, marked by numerous filings in the oil and gas sector. While the market doesn’t appear to be out of the woods, uncertainty related to global markets, political changes, and technological disruption may overshadow near-term discussions regarding energy prices.
High profile shipping and retail filings continue to make restructuring headlines, while companies across many sectors are challenged by slow growth in the US and abroad, as well as the potential rise in borrowing costs.
Commercial bankruptcy filings rose 21 percent in October 2016 over the prior year, the twelfth consecutive month of such increases (ABI Institute/
When will oil prices turn around?
Over the past 22 months, ending October 2016, approximately 105 North American oil and gas producers filed for bankruptcy according to statistics compiled by Haynes and Boone 3. The filings represent nearly $70 billion in debt. The question confronting energy companies, is when oil prices will turn around? Mid-November oil futures have traded around $45 a barrel; well below the $60 that many industry executives believe will kick-start investment.
Industry executives expressed a cautious but optimistic 2017 outlook, according to Deloitte’s Center for Energy Solutions 4 mid-2016 oil and gas industry survey 5. Optimistic respondents believed that stronger US GDP growth, 2 percent to 3 percent, would provide upward pressure on oil prices. Yet late in the year, the commodity continued to be weighed down by abundant supply and a strong dollar.
Contraction and oversupply in the upstream segment have led to similar issues in the midstream. Recent bankruptcy court developments exposed a weakness in traditional fee-based midstream contracts, leaving them at risk of being renegotiated or challenged in court, the Deloitte report said.
Batten down the hatches 6, a Deloitte Restructuring Service 2016 Outlook 7
“The international shipping industry has been in decline since the financial crisis. This period has been characterized by increasing costs, overcapacity and a lack of liquidity. This trend looks likely to continue, intensified by current market conditions including Britain’s decision to leave the European Union, the slow-down in China and recessions in natural resource economies such as Brazil and Russia.”
Depressed vessel values have impacted asset-based borrowing bases and access to capital. Oversupply continues to be problematic as larger and more efficient vessels enter the market, and owners remain reluctant to retire older ships due to low scrap metal prices.
Adapting to a new environment
While Amazon shined in 2016 with a string of record quarter profit reports, long-established brands felt the pain of lower sales. Those retailers who have invested in their omni-channel capabilities, by partnering to resolve last mile issues and have rationalized their real-estate portfolios through smaller stores and store closures hope to stay competitive in a quickly evolving marketplace. Even with these actions, retailers from apparel to grocery stores have experienced bankruptcies and liquidations this year, including Sports Authority, Aeropostale, and American Apparel.
Structural changes impacting the retail industry have forced traditional operators to confront shifting consumer preferences and buying patterns. 8 New market entrants utilize more flexible business models and leverage technology to connect with consumers through online and mobile channels. Customers are not only expecting consistent prices across retailers, they are looking for flexibility in fulfillment, in near real time. Retailers who fail to adjust their pricing, merchandising and inventory strategies accordingly risk lost sales, excessive inventory costs, and a hit to the top and bottom line–adding to the distress. We expect to see further attrition for those organizations not up to the challenge.
Organizations will need to be more nimble in the coming months and adapt rapidly to changing economic conditions. Shifts in global economies and geopolitical landscapes will no doubt have an impact on many sectors. Technology and the pace of innovation will continue to be a market disruptor, creating new solutions and reducing traditional barriers to entry. While opportunities exist for those who can adapt, organizations on the margin may face challenges. These market dynamics will likely result in a busy restructuring market.