February 19, 2018
By Steve Fleming, US Crisis and Restructuring Leader, PwC Deals
In our recently released paper, Bankruptcy and Restructuring: 2017 in Review and our Outlook for 2018 we examined the following key themes and looked into our crystal ball to try to forecast what might happen in 2018.
1.Bankruptcy filings for 2017 were low, as expected
The volume of Chapter 11 filings with more than $100 million of liabilities fell from 104 in 2016 to 90 in 2017. Filings of more than $25 million in liabilities increased slightly from 175 in 2016 to 177 in 2017.
2. Energy, Healthcare and Retail industries dominated bankruptcy filings last year
While the Energy industry had the most bankruptcy filings in 2017, it was less active in both number of filings and total size from the previous year and we expect this trend to continue with fewer energy bankruptcies in 2018. Healthcare bankruptcies are on the rise with 19 cases over $25 million (a 46% increase in number from 2016) and the potential for more in 2018. Retail filings were at the highest rate since the recession, with 30 retail filings of more than $25 million in liabilities in 2017.
3. Interest rates and leveraged debt are on the rise
Leveraged debt is up with over $2 trillion currently outstanding, however, the current debt maturity wall poses few specific challenges. Interest rate increases were implemented three times in 2017 — the most recent being in December, which raised the target to a range between 1.25% and 1.5%.
4. Tax reform is mostly favorable for businesses but could affect those in distress
The Federal corporate tax rate decreased from 35% to 21% with the new legislation. The reduction will likely help businesses, but could also be problematic because business interest deductions will be capped at 30% of adjusted taxable income, net operating loss carrybacks have been eliminated and a one-time “deemed repatriation” toll charge on a company’s previously untaxed foreign earnings could trigger cash tax payments in the US.
5. The outlook for 2018 is positive
The U.S. is currently at 103 months of continued economic expansion – its third-longest period in history. As a result, fewer large Chapter 11 filings are expected in 2018 as the macro environment remains strong and the number of oil and gas prices stabilize. We expect the majority of restructuring to come in the retail, healthcare and technology sectors due to structural failings and disruption.
Last year was fairly subdued thanks in large part to strong economic indicators. This year is looking to be more of the same with some slight variation in industry activity. To get a more in-depth view of what restructuring was like last year and what’s in store for this year, review our report, Bankruptcy and Restructuring: 2017 in Review and our Outlook for 2018 for more information and don’t hesitate to contact us directly for more information.