Restructuring

Favourable conditions for financial restructuring

The outlook for the domestic economy in 2024 appears rosier than many would have predicted. Despite some recent softening consumer spending remains buttressed by record migration, a defiant housing market and a bull run on global share markets. Global and domestic inflation are easing and the Reserve Bank has paused its monetary tightening strategy, having perhaps pulled off a seemingly improbable ‘soft landing’. Labour is easier to attract and retain, and post COVID supply chain disruptions have largely abated (domestic port and Red Sea related challenges aside).

Despite the improved economic outlook and prevailing market optimism, we predict many businesses will need to finally face up to excess leverage and unsustainable legacy debt over the next 12 months.

ATO recovery activity on record arrears continues to pick up pace and conventional theory supported by latest inflation and retail sales data tells us the full impact of 13 consecutive interest rate rises over the past 18 months is starting to really bite. Fitch Ratings are forecasting corporate high yield and leveraged loan default rates to rise in 2024 by 50bps (3.5% to 4.0%) and 200bps (5.0% to 5.5%) respectively. We believe we are only now seeing the beginning of the fallout.

There is a silver lining. Businesses with decent prospects but for excessive leverage and/or unsustainable legacy debt (the historically rare ‘good businesses with bad balance sheets’) are well-suited to successful restructuring outcomes. We are already seeing an uptick in the use of the safe harbour regime, consensual debt restructure, solvent schemes of arrangement and deeds of company arrangements to facilitate balance sheet rehabilitation.

Whilst we expect insolvency numbers to be elevated throughout 2024, we also anticipate a significant increase in the number of large businesses able to restructure solvently. Candidates for these processes would do well to engage early with their advisors to understand their options.

More from the author, Partner Keith Crawford

We are now entering a significant turning point as the impact of consecutive interest rate rises is yet to be fully realised, and with ATO recovery activity already picking up pace. Many businesses will need to make tough decisions in 2024.

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