Little room for error, as conditions remain challenging

Macroeconomic conditions will remain challenging across many sectors. As input costs increase, additional interest rate rises are expected in the year ahead which will likely have a dampening effect on consumer sentiment and spending. These factors, combined with regulatory reform in certain sectors and possible geopolitical impacts on trade, will drive elevated levels of distress. Structural challenges in the economy, including the energy transition, will also contribute to increased restructuring activity.

The growth of private capital in the Australian economy, including both private equity and private credit, has led to higher levels of leverage. As a result, the room for error for business underperformance is severely limited.

In recent syndicated matters undergoing restructuring and involving a mix of traditional bank lenders and credit funds, debt has traded into the hands of credit funds that have taken a more activist role in restructuring situations. We have also seen lenders providing additional funding to support longer solvent runways and turnarounds.

Role of government in sectors of national significance

Governments are becoming more involved in large-scale restructuring matters, particularly in sectors and resources identified as being of national significance. As the machinations of government policy change, we will continue to see structural reform and resulting distress. Providers under the National Disability Insurance Scheme (NDIS) for example, are already under significant pressure. Heavily regulated sectors such as gambling, energy, healthcare, and the construction industry, will continue to raise public interest concerns that require government involvement.

Restructuring environment remains positive, if businesses are proactive

Amidst these challenges, the restructuring environment remains favourable. Since the introduction of the safe harbour regime in 2017, company directors have leveraged this personal liability defence and taken steps to negotiate with their stakeholders. In our view, this has mitigated circumstances that would otherwise have created higher levels of corporate insolvency in Australia.

The general availability of capital has meant there are more liquidity options available for ‘good business, bad balance sheet’ situations.

The growing presence of private capital in distressed situations will continue to impact negotiations—as providers are typically willing to deploy funds, or convert to equity-like instruments, to support favourable restructuring outcomes.

Sophisticated boards, management teams, capital providers and advisors are well-positioned to work through challenging situations in 2026 and preserve enterprise value. Companies that can recognise challenges early and develop proactive turnaround plans will be able to find support from existing lenders, or new capital if necessary.

Key actions to take

• Act early – engage with your stakeholders at the first signs of distress.

• Seek advice – lawyers, financiers and restructuring professionals can advise on Safe Harbour protections. Input from your stakeholders and advisers can preserve options and improve outcomes.