The worst may be over for companies carrying precarious debt—at least for the time being.
When the pandemic began, Debtwire began tracking 340 at-risk businesses and scanning the horizon for events that could potentially trigger restructuring scenarios, from upcoming debt maturities to interest payments, forbearance expirations and liquidity shortfalls.
Back in March 2020, as lockdown conditions were first imposed, fewer than 50 companies made the watchlist and these were largely energy sector issuers (37%) and retail businesses (10%). By July, the watchlist had grown fourfold to 201 names.
What should companies be doing to cope with this restructuring roulette?
1/ Stay positive—the numbers are trending down
Since that initial surge, the picture has become far rosier. The turning point came in Q4, when the list began shrinking. It now sits at 104 companies, a 48% drop from the July 2020 peak. The biggest reasons for this about-turn include:
- markets that are hungry for loans and bonds, allowing even the most troubled businesses to refinance;
- lenders that have been willing to amend credit agreements and extend maturities, buying issuers extra headroom and extra time; and
- an economy that is whirring back to life after going into hibernation—the recovery of revenues and earnings means that borrowers are better able to meet their liabilities.
2/ Stay cautious—we’re not out of the woods yet
As the year progresses, this watchlist should continue to shrink, but there are caveats. Energy continues to represent the bulk of potentially exposed issuers (29%), which should come as no surprise given the fall in demand last year and the tectonic shifts occurring in the transition to renewables.
But the sector is followed by industrial products and services (12%). Industrials is a cyclical sector and stands to benefit from the rebound. However, it is also prone to inflation, a word that hasn't been used much in more than a decade.
The Consumer Price Index jumped to 4.2% in April 2021 year-to-date, up from 2.6% the month before, which is the biggest increase since September 2008, according to the US Bureau of Labor Statistics.
And with record stimulus and raw material supply shortages, many in the sector are concerned about rising costs. Apart from the fact that runaway inflation would encourage the Fed to lift the base rate, adding to borrowing costs, industrial companies need to think about their input costs.
If margins come under pressure from a divergence between costs and revenue growth, some companies could come unstuck amid the recovery. They may well be the next ones to watch.
