Was wondering what the outlook is looking like for the distressed/RX market. I know that there are huge maturity walls in 2024/25 and the interest rates aren't substantively dropping. At the same time equity markets are at new all time highs which points to a somewhat rosier view of the market. Wondering what all this means for different groups. Is there supposed to be more RX deal flow, is M&A supposed to pick up, or both.
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Based on the WSO Dataset, the outlook for the distressed/RX market is nuanced. Corporate defaults are currently at historic lows but are expected to start picking up again in the latter half of this year. This suggests that while the market is currently stable, there is anticipation of increased activity in the distressed and restructuring (RX) space as we move forward.
Furthermore, top RX groups are expected to maintain a steady deal flow. This is significant because even in times of market fluctuations, these groups have historically managed to secure deals, ensuring their stability and continued relevance in the market.
Regarding the broader market conditions you mentioned, such as the maturity walls in 2024/25 and stable high interest rates, these factors typically contribute to an increase in restructuring activities. Companies facing high debt maturities may struggle to refinance under less favorable conditions, potentially leading to more distressed scenarios.
As for M&A, it tends to be influenced by different factors, primarily market confidence and availability of capital. The current highs in equity markets suggest that there might be an appetite for such transactions, but this does not directly influence the RX market, which thrives on financial distress and restructuring needs rather than market highs.
In summary, it seems likely that RX deal flow might increase due to upcoming financial pressures on companies, while M&A could continue to be robust if the market confidence remains high.
Sources: Outlook for HL RX, Rx Slowdown? Outlook?, Invest in Evercore Stock?, Request for Restructuring League Tables 2018, Pros & Cons Summary - Post-MBAs in Restructuring (RX) - any regrets?
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Default rates will remain elevated (even if the broader economy stays strong) and we will continue to see out of court restructurings take share from in court. Impact on RX advisory fees is prob debatable, I’d imagine for same size cap structure with all else equal, advisors make less in an out of court RX than Chap.11
Distressed funds put out white papers on this and there’s also Milken panels that cover it.
I think the M&A market will start to pick up. There are more and more deals being announced, and the market is starved for new deals and lbo debt. The leveraged loan market and hy bond market are really strong, but most deals that are getting down right now are repricings, not new money deals. And the few that do come to market get gobbled up. Even single B and triple CCC deals, while fee and far between, get good pricing. I think you’ll see deals announced this summer, with bids due post election, because people want to see who wins first. If Biden wins it will be business as usual, and if Trump wins it might affect the market.
As far as RX outlook, I think it will be a normal to busy year. There are maturity cliff coming and the fed funds path has been pushed out. I remember late last year everyone was saying price cuts by May and still nothing has been cut as inflation has been sticky. So rates will stay high and all these highly levered companies that have been living the good life at 5% bonds will now have to refinance at 10%, and this will cause stress. According the latest sustainability report from the IMF, corporate bankruptcies are up like 20%. But I also think lots of these levered companies got deals done with private credit lenders, and the will come to solutions like PIK toggle or something and both parities will try to avoid bankruptcy.
So overall, market is healthy and I think the outlook is good for both sectors, but won’t be a bonanza or anything like that. And if you work at a top shop, you eat well even in the slow times.
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