This quarterly survey is targeted at workout banker professionals from the most prominent banking institutions in the region. It gathers their views on restructuring trends, solutions implemented and future expectations. This first edition of the survey presents the collective outlook of 42 workout bankers from more than 20 countries in the CESA region and Austria.
In brief
Businesses globally have faced numerous market headwinds this year. In July 2022 EY-Parthenon published an analysis of the interconnected impacts of money, energy and supply issues and how businesses address these three dilemmas. These “trilemmas” embody most of the external pressures currently facing companies across sectors and are a useful starting point for businesses that wish to identify pressure points, manage downside risk and seize opportunities.
In the CESA region, these pressures have been exacerbated by geographical proximity and often strong business links to the Ukrainian, Belarusian and Russian markets.
Our survey results indicate increasing trends in restructuring activity both in 2Q 2022 and 3Q 2022. The key drivers stated include the ongoing impact of the war in Ukraine, which exacerbates supply chain disruptions, and inflationary pressures driving up both direct and indirect costs, with rising energy prices at the forefront. Furthermore, businesses are weakened by post COVID-19 conditions, with their liquidity headroom often depleted, and/or required to repay related government-backed loans in addition to their original debt. This view is consistent with the EY-Parthenon team’s market observations and our current experience of restructuring transactions.
A two-thirds majority of respondents expects most new restructuring cases to occur in the first half of 2023. The key drivers include the need to agree on new energy purchase prices, as most companies’ energy contracts were fixed by year-end 2022. They expect market challenges to fully manifest themselves in companies’ financial performance in 12 to 18 months, compounded by the end of state-driven COVID-19 related moratoria. Additionally, new annual financial reports available in the first half of 2023 will be used by bankers in their credit assessments. Expectations are that these are likely to deteriorate.
In Q2 and Q3 2022, the sectors experiencing the greatest number of restructuring cases were agriculture, automotive, construction, manufacturing, real estate and retail.
Specific to the agricultural sector in Ukraine, stated pressures were related to blocked seaports reducing the ability to export production, war damage to land transport infrastructure and company assets, increasing logistics costs, plus inaccessible assets and inventory located in occupied territories. In addition, significant migration from Ukraine combined with reduced purchasing power led to a decrease in domestic demand.
Other sectors were negatively impacted by dramatically rising prices of energy, fuel, raw materials, construction materials and logistics in general. Deteriorating consumer sentiment and reduced disposable income have negatively impacted demand, especially for non-essential goods. Some sectors also faced significant labor shortages.
An out-of-court consensual amend and extend restructuring was the most common solution, identified by 34% of respondents. This preference for this option is explained by the fewer negative consequences it presents for banks. In contrast, an amend and extend with debt for equity (or debt-equity) swap or write-off solution has significantly more negative impact on banks and consequently, this was observed by less than 6% of respondents.
The solutions also frequently involved new equity from existing shareholders and asset sales (10% and 9%) and new debt from existing lenders (7%). Insolvency (9%), debt sale (6%) and refinancing (6%) made up the remainder of the list.
Surprisingly, the operational turnaround option was used in around 3% of cases. Given the market challenges applying pressure to costs, more cases of operational turnaround may be expected in the future.
Borrowers needed to present a credible business plan that forecast financial performance based on well-substantiated assumptions. This was the most important aspect identified in enabling successful restructuring, with financial forecasts essential to any restructuring deal as the basis of solution terms. However, considering growing market turbulence, forecasting will become increasingly challenging and working with scenario and case analyses will become more important.
A clean debt service payment track record prior to adverse market events (COVID-19, the Ukraine war) is considered the next priority. Of course, the direct impacts of such market events on businesses need to be demonstrated.
Finally, forecasts need to show the capacity to begin repaying debt in the new high-inflation and high-interest rate world. However, increasing market headwinds are likely to require greater concessions from more parties to reach remedial solutions. Therefore, we may expect increasingly challenging and more complex restructurings that will take longer to execute in forthcoming periods.
Most bankers see an out-of-court solution as the preferred restructuring approach. Given impending amendments to legislation implementing the EU Directive on Restructuring and Insolvency, we expect to see changes in the restructuring framework for companies in distress. EY has conducted an analysis of the duration of current restructuring processes in different EU Member States in Central and Eastern Europe. The lengthiest restructuring case proceedings were experienced in Romania and Estonia, now lasting up to five years. In some countries such as Slovakia and Hungary, these proceedings are a new concept and therefore it is difficult to assess their duration in context. On the other hand, debtors are incentivized to keep formal restructurings short, given the deadlines for moratoria on enforcement. In most countries such moratoria will be granted for a maximum period of four months, extendable to a total maximum of 12 months.
EY-Parthenon provides insights into the restructuring market in Central, Eastern and Southeastern Europe & Central Asia and Austria in its first EY Restructuring Pulse survey.