Brexit cited as top macroeconomic factor likely to fuel European restructurings in 2019

Brexit is the main macroeconomic factor likely to drive a European restructuring wave in 2019, according to Debtwire’s 15th European Distressed Debt Market Outlook, launched today.

In partnership with law firm, Orrick, and financial consultants, THM Partners, the study canvassed the opinion of 80 distressed investors and 50 private equity funds and provides insight into their expectations for the European distressed debt market in 2019 and beyond.

According to the survey, 97% of distressed investors and 100% of private equity funds agree that there are no benefits for the UK from Brexit. And, in the event of a hard or no-deal Brexit, survey respondents cite financial services, manufacturing and automotive as the sectors most likely to be negatively affected. Respondents also believe that Ireland and Benelux are the EU regions that would be most negatively affected by a no-deal situation.

Stephen Phillips, Restructuring Partner at Orrick’s London offices, said: “In a no-deal scenario, where supply chains may be disrupted and tariffs imposed, I would expect this to generate significant distress. It is hard to predict how chaotic a no-deal situation will be; behind the scenes, a great deal of preparation has undoubtedly been undertaken.”

Despite macroeconomic uncertainty and volatility, distressed debt investors in Europe believe 2019 will prove a tough year for sourcing deals. Over half (54%) of distressed investors in the survey anticipate tougher fundraising conditions in 2019, while only 21% believe they will be easier.

However, Robert Schach, Debtwire’s Managing Editor, argues that this pessimism may be misplaced: “2018 proved another slow year for the distressed debt community, with dovish monetary policy keeping credit markets saturated with liquidity. But the mood changed by year-end as increasing earnings misses triggered a string of steep selloffs in the secondary markets, resulting in investors finally repricing risk, which is bringing an end to the long run of easy refinancing conditions that sustained many problem credits. Together with increased event-driven macroeconomic risks, this suggests the tide is finally turning and the distressed market is coming back.”

This view is shared by Andrea Trozzi, Partner at THM Partners: “History teaches us that predicting future activity levels is hard, but we believe that the volume of distressed opportunities coming to market in 2019 will start to increase. If you can transact quickly and hold your nerve in the short term, we see no reason why 2019 should not offer some interesting investment possibilities.”