Restructuring professionals also expect healthcare, for-profit education, and municipalities in the United States to face distress in 2016.

Healthcare: A blend of regulatory considerations, many of them stemming from the effects of the Affordable Care Act, combined with ongoing operational pressures at underperforming hospital chains may drive a greater number of healthcare restructurings in 2016.

For-profit education: Sharp drops in student enrollment at leading for-profit colleges, which represent 13% of the total U.S. higher education market (1.),  may compound the effects of a recent  regulatory crackdown. The higher-education industry saw a 13.7% drop in enrollment from the fall term of 2014 to the fall term of 2015 (2.), and Federal rules concerning the availability of loans and the requirement that for-profit schools demonstrate that their graduates have gainful employment are increasing the pressure on this sector. Those facts prompted 68% of respondents to say they predict a moderate-to-significant jump in restructuring activity in the for-profit education sector in 2016.

Municipalities: A number of U.S. municipalities remain distressed, burdened by legacy pension and retiree healthcare obligations and costly infrastructure needs. As a result, 18% of survey respondents said municipalities are among the top sectors in the United States likely to face distress in 2016. Among troubled states, 64% of respondents singled out Illinois as the one most likely to face financial distress, reflecting well-documented struggles to meet pension obligations and to solve other problems related to existing debt payments.

Restructuring’s Return?

The end of near-zero interest rates may signal the end of seven years of sharply reduced restructuring activity. Much depends on how the economy performs in the near term. The U.S. economy is not as robust as it was before 2008, yet when asked whether a strong economy has helped sustain companies, 62% of experts said it had a “moderate” or “strong” influence on keeping companies out of Chapter 11. One factor in the declining numbers of bankruptcy filings may be costs, as many respondents said companies’ managements and boards of directors feel that bankruptcies have become too expensive and litigious, making out-of-court restructurings more attractive. Among the respondents, 68% said cost had either a “moderate” or “strong” influence on the drop in Chapter 11 filings. But as economic conditions shift and lenders adjust to a monetary policy that projects both rising interest rates and inflation, restructuring may have a larger role in the 2016 business environment.

Endnotes:
(1.)  Profit Industry Struggling Has Not Reached End Road
(2.)  Ibid.