Since the credit crunch hit last year, the distressed debt industry has been undergoing a somewhat surprising shake-up. In recent months, bankers in distressed debt trading, research or proprietary investing have been quietly leaving long-held positions.

Sales of strugglers likely to rise

More financially troubled companies could end up being sold rather than having their debt restructured in the next distressed debt cycle.

An increased level of M&A activity is expected to be seen in debt restructurings in the next distressed debt cycle, as a growing number of companies struggle to cope with the debt they have piled on in recent years.

Peter Marshall, co-head of European restructuring at Houlihan Lokey, expects to see more M&A linked to restructuring instead of lenders agreeing to swap debt for an equity stake, which has been a popular solution in European restructurings.

“The loosening of financing covenants in recent years means that by the time a company defaults, operational liquidity would have become more of an issue, and after the credit crunch that will be difficult to get existing bank lenders to finance,” he said.

The increased use of securitisation as well as multiple layers of more junior debt could make finding a restructuring solution more difficult.

Alan Bloom, partner at Ernst & Young, expects more distressed situations to need an insolvency process to execute a restructuring because of the many layers of debt and increased number of creditors in company financings. He also expects the next wave of debt restructurings to make more use of the ability to execute a financial restructuring within an administration process, as set out within the UK Enterprise Act.

The departures come as reports abound of vulture funds amassing war chests in preparation for a new cycle of opportunities in the bonds or loans of struggling companies. But a year after the credit crunch began, some of the most experienced and successful in this business say it is too early to jump in.