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Smarter NavigationLoan restructuring study 2022 2Introduction 3Part 1: From interest rate rises to tighter monetary policies, what will drive restructuring activity in the months ahead? 4Part 2: Restructuring debt strategies 8Part 3: The long-term outlook, from shifting financing options to ESG 12Conclusion 15MethodologyIn the second quarter of 2022, Debtwire surveyed 25 distressed investors, 25 hedge funds/hedge investors, 25 investment bankers, and 25 direct lenders, all headquartered in the United States. The breakdown of respondent groups is as follows: 64% of respondents overall say the current value of their firm’s assets under management is greater than US$10 billion, rising to 76% among hedge fund respondents. Direct lenders have a slightly different mix than the other respondents, with a greater proportion saying they have AUM of between US$1 billion and US$5 billion compared to the other groups surveyed. All charts show overall figures except when splits based on the type of organizations are statistically significant.Contents0%10%20%30%40%50%60%70%80%90%100%Less than $500m$500m - $1bn$1bn - $5bn$5bn - $10bn6%72%4%8%18%64%12%44%12%4%28%12%12%4%76%20%4%0%4%64%12%12%8% TotalInvestmentBankHedge Fund/Hedge InvestorDistressedInvestorDirectLenderGreater than $10bn0%What is the current value of your firm’s assets under management?0%10%20%30%40%50%60%70%80%90%100%Less than $500m$500m - $1bn$1bn - $5bn$5bn - $10bn6%72%4%8%18%64%12%44%12%4%28%12%12%4%76%20%4%0%4%64%12%12%8% TotalInvestmentBankHedge Fund/Hedge InvestorDistressedInvestorDirectLenderGreater than $10bn0% 3IntroductionSince the global financial crisis, the US has been through a period of the loosest monetary policy in its history. Responding to the pandemic and its disruptive impact on the economy, the US Federal Reserve cut interest rates to the floor. More importantly, the Fed’s balance sheet expanded to levels never previously seen, with its bond purchasing program upsized throughout the pandemic and reaching almost US$9 trillion. But times are changing. Inflation exceeded expectations early in the year and the Fed was forced to act. By mid-2022, reversing inflation became the central bank’s primary policy target and, accordingly, it pumped the brakes, both raising rates and beginning to run off its balance sheet assets. This was a regime change to which the central bank was unaccustomed. While monetary policy was generationally loose in the years following the global financial crisis, inflation never materialized. Faced with novel conditions, the Fed had to adjust. Speaking at the European Central Bank’s Forum on Central Banking in June 2022, Fed Chair Jerome Powell admitted that: “We understand better how little we understand about inflation.”Restructurings loom Debt investors suddenly found themselves at a crossroads. Not only did rising rates have implications for pricing loans, but the Fed was reining in markets and increasing the cost of capital amid slowing growth. Many companies that were once propped up by generous policy found themselves swimming against the tide. Given the increasingly volatile market conditions, what can these vulnerable companies expect in the months ahead? Distressed debt and defaults have the potential to rise through 2023 as companies struggle to meet their liabilities. In June 2022, Fitch Ratings lifted its default forecast for US institutional leveraged loans by 25 basis points to a range of 1.5% to 2% for 2023—the third-highest yearly loan default volume ever, although still well below the totals in 2009 and 2020. The agency said the increase reflected recessionary concerns and a rise in troubled loans. As default risk rises, so too will loan restructuring activity, as lenders and borrowers alike take steps to ease the burden. Creditors should be expected to make concessions to reduce or postpone interest payments of their debtors to ensure their principal is recovered plus interest or realize value through equity swaps in some cases and where the creditor has the expertise to actively manage out those situations. These are uncertain times. However, by preparing themselves, lenders can position themselves for the uncertainty that lies ahead. 4Inflation is running hot, driven initially by pandemic-stricken supply chains coupled with monetary expansion. Pent-up demand then led to soaring energy prices, an effect compounded by Russia’s invasion of Ukraine as supply lines have been further disrupted. The only tool at the Fed’s disposal is to curb demand by tightening financial conditions. Reducing the availability o