Emerging market (EM) companies have typically been more vulnerable to the impacts of global economic trends and geopolitical shifts, and there is little change in this trend as we face up to a new set of challenges over the next year. From Africa to Latin America, exposure to volatile commodity markets amid the possibility of prolonged (and broader) armed conflicts, a raft of regional political changes, and the ongoing higher interest rate environment will mean volatile and uncertain times ahead.
In this article, Cleary Gottlieb’s Restructuring team highlights five key trends we expect will influence EM restructuring activity in 2024.
The interest rate environment has changed substantially over the past few years, with 10 year Treasury yields briefly eclipsing 5% in October for the first time since 20071 and rates having risen by around 250 basis points over the past two years2.
A large share of the debt issued in 2016 and 2017 – when interest rates were very low – is now coming due. This will have to be refinanced. In a higher interest rate environment, lower-rated EM issuers will likely have a harder time refinancing debt in 2024. In some instances, these companies will struggle to support the increased interest costs that will accompany these transactions. As a result, we expect to see a wave of macro-driven restructurings over the next year.
Already, we are observing the difficulties faced by certain companies in closing refinancing deals this year: whether new money offerings or exchange offers, the challenges are clear. Even if new notes are being offered at double-digit interest rates with strong collateral packages, investors are being more careful about the securities that they buy, leading to unpredictability.
The interest rate environment has changed substantially over the past few years, with 10 year Treasury yields briefly eclipsing 5% in October for the first time since 20071 and rates having risen by around 250 basis points over the past two years2.
A large share of the debt issued in 2016 and 2017 – when interest rates were very low – is now coming due. This will have to be refinanced. In a higher interest rate environment, lower-rated EM issuers will likely have a harder time refinancing debt in 2024. In some instances, these companies will struggle to support the increased interest costs that will accompany these transactions. As a result, we expect to see a wave of macro-driven restructurings over the next year.
Already, we are observing the difficulties faced by certain companies in closing refinancing deals this year: whether new money offerings or exchange offers, the challenges are clear. Even if new notes are being offered at double-digit interest rates with strong collateral packages, investors are being more careful about the securities that they buy, leading to unpredictability.
There is also continuing geopolitical uncertainty across the world. Conflict in the Middle East has led to concerns about the potential for the conflict to spread and a broader impact on supply chains, while in Eastern Europe the Ukraine-Russia conflict continues.
These issues will create ongoing challenges, not just for companies that are directly exposed to the affected regions, but also for organizations that have exposure to or rely on commodities from those areas, such as the agricultural sector for Ukraine, and oil and gas resources more broadly in the Middle East.
There is also continuing geopolitical uncertainty across the world. Conflict in the Middle East has led to concerns about the potential for the conflict to spread and a broader impact on supply chains, while in Eastern Europe the Ukraine-Russia conflict continues.
These issues will create ongoing challenges, not just for companies that are directly exposed to the affected regions, but also for organizations that have exposure to or rely on commodities from those areas, such as the agricultural sector for Ukraine, and oil and gas resources more broadly in the Middle East.
Political changes in a more general sense are being felt in a number of emerging market nations.
In Latin America, Argentina has seen the victory of right-wing libertarian economist Javier Milei, whose proposals include abolishing the country’s central bank and dollarizing the economy.
In Chile, a national referendum will be held on December 17 to either approve or reject a new constitution drafted by a constitutional council3. This is Chile’s second attempt to put an end to its 1980 Constitution and represents a political shift. In 2021, a joint body with a leftward tilt put forward a proposal which was rejected by Chileans in September 2022.
Meanwhile, in Chile ongoing dialogue between the right and the left could see an impact on industries including lithium (where the state is potentially seeking a bigger role in the sector) and energy broadly, while economic and political issues are trickling down even to retail and industrial companies that are struggling with over-leverage4.
Companies from jurisdictions that are less market friendly will inevitably face headwinds when trying to raise or refinance capital due to these new political climates. These political challenges, when combined with higher interest rates and wider geopolitical risks, could create a difficult environment for emerging market companies in 2024.
Energy and infrastructure will be sectors particularly at risk, but political uncertainty in the region is already having an impact on industries ranging from consumer goods to agriculture to export-led firms. In Argentina, for example, Milei’s proposed overhaul of the country’s economy could lead to disruption in almost every single sector.
Political changes in a more general sense are being felt in a number of emerging market nations.
In Latin America, Argentina has seen the victory of right-wing libertarian economist Javier Milei, whose proposals include abolishing the country’s central bank and dollarizing the economy.
In Chile, a national referendum will be held on December 17 to either approve or reject a new constitution drafted by a constitutional council3. This is Chile’s second attempt to put an end to its 1980 Constitution and represents a political shift. In 2021, a joint body with a leftward tilt put forward a proposal which was rejected by Chileans in September 2022.
Meanwhile, in Chile ongoing dialogue between the right and the left could see an impact on industries including lithium (where the state is potentially seeking a bigger role in the sector) and energy broadly, while economic and political issues are trickling down even to retail and industrial companies that are struggling with over-leverage4.
Companies from jurisdictions that are less market friendly will inevitably face headwinds when trying to raise or refinance capital due to these new political climates. These political challenges, when combined with higher interest rates and wider geopolitical risks, could create a difficult environment for emerging market companies in 2024.
Energy and infrastructure will be sectors particularly at risk, but political uncertainty in the region is already having an impact on industries ranging from consumer goods to agriculture to export-led firms. In Argentina, for example, Milei’s proposed overhaul of the country’s economy could lead to disruption in almost every single sector.
The energy transition – the shift from oil and gas to green energy – has proved to be more challenging in Latin America than many had anticipated, creating difficulties for organizations operating in closely involved sectors.
In Chile, for example, a number of renewable energy resources have been put out to bid in recent years. Now, several companies that won the auctions are having to restructure. This is because of a limited energy transmission capability across the country, with insufficient capacity running from the North and the South, where wind and sun power is stronger, to the center where demand is higher due to mining activities.
Colombia’s President Gustavo Petro has also routinely talked about weaning the country away from its dependency on hydrocarbons in favor of renewables5. However, oil and gas have been a material part of the country’s economy for decades, and it is unclear how an energy transition would occur in practice and what impact this could have on corporations.
We continue to see a move away from local restructurings to Chapter 11 proceedings and expect this to continue in 2024.
In part, this has been driven by a perception that certain local institutions have weaknesses, such as the Concurso Mercantil proceedings in Mexico or Recuperação Judicial/Recuperação Extrajudicial in Brazil. Even in Chile, where there have been fewer concerns about transparency, local organizations are taking a growing interest in Chapter 11 as a preferred route for restructuring. The attraction to the U.S. bankruptcy procedure also owes much to several Chapter 11 success stories for companies based in the region, including Colombian airline Avianca, Mexico’s Aeroméxico, and Chile-based Latam Airlines.
Chapter 11 can be expensive, but it is considered to be quicker, more transparent, and legally certain compared with local law proceedings. Creditors are increasingly willing to pay the higher costs associated with Chapter 11 in exchange for greater certainty and speed.
We continue to see a move away from local restructurings to Chapter 11 proceedings and expect this to continue in 2024.
In part, this has been driven by a perception that certain local institutions have weaknesses, such as the Concurso Mercantil proceedings in Mexico or Recuperação Judicial/Recuperação Extrajudicial in Brazil. Even in Chile, where there have been fewer concerns about transparency, local organizations are taking a growing interest in Chapter 11 as a preferred route for restructuring. The attraction to the U.S. bankruptcy procedure also owes much to several Chapter 11 success stories for companies based in the region, including Colombian airline Avianca, Mexico’s Aeroméxico, and Chile-based Latam Airlines.
Chapter 11 can be expensive, but it is considered to be quicker, more transparent, and legally certain compared with local law proceedings. Creditors are increasingly willing to pay the higher costs associated with Chapter 11 in exchange for greater certainty and speed.
As always, the impact of wider macroeconomic trends appears to be felt more strongly by emerging market companies, which face a number of challenges going into 2024.
We look forward to monitoring how global economic, political, and financial trends will continue to shape the solutions sought by companies: whether in terms of new issuances, refinancing debt as it comes due, or restructuring existing debt obligations.
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