(Bloomberg) -- Amid higher inflation and rising interest rates, companies that binged on debt when it was cheap have a lot of work to do to slim down, according to Bill Derrough, a restructuring expert and global co-head of capital structure advisory at Moelis & Co.

“In some cases it may be a minor surgery -- a little nip, tuck here and there -- and in others, limb amputations,” he said in an episode of Bloomberg Intelligence’s FICC Focus State of Distressed podcast.  

More than a decade of easy money created desperation for yield, leading both companies and investors into “sloppy deals,” where “you had to be really, really bad to not be able to borrow money,” Derrough said. As the Federal Reserve raises rates at the fastest pace since the 1980s, debt markets will shudder to adjust. 

“It’s going to be harder to borrow money, and valuation and leverage multiples will come down, interest rates will go up and companies are going to have to do a lot of work on their balance sheets,” he said   

Meanwhile, supply chain disruptions caused by Covid and the Ukraine invasion mean the global economy has been forced to become less dependent on Russia and China -- an undertaking Derrough compared to a stroke patient re-learning how to move. 

“In many cases a person can through hard work and therapy rewire the brain; the same muscle doesn’t ever work properly but others take over,” Derrough said. 

The global workarounds of Russian energy exports and less dependence in the US on China and a revival of domestic manufacturing will lead to higher prices even as the Federal Reserve continues to tighten policy, he said.

“So the odds of a real recession are high, but we also could have stagflation,” or high inflation coupled with low economic growth, Derrough said. “We could see that again, and that is a horrible place to be.” 

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