EUROPEAN DISTRESSED DEBT MARKET OUTLOOK DISTRESSED DEBT MARKET OUTLOOK 2010 JANUARY 2010 MER 1128 Euro DD Market Outlook V14.qxd 20/1/10 14:23 Page 1
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EUROPEAN DISTRESSED DEBTMARKET OUTLOOK 2010
MER 1128 Euro DD Market Outlook V14.qxd 20/1/10 14:23 Page 1
Distressed Investor Survey 4
Private Equity Survey 20
Case Study: Akerys restructuring 29
Banks Survey 34
MER 1128 Euro DD Market Outlook V14.qxd 20/1/10 14:23 Page 2
Welcome to the European Distressed Debt Outlook 2010, which Debtwire is delighted to present in conjunction with Cadwalader, Wickersham & Taft LLP, FTI Consulting Inc. and Rothschild.
In early 2009, the impact of the global credit crisis eventually spilled over from thefinancial sector into the real economy. Corporate activity slumped dramatically and over-leveraged businesses acquired during the boom years came under severe financialpressure due to reduced consumer demand. Banks and loan investors struggled to copewith the sheer number of debt workouts and demands for emergency funds.
Just twelve months later, the landscape looks markedly different. Capitalmarkets have rebounded strongly, buoyed by real money demand chasingyield in a low interest rate environment. The dash for juicy yields hasintensified in the first two weeks of 2010, but the onus is on therenascent high yield market to overhaul bloated and top-heavy corporatedebt structures.
The challenge for distressed investors in 2010 will be to find value inthis rapidly moving market. Recovery in corporate earnings has yet tomatch the improvement implied by surging debt prices and liquidity inthe secondary market remains poor. The survey suggests many will bepassive in their approach, hoping to be lifted by the rising tide of assetprice recovery.
Last year began with a number of private equity sponsors seeking toimpose aggressive financial restructurings on their portfolio companies,amid bank lenders inability to provide fresh funds. As the yearprogressed, lenders appetite for taking control increased, and PEsponsors were forced to take a more conciliatory approach.
In many cases, bank and CLO investors were unwilling to countenancesignificant write-offs, leading to a number of zombie credits carryinghigher than optimal levels of post-restructured debt. However, defendersclaim that this is the lesser of evils, as lenders can afford to wait forearnings and valuation multiples to return to normal so long as thecompany has enough liquidity and can service its debt.
With the number of urgent workout cases on the wane, private equitysponsors turned towards the healthier parts of their portfolios.
Keen to capitalise on better performing investments and avert covenantpressures on the underperformers, sponsors issued a raft of IPO andcovenant amendment requests during the second half of 2009. Themonetary cost in securing amendments has steadily risen, as lenderspush for better terms, arguing that deals should be re-priced to reflectincreased risk and primary pricing.
Survey respondents also noted that the leveraged loan market is set toreturn in 2010, albeit at issuance levels of less than 30% of the 2007peak. Seasoned market professionals are already looking further ahead,with significant leveraged loan maturities due in 2012 and 2013.
Debtwires European Distressed Debt Market Outlook report presentsdetailed results of a survey canvassing 100 distressed marketparticipants on their expectations for the coming year. This edition, the sixth, includes responses from private equity firms, as well as viewsfrom a select number of banks, and the perspective of companymanagers undertaking financial restructurings in the last 12 months.
KEY FINDINGS FROM THE SURVEY INCLUDE THE FOLLOWING:
The majority of respondents expect the European restructuring peak toarrive during the first half of 2010, with covenant resets/amendmentsand debt buybacks set to dominate market activity.
Most investors anticipate 10%-20% of leveraged buyouts to berestructured in the next twelve months, with the UK, Germany andSpain the most active geographies. Property/Construction, Media,Leisure, and Auto/Auto parts should offer the greatest opportunities for distressed investors.
Senior debt remains the most attractive debt instrument, but the re-emergence of the high yield market has consolidated its second placeamongst investor preferences.
Investors are more cautious in their return assumptions, with themajority expecting 10%-19% returns in 2010, compared to 20%-25%on average in last years survey.
Private equity respondents consider over-leveraging the most likelytrigger for restructurings of their portfolio companies, while only 20%of sponsors picked overall economic decline as their first choice.
The key challenge for company managers during the restructuringprocess was securing a consensus from disparate lender groups in anenvironment where value broke high in the senior debt. PE sponsorsremained supportive despite, in many cases, facing the imminent lossof ownership.
Debtwire, Cadwalader, Wickersham & Taft LLP, FTI Consulting Inc.and Rothschild would like to thank all the respondents who took time to contribute to what we believe is the definitive market outlook fordistressed players in Europe. Any feedback you may have on this yearsresearch would be welcome, as would comments and suggestions onwhat you would like to see in future editions of the report.
Andrew MerrettManaging Director, Co-head ofEuropean Restructuring, Rothschildandrew.email@example.com
Kevin Hewitt Head of FTI Corporate FinanceEuropeFTI Consulting, Inc.Senior Managing Directorkevin.firstname.lastname@example.org
Sophie JavaryGeneral Partner, Co-head ofEuropean Restructuring, Rothschildsophie.email@example.com
Richard NevinsPartnerCadwalader, Wickersham & Taft LLPrichard.firstname.lastname@example.org
Carrie-Anne HoltManaging EditorDebtwirec.email@example.com
MER 1128 Euro DD Market Outlook V14.qxd 20/1/10 14:23 Page 3
DISTRESSED INVESTOR SURVEY
1(a) When do you expect the volume ofEuropean restructurings to hit its peak orhas this already happened?
2011 and beyond
Almost half of the respondents (46%) expect the peak of Europeanrestructurings to arrive during the first half of 2010. The surveyfindings may come as a surprise to some restructuring professionals.Many advisers believe we may have already seen the peak, reportinga tail-off in new transaction activity during the last quarter. Otheradvisers anticipated a busy Q1, and there has been some resurgenceof activity in the first few weeks of the new year. However, the datamay reflect anticipated completion dates and the realisation thatexisting transactions could take a long time to close.
I agree with survey participants, not other advisers,on this topic. Peak European restructuring volumelies ahead, not behind us. Government support offinancial institutions, massive liquidity injections and low interest rates have delayed, but cantindefinitely avoid, long overdue deleveraging in the private sector. Richard Nevins, Cadwalader, London
2009 was the year banks worked hard to keep par assets and avoid capital write-offs. By autumn,secondary prices had risen sharply making sell-offsmore attractive for banks. Sophie Javary, Rothschild, Paris
I expect further restructuring will be triggered in2010 due to an increasing amount of debt maturitiesand amortisations, expiry of temporary fixes, evertightening covenants and cash requirements asworking capital releases and cash reserves dwindle. David Morris, FTI Corporate Finance, London
In October and November 2009, Debtwire canvassed the opinion of 100 hedge fund managers, long only investors and prop desktraders in Europe. Interviewees were questioned about their expectations for the European distressed debt market in 2010 andbeyond. The interviews were conducted over the telephone and respondents were guaranteed anonymity.
1(b) What forms of restructuring do youexpect to be most prevalent in 2010? Please choose the top three.
Equitisations are so 2009. Investors cite covenant resets/amendmentsas most prevalent in 2010, confirming lender appetite for full-blownrestructurings are on the wane, with debt-for-equity swaps coming in a lowly eighth place. With a large proportion of lenders unwillingto countenance debt write-offs, equity sponsors are expected to tablea plethora of liability management proposals next year.
The distressed community appears to anticipate a contentious year dealing with debtors. A largeproportion of lenders are unwilling to countenancedebt write-offs, yet respondents believe debtbuybacks and distressed exchanges, which oftenpropose a reduction in original principal amount, will be the second most prevalent restructuring tactic in 2010.Richard Nevins, Cadwalader, London
The problem with amend and extend solutions is that it just delays the day of reckoning. It is a leap of faith and does nothing to remedy the fundamentalproblem: too much debt. Unless this is solved, thepain is merely prolonged and struggling companieslimp along in an uncompetitive fashion.Shaun OCallaghan, FTI Corporate Finance, London.
0 70403010 50 6020Percentage of responses
Covenant resets/amendments 34%
Debt buybacks/distressed exchanges
New money injection
Amend and extend/forward