european distressed debt market outlook 2013 · 2011 legacy workouts like eircom and Seat Pagine Gialle and new ones such as Klöckner Pentaplast, Findus Group, Fitness First, Travelodge

european distressed debtmarket outlook 2013

january 2013

Contents

Foreword 3

Executive summaries 4

Distressed investors survey 8

Private equity survey 36

Interview with James Roome, Barry Russell and James Terryof Bingham McCutchen LLP 57

Bingham McCutchen LLP Contacts 60

Rothschild Contacts 61

3

For

ewo

rd

Foreword

The European restructuring community remained busy thanks to a number of 2011 legacy workouts like eircom and Seat Pagine Gialle and new ones such as Klöckner Pentaplast, Findus Group, Fitness First, Travelodge and Biffa.

In 2013 the high yield market is expected to remain hungry for paper, allowing over indebted companies to continue refinancing. As yields keep on compressing and liquidity abounds in the US and Europe, bond issuance is increasingly becoming the preferred route to workouts as well as working capital financing, according to respondents of this year’s Debtwire European Distressed Debt Market Outlook.

The Eurozone slowdown and sovereign debt crisis will, however, likely return to play a major role this year, bringing uncertainty to the credit markets. Italian and German elections in February and September and the upcoming US debt ceiling will generate volatility while limited growth prospects in developed economies will fuel the distressed debt opportunities pipeline.

Debtwire’s European Distressed Debt Market Outlook, in its ninth year of production, presents detailed results of a survey questioning 100 European hedge fund managers, prop desk traders and long-only investors on the outlook for the European distressed debt market in 2013. The report also polled 30 private equity practitioners and offers their insights on the market.

Mario OlivieroDeputy Editor, Debtwire [email protected]

2012 was a rollercoaster year. The post credit crunch recovery ground to a halt and Europe’s sovereign debt crisis erupted again. The ECB long-term refinancing operations (LTRO) bolstered European banks and provided a temporary respite while Draghi’s public commitment to preserving the euro at any cost ultimately restored confidence and liquidity, reviving the high yield market and supporting secondary prices. The resultant rally provided a lifeline to many stressed credits, limiting opportunities for alternative investors.

eXeCutiVe summaries

Rothschild

We enter 2013 with a strong sense of déjà vu regarding the economic outlook. European market participants, both inside and outside the distressed debt markets, experienced a 2012 characterised by market uncertainties, critical elections and anemic growth, and it seems that 2013 will bring more of the same. Europe’s periphery is as precarious as this time last year, questions remain around full resolution of the fiscal cliff and the seemingly annual debt ceiling debate in the US. Although elections in Germany and Italy will fail to garner as much attention as last year’s polls in the US and France, both have the potential to be game changers. Global economic growth will likely disappoint again with, in particular, Europe’s economic engines sputtering to barely positive growth rates.

Against this bleak macroeconomic background, certain areas of the market have a more optimistic outlook. As respondents to this survey testify, we can expect better liquidity in the credit markets in 2013 than we did last year. The relaxation of certain Basel III requirements can only help turn this view into reality. If liquidity does increase, pushing valuations and refinancing levels higher, we are likely to see stressed credits better able

to achieve fulsome solutions and not simply have another go at kicking the can down the road. With the private equity funds’ dry powder and the high levels of cash on many healthy corporate balance sheets, investors appear more ready now than at any time post the financial crisis to put new money to work.

2013 will be an exciting year in the restructuring and distressed debt markets. New legislation in Germany, France and particularly in Italy will be put to the test. As the survey makes clear, distressed investors expect to see more debt for equity swaps coming this year, with more acquisitions coming through the junior debt than before. Companies with zombie balance sheets will survive as long as amend-and-extends and covenant resets persist. But appetite for these sticking-plaster solutions looks to be diminishing as bank balance sheets begin to strengthen and lenders begin to see scope to get repaid if they write down a little. As such, the opportunity for new money is expected to increase. Now is the perfect time to start ridding Europe of the zombies.

Andrew MerrettEuropean Head of RestructuringCo-Head Financing Advisory – UKRothschild

Leading EMEA restructuring adviser

Image: Detail from a bond issued by Rothschild in London for the 1900 4.5% Coquimbo railway loan, Chile (The Rothschild Archive)

www.rothschild.com

For further details please contact Andrew Merrett:

New Court, St Swithin’s Lane, London EC4N 8AL Telephone +44 (0)20 7280 5728

Kloeckner Pentaplast (2012)

Adviser to SVP on the €1.2bn financial restructuring and debt-for-equity swap

Belvedere (2012)

Adviser to the company and its receiver on the restructuring of c.€600m of bonds

Findus (2012)

Adviser to the company on its £750m restructuring

Seat Pagine (2012)

Adviser to the company on its €2.7bn restructuring

Novasep (2012)

Adviser to the ad-hoc committee of bondholders on a €415m restructuring

Punch Taverns (on-going)

Adviser to the ABI Special Committee of Noteholders on the £2.7bn restructuring of Punch A and Punch B WBS

Endemol (on-going)

Adviser to a senior lender consortium on the €2.1bn debt restructuring

Arcapita (on-going)

Adviser to the company on the reorganisation of c.$2.5bn liabilities under Chapter 11

Deutsche Annington (2012)

Adviser to the ad-hoc group of noteholders on the €4.3bn renegotiation of GRAND CMBS

Marken (2012)

Adviser to the co-ordinating committee of senior lenders on €408m restructuring

C6394 DebtWire Advert.V3.indd 1 12/12/12 16:21:37

Bingham McCutchen LLP

2012 was not a vintage year for debt restructuring in Europe. Although the Eurozone crisis and the consequences of the financial crisis resulted in serial recessions around Europe, the banks were not under pressure to revalue assets or take losses. Consequently, amend and extend transactions were far more common in 2012 than comprehensive debt restructurings. Those restructurings that did happen, such as the successful recapitalisation of Findus Foods through a mezzanine debt to equity swap, highlighted the difficulties of implementation in Europe as compared to Chapter 11 in the US.

In some respects, 2013 starts out with similar features. Although the Eurozone crisis is in remission, it has the ability to cause further damage to the European economy if symptoms re-emerge. European banks remain under-capitalised and, but for the high yield bond issuance by leveraged companies, their financial health would not be improving. Consequently, the banks are likely to continue to prefer amend and extend transactions over debt reductions in 2013. With primary debt and equity markets so subdued, distressed investors in Europe will continue to scan the horizon for exit routes before being willing to invest heavily in restructuring opportunities in the secondary market. Sustained strength in equity markets could lead to more deals.

Nonetheless, some new features will come into play during 2013, which might change the landscape. Some of the temporary solutions negotiated with banks over the past few years will need to be revisited and, in some cases, more comprehensive restructurings will be needed. The maturity

wall starts to build this year and the level of maturities will be very significant by 2014. We cannot conceive that it will be practical simply to extend all of these maturities. Some borrowers will inevitably need to restructure, if only because their liquidity cannot sustain the levels of debt they have incurred. In addition, the boom-time bond issuance in the high yield market over the past two years will surely change the dynamics.

The past several years have seen a series of attempts by the EU and its member states to modernise their insolvency and restructuring legislation, much of it based, at least nominally, on Chapter 11 of the US Bankruptcy Code. However, few European countries have adopted effective legislation to facilitate restructurings outside the framework of formal insolvency proceedings, and investors still lack confidence in the courts’ willingness to give speedy approval to agreed deals. Consequently, these laws have not yet stemmed the volume of deals implemented by scheme of arrangement or administration sales in the UK. Curiously, the laws introduced in Luxembourg and elsewhere to implement the Financial Collateral Directive are probably the most widely used implementation tools outside these UK procedures. The prevalence of secured bonds governed by New York law in the next wave of restructurings will likely boost the use of Chapter 11 as a restructuring tool.

The volume of non-bank lending into Europe was extraordinary in 2012, as insurance companies and others stepped into the void left by the commercial banks. There is every reason to think that that trend will continue into 2013.

Barry RussellCo-Head, Transactional Finance GroupBingham McCutchen (London) LLP

James RoomeCo-Head, Financial Restructuring GroupBingham McCutchen (London) LLP

Bingham’s European Financial Restructuring Practice Widely recognised as one of the world’s top-tier financial restructuring firms, Bingham has played a leading role representing creditors in numerous high-profile, precedent-setting workouts and restructurings throughout Europe, including:

Nationalisation and financial restructuring of three major Icelandic banks—Kaupthing, Landsbanki and Glitnir—and participation on the informal creditors committee of each of the three banks

Bingham is advising the worldwide bondholder group

Debt restructuring of a European frozen foods business

Bingham advised the ad hoc committee of mezzanine bondholders

Insolvency filings in multiple European jurisdictions—total outstanding bond debt of US$1.75 billion

Bingham is advising the ad hoc committee of bondholders

€1.2 billion financial restructuring of one of Ireland’s largest companies

Bingham is advising the noteholders

Financial restructuring of the owner and operator of three FPSOs listed on the Oslo Børs

Bingham advised the bondholders

€1.8 billion financial restructuring of a Greek telecommunications operator

Bingham advised the ad hoc committee of senior secured noteholders

Bingham’s European Financial Restructuring Practice is top ranked in the following:

1

Icelandic Banks Findus Petroplus

Quinn Group Sevan Marine Wind Hellas

Atto

rney

Adv

ertis

ing

© 2

013

Bing

ham

McC

utch

en L

LP O

ne F

eder

al S

tree

t, B

osto

n M

A 02

110

T. 6

17.9

51.8

000

Prio

r res

ults

do

not g

uara

ntee

a s

imila

r out

com

e. B

ingh

am M

cCut

chen

® B

ingh

am M

cCut

chen

(Lon

don)

LLP

, a M

assa

chus

etts

lim

ited

liabi

lity

part

ners

hip

auth

oris

ed

and

regu

late

d by

the

Solic

itors

Reg

ulat

ion

Auth

ority

(reg

iste

red

num

ber:

003

2838

8), i

s th

e le

gal e

ntity

whi

ch o

pera

tes

in th

e U

K as

Bin

gham

. A li

st o

f the

nam

es o

f its

par

tner

s an

d th

eir q

ualif

icat

ions

is o

pen

for i

nspe

ctio

n at

the

addr

ess

abov

e. A

ll pa

rtne

rs o

f Bin

gham

McC

utch

en

(Lon

don)

LLP

are

eith

er s

olic

itors

or r

egis

tere

d fo

reig

n la

wye

rs.

distressed inVestors surVey

The majority of investors believe the sovereign debt crisis in the Eurozone will continue to have a major impact on private credit markets in 2013. Sixteen percent of respondents think the crisis will not have an impact on the markets. In last year’s survey 99% of respondent expected the sovereign debt crisis to have some kind of impact on private debt markets in the year ahead with a mere 1% saying it would have had no impact.

“Bank lending standards have tightened and debt funding costs have risen sharply. Traditional financial institutions have remained cautious. This is the right opportunity for private credit providers who can still provide some leverage,” suggested a Norwegian hedge fund manager.

“To judge by the headlines, the intensity of the European crisis has abated since the summer of 2012. Although it remains to be seen whether the world is as disconnected as this trend tends to indicate, European leaders certainly seem to have quelled the fears of Eurozone break-up for the moment.”

James Roome, Partner, Bingham McCutchen LLP

Do you expect the Eurozone and sovereign debt crises to continue to have a major impact on private credit markets in 2013?

Yes

No

84%

16%

In the final quarter of 2012, Debtwire canvassed the opinions of 100 hedge fund managers, long-only investors and prop desk traders in Europe.

Interviewees were questioned about their expectations for the European distressed debt market in 2013 and beyond. The interviews were conducted over the phone and the respondents were guaranteed anonymity. The results are presented in aggregate.

9

distr

essed in

Vestor

s sur

Vey

Compared to last year, a smaller portion of respondents believe Greece will be cast out of the Eurozone. Twenty-one percent of investors think Greece is likely to exit the single currency area. Spain is viewed as next most likely, with 6% of respondents predicting its exit. Forty-three percent of respondents to last year’s survey expressed doubt over Greece’s ability to remain a member.

“There is every possibility that the Greek government will succumb to the pressure of its people and opposition and end austerity measures leading to a disorderly default,” commented a UK based hedge fund manager.

If yes, do you expect any European country/countries to leave the Eurozone?

0% 5% 10% 15% 20% 25%

Portugal

Spain

Greece 21%

6%

1%

Percentage of respondents

Over three quarters of the distressed investors surveyed do not think that any country will leave the Eurozone.

“Concerns of Greece or any other European country exiting the Eurozone are diminishing,” suggested a hedge fund manager in Sweden.

“The Eurozone looks safe now and I don't think any country will leave it," added a prop trader in the UK. “Now there is greater co-operation among the Eurozone members; this is improving the environment and developing the market.”

“Fears of a break-up seem to be receding and the public sector has replaced a lot of private foreign investment in the weaker Eurozone countries. Nonetheless, if any country were to leave the Eurozone, the legal consequences for investors would still be very serious - not least due to the inevitable introduction of capital controls and currency redenomination.”

Stephen Peppiatt, Partner, Bingham McCutchen LLP

Do you expect any European countries to leave the Eurozone?

No

Yes

77%

23%


A slim majority of respondents think that the Eurozone crisis has not yet reached its peak while 44% think that the worst has now passed.

“The debt crisis in Europe is still intense because of huge upcoming debt maturities,” said a prop trader in Switzerland.

“The level of uncertainty is too high to sustain,” suggested a hedge fund manager in the UK. “Lack of growth and recovery is threatening the fragile political consensus that has kept Europe's currency bloc intact through more than two years of crisis.”

“Forget ‘Groundhog Day’, we are entering the third reincarnation of ‘Groundhog Year’ with Europe facing another year of anaemic growth, currency risk and general geopolitical uncertainty. Read into this another active year for distress.”

Glen Cronin, Rothschild

Has the worst passed in the European sovereign debt crisis?

No

Yes

56%

44%

Over two thirds of respondents do not believe the EU fiscal compact is a feasible long-term solution.

Investors interviewed agreed that the fiscal compact is too focused on austerity measures and argued that this cannot represent a long-term solution to the sovereign debt crisis. In addition governments should consider development and growth measures to balance out the negative effects caused by austerity and to avoid recession.

“The only solution to the crisis is to end the negativity and bring back confidence, suggested a hedge fund manager in the UK. “For that it is essential for governments to restore development measures. Austerity is not the right solution to end the crises.”

Do you think the EU fiscal compact is a feasible long-term solution?

No

Yes

68%

32%

11

distr

essed in

Vestor

s sur

Vey


In a similar fashion to last year, respondents remain divided over when the volume of European restructuring activity will peak. However, just over half of them think it will peak in 2013, with 20% opting for the first half of the year and 31% the second.

A smaller 22% portion forecasts that the next top will occur in the first half of 2014, while 12% think it will occur in the second half of that year.

“I was expecting 2012 to be the peak but many companies managed to push their maturity by six to twelve months,” said a prop trader from the Netherlands.

“I think banks have been pushed to their limits to refinance debt to prevent defaults and are now above their capacity to continue to refinance,” said a prop trader in Switzerland. “They do not have capital in hand and because of new regulations they are not able to raise new capital. Thus I think by the second half of 2013 restructurings will peak.”

“With interest rates so low and with government policy so accommodating, we do not expect the restructuring pressure to grow until the maturity wall is upon us. At that point, a proportion of borrowers will inevitably need to restructure. Based on historical default statistics, we would also anticipate increased defaults amongst high yield issuers within the next 12 to 18 months, given the enormous issuance over the last two years.”

James Terry, Partner, Bingham McCutchen LLP

When do you expect the volume of European restructurings to hit its next peak?

0% 10% 20% 30% 40%

2016

2015

H2 2014

H1 2014

H2 2013

H1 2013

H2 2012 2%

20%

31%

22%

12%

10%

3%

Some 28% of those surveyed think that amend and extend and/or forward start facilities will be the most frequent form of debt renegotiation during 2013. The same number of respondents point to break-up or asset disposals as the most likely type of renegotiation, a big change on last year's survey when only 6% of respondents picked this as the most likely option.

A larger portion of investors than last year thinks whole or partial debt equitisations will feature in debt renegotiations in 2013. Last year only 11% of those surveyed foresaw this as the most frequent process against 20% this year.

Notably this year only 11% of respondents believe new money injections will most likely feature in debt renegotiations in 2013 against 22% of those surveyed last year.

“The unwillingness of banks to take losses through sales or write-downs means that amend and extend will still be the favoured solution during 2013. However, we are starting to see more second round restructurings where the sticking-plaster solution of the last few years has not worked and where a fresh approach may be needed. There will inevitably be more companies facing fundamental problems which will increase opportunities for distressed investors.”

Neil Devaney, Partner, Bingham McCutchen LLP

Which form of debt renegotiation do you expect to be prevalent in 2013?

0% 5% 10% 15% 20% 25% 30%

Amendments

Debt buybacks

New money injections

Whole or partial debtequitisation / exchange

Break-up or asset disposals

Amend and extend/forward start facility

28%

28%

14%

14%

25%

20%

11%

11%

8%

21%

15%

5%

Most Least



Distressed debt investors are expecting a larger proportion of sub-investment grade companies to face debt restructurings in 2013.

This year 31% of respondents think that more than 25% of sub-investment grade companies will face restructurings while 18% think that 20-25% will go down this road and 48% think that 10-20% will restructure

Last year 58% of those surveyed thought that only 5-10% of companies would go through a workout process and 36% believed the correct figure was 10-15%. The 15%-20% and the 20%-25% brackets included just 12% of respondents while the over 25% camp represented a mere 10%.

What proportion of sub-investment grade companies do you believe are likely to face debt restructurings in 2013?

Over 25%

20-25%

15-20%

10-15%

5-10%

31%

26%

22%

18%

3%

Some 50% of respondents expect the number of sub-investment grade companies facing restructurings in 2013 will increase while 30% think the number will remain the same. Last year close to 60% of those surveyed expected an increase in 2012 restructurings and only 5% foresaw a reduction.

“A large and growing number of companies are running into difficulties over interest payments and we will see a marked increase in debt restructurings in the next 12 months,” explained a hedge fund manager in Germany.

Does this represent an increase or a decrease on 2012?

Increase

No change

Decrease

50%

30%

20%

13

distr

essed in

Vestor

s sur

Vey

Nearly a quarter of respondents think that the UK will be the European country to see the highest number of debt restructurings in 2013. Spain and Italy follow the UK with 18% each while 17% opt for Ireland.

Germany will account for the largest percentage of corporate workouts according to 14% of respondents while only 8% expect France to have the highest number of restructurings.

The results represent a reversal on last year when only 6% of those surveyed thought the UK would lead in terms of restructurings, and a return to the position of the 2011 survey when the UK got the top spot with 39%. Some 32% of respondents last year expected Italy to account for the largest number of workout while 31% opted for Spain.

“Distressed investors will continue to explore opportunities in the peripheries of the Eurozone, but will continue to deploy most of their capital in the UK/Ireland, France, Germany, Benelux and Scandinavia.”

Dacre Barrett-Lennard, Rothschild

Where do you expect most European debt restructuring to take place?

UK

Spain

Italy

Ireland

Germany

France

Greece

14%

17%

18%

18%

24%

1%8%

Mirroring last year’s results, a majority of respondents (58%) expect Southern Europe to witness the highest number of corporate restructurings in 2013 while 42% opt for Western Europe. In this year’s survey, no respondents expected Eastern Europe or the Nordic region to account for the highest number of corporate workouts compared to 10% and 7% in last year’s survey.

Where do you expect most European debt restructuring to take place?

Western Europe

Southern Europe

42%

58%


Respondents were fairly equally split regarding the region likely to offer the best distressed opportunities with around a third opting for Asia, Europe and North America.

“Distressed opportunities in Asia have an attractiveness component with them,” suggested a fund manager in Norway. “Asian markets are not in as deep trouble as the European and North American markets. Investors are confident of making returns while they lack the same confidence in Europe and North America.”

A hedge fund manager in Germany had a different view: “North America is unique because of its sheer scale, breadth of opportunities and the inexpensive price of the debt. European markets cannot handle the size of the refinancing needs and the distressed assets are more of junk category. APAC is still fresh and the valuations are very high.”

“Our restructuring team in Asia has had a very busy 2012, particularly in Japan and India, and we are starting to see increased debt restructuring opportunities throughout the broader region. As always, participants should understand the different systems of each jurisdiction and appreciate that no country offers the clarity or procedural certainty of US Chapter 11.”

Mark Fucci, Partner, Bingham McCutchen LLP

Where do you expect to find the best distressed opportunities going forward?

Asia

Europe

North America

35%

33%

32%

A large majority of respondents expect the high yield bond market to remain open, allowing companies that become stressed to refinance their bank debt affordably.

“Stressed companies will not only use high yield bonds to refinance their debt but also to raise money for working capital,” a hedge fund manager in Switzerland suggested. “The high yield bond market has become much more liquid, diverse and reliable and will be significantly used to take advantage of its low rates.”

“As the high-yield and leveraged loan markets continue to open and close sporadically, the success of stressed refinancings remains a question of timing. The mantra is: Be ready early to exploit these potentially short windows stands.”


“Despite unstinting efforts by institutional investors to revise investor-unfriendly terms in senior secured notes, the volume of issuance and of demand for high yield paper has limited their success. When the default rate in the high yield market does resurge, as it inevitably will, these documentary problems will present legal and technical obstacles to successful debt restructuring.”

Elisabeth Baltay, Partner, Bingham McCutchen LLP

Do you expect the high yield market to remain open allowing stressed companies to refinance their bank debt cheaply?

Yes

No

70%

30%

15

distr

essed in

Vestor

s sur

Vey

For the second year in a row financial services remain the area expected to offer the most opportunities for distressed investors. The property and construction sector has climbed up the list to stand in second place, from tenth in 2012. The automotive sector has risen from eighth place to third, bearing out the negative signs emanating from some of Europe’s largest vehicle producers. Investors also see substantial opportunities within the consumer and retail space, which maintains its position in fourth, as well as transport, energy and technology.

“Construction and property companies are finding it very difficult to raise capital and lack of demand has increased the chance of their default providing opportunities for the distressed investors,” suggested a prop trader in the UK.

“Lower discretionary spending will continue to hurt consumer-facing industries the most, such as retail and hotels & leisure. Real Estate is and will remain a significant source of distress over the coming year.”

Andrew Merrett, Rothschild

“For some time now, distressed investors have been eyeing the shipping market. There have been few rewards to date, but there are now signs that this may be starting to change as portfolios begin to be marketed and as shipping becomes a non-core sector for some banks.”


Please rate the following in terms of the opportunities they present for distressed investors in 2013.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Property & Construction

Financial Services

Auto/Auto Parts

Consumer/Retail

Transport (Incl. Shipping)

Energy

Technology

Infrastructure

Telco/Cables

Leisure

Chemicals and Materials

Media

Utilities

Paper and Packaging

Aerospace

Basic Industries 46%

54% 36% 10%

42% 48% 10%

42% 48% 10%

33% 53% 14%

22% 51% 27%

30% 42% 28%

24% 48% 28%

12% 56% 32%

18% 43% 39%

16% 44% 40%

7% 46% 47%

6% 46% 48%

12% 31% 57%

4% 37% 59%

2% 32% 66%

47% 7%

0% 10% 20% 30% 40% 50% 60%

PIK notes

CDS

Second lien debt

Senior debt

Securitisations/ABS

Private placements

Convertible bonds

Mezzanine debt

High yield bonds

8% 15% 9%

4% 4%5%

11%2%1%

7%5%3%

13% 11% 12%

14% 11% 20%

17% 19% 16%

19% 9% 9%

21% 23% 12%

Few opportunities Some opportunities Significant opportunities


High yield bonds, chosen by 21% of respondents, remain in first place as the most attractive investment instrument for the year ahead. Mezzanine debt has moved up to second place from fifth while convertible bonds and private placements swapped places in third and fourth position. ABS debt has increased its appeal moving up to fifth place from ninth while CDS and PIK notes remain among the least attractive debt instruments for the distressed investor community.

“Everyone is now in a classic framework of allocating capital to diverse assets,” explained a hedge fund manager in Switzerland. “High yield bonds are risky but every investor still wants to invest in them because they have always generated higher returns than investment grade bonds or any other investment area.”

Out of the following, please rank the three instruments that you think will offer the most attractive investment opportunities in 2013.

Most attractive Significantly A`ttractive Attractive



Mezzanine debt, convertible bonds, private placements and high yield bonds were chosen by respondents as the most attractive instruments to secure control of credit in 2013.

This represents a shift compared to last year when senior debt was seen as the most likely instrument with 47% of respondents selecting it. This may suggest investors are becoming more optimistic about valuations in 2013 and believe first lien debt will be less likely equitised or that junior lenders will be more able to refinance the senior debt.

“We have seen a small number of very successful junior debt restructurings in Europe over the past five years. In Gala Coral, Klöckner Pentaplast and Findus Foods, junior lenders were able to secure control. But the lack of an absolute priority rule in any European insolvency law - compared to the US where this is a key feature of Chapter 11 - means that in Europe senior lenders always remain in control of the process even when their debt is fully covered.”


Which instrument is most likely to be attractive as a means to secure control of a credit in 2013?

Mezzanine debt

Convertible bonds

Private placements

High yield bonds

Securitisations/ABS

Senior debt

Second lien debt

PIK notes

CDS

20%

19%

16%

14%

12%

9%

5%4% 1%

Looking at an 18 month time horizon, some 42% of distressed investor respondents think that the peak for high yield-related restructurings will occur in the second half of 2013 and 38% expect it in the first half of 2014. Only 20% think the peak will occur in the first half of 2013.

“The outlook for 2013 is similar to last year: restructuring events driven more by maturities and liquidity issues than mere covenant issues, but with more high yield maturities looming on the horizon.”

Hamish Mackenzie, Rothschild

When do you expect high yield-related restructuring opportunities to peak in the next 18 months?

0% 10% 20% 30% 40% 50%

H1 2013

H1 2014

H2 2013 42%

38%

20%


17

distr

essed in

Vestor

s sur

Vey

Nearly two thirds of respondents think that there will be more in-court restructurings in 2013 versus 2012. This represents a slight decline from last year’s survey when 82% of respondents expected more in-court restructurings in the following 12 months.

“In most of Europe, it remains the rule that in-court debt proceedings result in liquidations. As a result, all parties are motivated to follow an out-of-court route so as to preserve the going concern value of the distressed business. Moreover, outside England, where the scheme of arrangement and administration pre-pack are widely used to implement deals, it is rare to find a formal process that works to facilitate debt restructurings.”

Liz Osborne, Partner, Bingham McCutchen LLP

Do you expect to witness more in-court debt restructuring in 2013 than during 2012?

Yes

No

65%

35%

A majority (58%) of respondents think that there will be an increase in forum shopping to either the UK or US. This is in line with a trend for both creditors and debtors opting to have their case heard in countries with a well developed restructuring culture and a tested insolvency regime.

“Continuing attempts by European states and the European Commission to improve debt restructuring procedures have not stemmed the volume of deals implemented by scheme of arrangement in the UK.”

Emma Simmonds, Partner, Bingham McCutchen LLP

“As complex multinational global businesses encounter the need to restructure, such companies and their creditors are likely to take actions intended to provide jurisdiction to US and/or UK courts to implement their 'plans' and 'schemes'.”

Jeff Sabin, Partner, Bingham McCutchen LLP

Do you expect to see an increase in forum shopping to the UK or US to transact restructurings via a court-driven process?

Yes

No

58%

42%


Around two-thirds of distressed investor respondents expect changes to insolvency laws in Germany, France and Italy to lead to an increase in the number of in-court restructurings taking place in these countries.

“Wherever possible, we prefer to use local laws to implement restructurings, adapting existing processes for sophisticated capital structures. However, each country has introduced laws to suit its own culture and legal framework, and there remains a lot of uncertainty about the ways these new laws will be applied in practice in individual cases. The changes in Germany look most promising, but the restructuring culture in France and Italy is very entrenched.”

Christian Halász, Partner, Bingham McCutchen LLP

Do you expect the changes implemented in the German, French and Italian insolvency laws to boost in-court debt restructurings in these countries?

Yes

No

66%

34%

A large majority (73%) of respondents think that the legal changes made in Germany, France and Italy are strong enough to encourage distressed investors to invest more into these markets.

“The German and French legislators have made changes to their respective insolvency laws and this is helping investors have significant control which is convincing them to venture into these geographies,” suggested a hedge fund manager in Belgium.

“The end of 2012 saw an increase in distress activity in France due to the weak economic environment in an election year. We can expect more lender-led situations being implemented despite the perceived borrower-friendly jurisdiction and more fulsome restructurings in 2013 – it remains to be seen what impact the new policy environment has on appetite to provide new capital in stressed situations.”

Arnaud Joubert, Rothschild

Do you think the legal changes are significant enough to convince distressed investors to venture further in these geographies?

Yes

No

73%

27%

19

distr

essed in

Vestor

s sur

Vey

A large majority (70%) of respondents think that there will be more interest in assets and debt in Southern Europe.

“Distressed investors are eyeing Southern Europe as a limp market,” explained a hedge fund manager in Switzerland. “The economic woes in the region are attracting the attention of distressed debt funds that want to take advantage of cheap opportunities.”

“We are seeing tremendous interest in distressed assets in Southern Europe, particularly in Spain. This interest has, however, for the most part been limited to real assets rather than debt, since the influence of local banks and the uncertainty in local restructuring regimes continue to undermine the confidence of foreign investors.”

Tom Bannister, Partner, Bingham McCutchen LLP

Do you think there will be an increased interest in Southern European debt/assets?

Yes

No

70%

30%

Of those respondents that anticipate increased interest in Southern Europe some 41% think that investors will be mostly targeting government assets up for sale or privatisation, 35% opt for the debt of companies with some sovereign involvement while 24% see sovereign debt as the main area of interest.

“All the Southern European countries are doing massive restructurings to increase private investment and raise capital. Privatisation of many core areas will attract investors and improve the condition of the government as they can use the capital raised to pay down their debt,” a prop trader in Greece commented.

“Notwithstanding investors’ growing interest in Southern Europe, appetite for European sovereign debt has been greatly undermined by restrictions on short-selling, which have reduced investor liquidity.”

Christopher Leonard, Partner, Bingham McCutchen LLP

If yes to the previous question, what are investors mostly looking at?

Assets up for sale/to be privatized

Debt of Sovereign-owned or part-owned companies

Sovereign debt41%

35%

24%


Portugal, chosen by 32% of respondents, is seen as the most attractive country within Southern Europe, closely followed by Italy picked by 31% of respondents. Spain with 26% placed third while Greece was last with only 11% of those surveyed viewing it as the most interesting market to invest in debt or assets.

“The market conditions in Portugal have started to improve and soon they will be returning to the bond markets so I see Portugal as more interesting," a prop trader in Italy noted.

“The recent privatisation programs in Portugal have been positive for the macro-economic environment. This privatisation program has increased investor confidence and makes Portugal an interesting market,” added a managing director in Belgium.

A trader in Spain took a different view: “Spain’s legal jurisdiction is moderately attractive and their double taxation treaties have a wide network which makes the country more interesting.”

Which country do you think is most interesting to invest in debt/assets?

Portugal

Italy

Spain

Greece

32%

31%

26%

11%

“In 2012 Spain avoided an Irish/Greek-style bail-out partly due to the €40bn banking recapitalisation scheme provided by the European Union. A full sovereign bail out seemed unavoidable, but the risk now seems to be considerably diminished, with the 10 year bond yield below 5% and Spanish issuers accessing the capital markets again in January 2013. The real economy will, however, continue to struggle in 2013, due to high unemployment and very subdued consumer confidence. This and the banking consolidation are likely to result in continuing restructuring opportunities that will reach beyond the pure amend and extend refinancings typically implemented during the last three years. The UK Scheme used for amend and extend transactions will become more frequent and typically start to be utilised for disenfranchising subordinated lenders.”

Beltran Paredes, Rothschild

21

distr

essed in

Vestor

s sur

Vey

The economic environment, chosen by 64% of respondents, is seen as the biggest barrier to investment within Southern Europe. The legal backdrop was picked by 25% of respondents while the size and availability of the opportunity was seen as the least important deterrent chosen by just 11%.

“Most of the Southern European countries have returned to recession which has led to tax rises meaning that investments are held back,” a prop trader in Italy commented.

“Economies in Southern Europe are contracting because of the pressure to reduce debt and implement austerity measures; investors prefer markets which are less volatile,” added a hedge fund manager in Germany.

What if anything has held investment back in Southern Europe?

Economic environment

Legal jurisdiction

Size of/availability of opportunity

64%

25%

11%

A majority (71%) of respondents expect liquidity in the primary market to improve in 2013, a significant change from last year when only 53% of those surveyed expected the market to improve over the course of 2012. “I am expecting the liquidity to improve in the primary market because corporates are boasting healthy balance sheets while primary market dealers such as private equity are holding huge stores of dry powder,” commented a prop trader in Austria.

Do you expect liquidity in the primary market to improve in 2013?

Yes

No

71%

29%


Refinancing continues to be seen as the main driver of primary market activity but the number of respondents choosing it as the most important factor has fallen to 43% from 65% in the 2012 survey.

Funding M&A is seen as the second most important reason to tap debt capital markets, chosen by 33% of respondents versus only 9% in 2012. LBOs are in third place, chosen by 20% of respondents while dividend payouts are considered the least likely driver, picked by just 3%.

“The private equity buyers and corporates are sitting on a lot of cash and their priority is to go for strategic deals so M&A will be the key driver behind primary market activity in 2013,” suggested a prop trader in Switzerland.

“Private equity funds still have dry powder and will be keen to deploy this in 2013 ahead of fund maturitiesmaturities. We can also expect trade buyers to be more present in distressed M&A than in the past, particularly as healthy corporates are sitting on record cash piles.”

Andrew Merrett, Rothschild

What will be the key driver behind primary market activity in 2013?

Dividend payouts

LBOs

M&A

Refinancings

43%

20%

4%

33%

Reflecting the results of the previous question half of those surveyed expect liquidity in the primary market to improve by a sizeable 20-29. Some 13% expect the improvement to be even greater at 30-39 while 15% anticipate an improvement of 10-19 and 22% expect an improvement in the 0-9 range.

Optimism has increased since the 2012 survey when only 32% of those polled expected an increase of more than 20%, compared to 63% in this year’s survey.

“The market is recovering as the Eurozone is stabilising,” suggested a prop trader in Austria. “Investors who were holding cash will now bring it to the market and that will boost liquidity.”

In percentage terms, how much will liquidity improve in the primary market in 2013?

30-39%

20-29%

10-19%

0-9%

50%

15%

13%22%

23

distr

essed in

Vestor

s sur

Vey

Expectations about who will be the primary providers of liquidity remain broadly similar to last year.

Just over half of respondents think that funds will be key (compared to 49% in 2012). Banks are expected to be the main providers of liquidity by 35% of respondents versus 46% in 2012, while CLOs are tipped by 13% of respondents, up from 5% last year.

“Alternative lending institutions have been stepping into the primary lending void left by the banks. Our London office originated over €6 billion of privately-placed notes in 2012, none of it from banks. We have seen no sign of this unprecedented activity abating.”

Barry Russell, Partner, Bingham McCutchen LLP

Who will be the players behind primary market liquidity in 2013?

Mutual funds, insurance companies and pension funds

Banks

CLOs

52%

13%

35%

Basel III rules will inhibit banks' lending capabilities by 0-25% according to just over half of those surveyed. Some 40% think that that the capacity to lend will be cut by 25-50%, while only 7% of respondents think that banks' ability to lend will be unchanged.

“The changes to Basel III, specifically the LCR, would appear to further limit the need for banks to sell assets into the market.”

Dacre Barrett-Lennard, Rothschild

In percentage terms, to what degree do you think banks’ ability to lend new money or extend existing debt facilities has diminished as a result of Basel III rules?

More than 50%

25-50%

0-25%

Unchanged

51%

7% 2%

40%


There is a reasonable amount of liquidity in the high yield secondary market, according to the survey respondents.

Views are more positive than this time last year. Some 64% of respondents say there is a reasonable amount of liquidity compared to just 30% in last year’s survey. Conversely only 33% of those surveyed suggest that there is not very much liquidity while in 2012 some 60% of respondents held this opinion.

“The mark to market nature of high yield structures and the likely trading which may follow in distressed names will be fertile ground for funds, particularly as ratings downgrades trigger liquidity.”


How much liquidity is there in the high yield bond secondary market in Europe?

A lot of liquidity

A reasonable amount of liquidity

Not very much liquidity

64%

33%

3%

Distressed debt respondents are split on whether hedge funds will be able to fill the funding gap left by banks.

“Commercial banks are reluctant to extend credit as they have become more cautious about exposure to risk and this is creating an opportunity for the hedge funds to fill in the lending gap,” said a prop trader in Italy.

Do you expect hedge funds to fill the lending gap?

No

Yes

51%49%

25

distr

essed in

Vestor

s sur

Vey

A majority (55%) of respondents expect the amount of liquidity in the high yield secondary market to increase in 2013, while 41% expect liquidity to remain the same and only 4% expect deterioration.

Do you think that this level of high yield liquidity will increase, decrease, or stay the same in 2013?

Increase

Stay the same

Decrease

55%

41%

4%

A majority (53%) of respondents say that there is a reasonable amount of liquidity in the secondary debt market compared to some 43% who say that there is not very much.

How much liquidity is there in the secondary debt market in Europe?

A reasonable amount of liquidity

Not very much liquidity

A lot of liquidity

53%

43%

4%


A majority (61%) of those surveyed have increased their asset allocation to distressed investments over the last 12 months. This represents a big change from 2012 when only 28% of respondents said that they had shifted their allocation towards distressed assets.

Have you increased your asset allocation to distressed investing in the last twelve months?

Yes

No

61%

39%

Liquidity in the wider secondary debt market is expected to improve in 2013 with 55% of respondents expecting an increase and only 5% expecting a decrease. Some 40% think that the liquidity will remain the same.

Do you think this level of liquidity will increase, decrease, or stay the same in 2013?

Increase

Stay the same

Decrease

55%

40%

5%

27

distr

essed in

Vestor

s sur

Vey

Affirming the trend seen in the previous question 46% of those surveyed expect to increase their distressed asset allocation in 2013, while 43% expect to keep the share the same and only 11% anticipate a decrease.

What do you expect to happen to your distressed allocation in 2013?

Increase

Stay the same

Decrease

46%

11%

43%

Just under half (45%) of those surveyed say that they are actively raising funds to invest in distressed debt, which represents a sizeable shift from last year’s survey when only 20% of respondents were sourcing funding to invest in distressed situations.

Are you actively raising funds to invest in distressed debt?

No

Yes

55%

45%


Pension funds, chosen by 30% of respondents, are now expected to be the top source for investment into distressed funds in 2013, up from second place in last year’s survey. The top pick in 2012, funds-of-funds, has slipped to second place at 28%, while high net worth individuals came in third at 16% and insurance companies fourth at 15%.

“Pension funds have raised a lot of capital in the past years and will be investing more in distressed funds,” says a hedge fund manager.

“Pension funds are attracted by the high rates of return that distressed debt offers which they can cannot expect from their common investments such as stocks,” a UK based prop trader noted.

Which source do you expect to represent the largest investment in distressed funds in 2013?

Pension funds

Funds-of-funds

High net worth individuals

Insurance companies

Family offices

Banks

Universities

30%

28%

16%

15%

5%5% 1%

Raising new money is becoming easier according to the distressed investors surveyed. A minority (43%) of respondents expect fundraising conditions to worsen in 2013, a more positive picture than last year when over half (54%) were expecting conditions to deteriorate.

“The economic environment has stabilised so I feel the fundraising conditions will not be tougher in 2013 compared to last year,” suggested a hedge fund manager in Switzerland.

Do you anticipate tougher fundraising conditions in 2013?

No

Yes

57%

43%

29

distr

essed in

Vestor

s sur

Vey

Distressed opportunities are expected to be easier to source in 2013 according to 63% of survey respondents, a slight increase on the 60% who said that deals would be easier to come by in last year's survey.

A sizeable minority think that deals will be harder to source as reflected in a comment from a hedge fund manager: “Distressed opportunities are not easy to find. Capital is cheaper which is helping companies to refinance their debt. Over the last two years the level of nonperforming assets has decreased significantly.”

“The banks are not under pressure to revalue assets or take losses. In the absence of capital increases, most European banks will not be able to sell distressed debt at knock-down prices. We see no reason why this trend will not continue in 2013. Sourcing of good opportunities remains key.”


Do you expect it to be more or less difficult to source distressed opportunities in Europe in 2013?

Less

More

63%

37%

Private equity deals are seen as the most important source of liquidity for long-term exits from European distressed debt, with 26% of respondents choosing this as their top choice and 60% putting it in their top three

Sale to other distressed players, chosen by 20% as their first choice and 60% as one of their top three, came second. Refinancing was in third place with 11% of respondents choosing it as their top choice and 51% of those surveyed putting it in their top three selections. A sale to a strategic buyer was placed fourth, with 18% of those surveyed selecting it as their primary source for exits and 40% in their top three

“Distressed players, particularly hedge funds, will be the primary source for exits from distressed assets,” suggested a hedge fund manager in Germany. “Hedge funds have a huge appetite for distressed assets as they are prone to take risks which other investors are not ready to assume.”

What do you expect to be the primary source of liquidity for long-term exits from European distressed debt?

0% 10% 20% 30% 40% 50% 60% 70%

Distressed OTC trading/saleto other distressed players

Public markets

Existing shareholders

Strategic buyer

Refinancing

Distressed OTC trading/saleto other distressed players

Private equity 26% 14% 20%

20% 24% 16%

11% 21% 19%

18% 10% 12%

4% 10% 11%

8% 8% 8%

13% 3% 4%

Primary Source (choice one) Secondary Source (choice two)

Tertiary Source (choice three)



Distressed debt was the most popular asset class during 2012 with 95% of those surveyed allocating more than 10% of their investment to this area and 62% allocating over 20%. Equities were the second most popular option with 47% of respondents allocating 21-30% to this area and 22% allocating over 30% of their investments to this asset class.

“German corporates have breathed a sigh of relief as the economy has avoided going into recession but may begin to wonder whether marginal growth is the new norm. This, in turn, could shift attention to the more stable asset classes (such a residential real estate) whose risk/return profiles appear to be increasingly appealing and apply some stress to companies in more cyclical sectors who are expected to see more difficult trading but so far have avoided restructuring.”

Heinrich Kerstien, Rothschild

What proportion of your investments in the past 12 months have you allocated to the following:

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

CDS

Discounted par credits

Fallen Angels

New Issuance

Equities

Distressed 5% 32% 41%

23%

1%

47%

7% 29%

27% 32%

32% 12% 5%

24% 19% 7%

4%

2%

30% 11% 2%

19% 3%

16% 5%

<10% 11-20% 21-30%

31-40% >40%


Some 31% of respondents think that long-term exits from unlisted equity will be limited in 2013, giving this option the highest proportion of first choice answers and highlighting the challenging nature of the market.

When considering respondents’ top three choices private equity was the preferred pick, with about 60% of those surveyed putting this exit route among their top three options. A strategic buyer was the second pick, with a total of 57% and a sale to existing shareholders was third with 54%.

“Many debt-to-equity swaps have involved private equity owned businesses, with no existing listed platform to facilitate an easy exit. At some point, when liquidity returns to the debt and equity primary markets, there should be good opportunities to realise distressed investments.”


What do you expect to be the primary source of liquidity for long-term exits from your European distressed investments in unlisted equity?

0% 10% 20% 30% 40% 50% 60% 70%

Public markets

Exits will be limited innumber in 2013

Existing shareholders

Strategic buyer

Private equity 19% 25% 16%

27% 20% 10%

15% 20% 19%

31% 6% 8%

8% 7% 22%

Primary Source (choice one) Secondary Source (choice two)

Tertiary Source (choice three)


31

distr

essed in

Vestor

s sur

Vey

Some 42% of those surveyed are actively seeking direct new money investments in stressed scenarios representing an increase on last year’s figure when only 22% of respondents were looking for opportunities to invest into stressed situations.

Are you actively seeking direct new money investments in stressed scenarios?

No

Yes

58%

42%

Senior debt, chosen by 69% of those surveyed, is the most popular option for respondents seeking new investments into stressed companies. This is similar to last year’s result, when senior debt was also the top pick chosen by 67% of respondents. Equity is again the second most popular choice but has increased its standing with 62% of investors seeking equity investments in 2013 compared to 46% in 2012. Super senior debt has moved from fourth position to third with 26% of respondents seeking investment through super senior debt instruments this year.

“Given the risks in the market, any new investor will want senior ranking, appropriate leverage and extensive control. The challenge is to marry those benefits up with appropriate returns.”

Barry Russell, Partner, Bingham McCutchen LLP

If yes to the preceding question, in what form?

0% 10% 20% 30% 40% 50% 60% 70% 80%

Subordinated debt

Super senior debt

Equity

Senior debt 69%

62%

26%

17%



21-30%

16-20%

10-15%

5-9%

59%

31%

8% 2%

More than half (59%) of respondents say that they targeted returns of 10-15% in 2012, while 31% were targeting returns of 16-20%, 8% were hoping for returns of 5-9% and 2% were aiming for returns of 21-30%.

What percentage return did you target in 2012?

There is increased appetite for buying out fellow creditors with 41% of respondents saying that their willingness to commit additional cash has increased compared to only 22% who said the same in last year’s survey. Just under half (48%) of respondents said that their appetite to buy out other creditors has remained the same while only 11% said that willingness to add exposure has declined.

Has your appetite for committing fresh cash to a situation to buy out other creditors increased, decreased or remained the same?

Remained the same

Increased

Decreased

48%

41%

11%

33

distr

essed in

Vestor

s sur

Vey

A majority (53%) of respondents say that their targets are the same as the previous year while 26% target a higher return and 21% report a decrease in their expectations.

Has this target increased, decreased or stayed the same?

Remained the same

Increased

Decreased

53%

26%

21%

Over two-thirds (68%) of distressed investors surveyed seek control over companies via a loan-to-own strategy. This represents a substantial increase on last year when only 41% of respondents were pursuing this approach.

Do you seek equity control of companies via a ‘loan-to-own’ strategy?

Yes

No

68%

32%


Yes

No

82%

18%

The vast majority (82%) of those surveyed expect to see an increase in the number of investors looking to convert debt to equity as a means of gaining control. This represents a sizeable change from last year’s survey when only 55% of respondents expected an increase in the number of investors seeking control through equitisation.

“Despite the general resurgence of credit markets it remains challenging to source new debt financing for companies in balance sheet distress or with volatile earnings history. That said, certain businesses will support levels of new debt financing sufficient to facilitate a substantial refinancing of the existing debt structure, with the remainder funded by new equity on satisfactory return expectations. Consequently, there is no substitute for a comprehensive M&A sales process to establish value in a restructuring situation, in particular given that debt financing markets are open, equity investors – trade and financial – have cash to spend, and desktop valuations frequently sit closer to or above the top of the debt stack in question.”

Hamish Mackenzie, Rothschild

Do you expect an increase in the number of investors intent on acquiring control through equitations in 2013?

Over half (55%) of those surveyed believe that the acquisition of a blocking stake is key to the pursuit of a loan-to-own strategy representing a slight increase on the 47% who saw it as crucial in 2012.

Do you think acquiring a blocking stake will be the key to loan-to-own strategies in 2013?

Yes

No

55%

45%

35

distr

essed in

Vestor

s sur

Vey

With 28% of respondents citing it as the most important metric and 57% putting it among the top three considerations the underlying economic environment and associated geography/industry performance is the standout factor to select potential investment opportunities. Financial ratios, last year’s top pick, is now in second place with 15% of those surveyed saying it was the most important factor, and 42% stating that it was among the top three considerations. The respondents also rate management change, positioned third, and cash balances/headroom on facilities, positioned fourth, as key metrics when choosing investments.

“Both geography and industry are key for distressed debt investment,” suggested a prop trader in Portugal. “Not all sectors are attractive or even feasible for distressed investments.”

“In Italy, all eyes will be on the elections. Uncertainty may affect the appetite of foreign investors and the overall liquidity of the market, potentially jeopardizing the chances for the country to get back on a growth path”

Alessio De Comite, Rothschild

What are the key metrics you are tracking to determine potential investment opportunities?

0% 10% 20% 30% 40% 50% 60%

CDS prices

Acquisition history

Profit warnings

Maturity of amortization of debt

Price movement in quotedinstruments (i.e. debt, shares)

Cash balances and availableheadroom on facilities

Management change

Financial ratios

Economic trends andperformances by geography/

industry (including competitors)28% 19% 10%

15% 15% 12%

7% 15% 17%

16% 14% 8%

9% 14% 7%

9% 4% 16%

6% 9% 11%

6% 10%4%

4% 9%5%

11%

Most Important Important Moderately Important

Market uncertainty is currently the most important deterrent to investing in distressed businesses for those surveyed, with 31% picking it as the top issue and 61% putting it in their top three choices. Regulatory risk is the second most important issue picked by 15% of respondents as their top choice and put in a top three position by 42%. Regulatory risk was also the biggest mover, climbing up from fifth position in last year’s survey.

“Market uncertainty is the biggest concern as it affects all other dimensions,” said a prop trader in Austria. “Valuations are very volatile because of market uncertainty which is also the prime reason for the change in regulations.”

What are the main issues preventing your investment in distressed businesses?

0% 10% 20% 30% 40% 50% 60% 70%

Pension deficit

Unionisation

Extent of CDS referencing/guarantees

Intercreditor issues/debt documentation

Cash need of the business

Access to funds internally

Timeframe for exit at requirerate of return

Leverage multiple

Legal jurisdiction

Regulatory risk

Market uncertainty 31% 12% 18%

15% 15% 12%

7% 20% 10%

13% 9% 13%

7% 13% 14%

8% 9% 9%

7% 7% 9%

6% 5% 9%

2%5% 4%

5%1%

2%

3% 2%

Percentage of respondents Percentage of respondents

Most Important Important Moderately Important

priVate equity surVey

The overwhelming majority (80%) of respondents believe that the Eurozone and sovereign debt crisis will continue to have a major impact on private credit markets in 2013.

However, this has led to new opportunities explained a partner from Sweden: “The Eurozone crisis has continued to provide opportunities as volatile stock markets, low bond yields, and a general market uncertainty has rewarded private credit markets handsomely leading to many investors and institutions increasing allocations to this area.”

Do you expect the Eurozone and sovereign debt crises to continue to have a major impact on private credit markets in 2013?

No

Yes

20%

80%

In the fourth quarter of 2012, Debtwire canvassed the opinions of 30 private equity investors to gauge their views on restructuring and the state of the market.

The interviews were conducted by telephone and the respondents were guaranteed anonymity. The results are presented in aggregate.

37

pr

iVate equ

ity sur

Vey

Greece is the country seen as most likely to leave the Eurozone, with 23% of those surveyed expecting the country to exit.

“Greece is going to miss its targets and is falling behind in the implementation of structural reforms that are part of the bailout packages that are keeping its economy afloat. If Greece fails to implement the reforms then its bailout packages will be stopped leading to a default on its sovereign debt and ultimately Greece will have to exit the Eurozone,” a principal in Spain commented.

Do you expect any European country to leave the Eurozone? If Yes, which one(s)?

0% 5% 10% 15% 20% 25%

Germany

Spain

Greece 23%

3%

3%

Close to three quarters (73%) of respondents believe that no country will leave Eurozone.

“It’s hard to imagine any European country leaving the Eurozone. Greece is the most vulnerable because of its mounting debt crises and default worries. However, the concerns of a Eurozone breakup have eased as the European central bank has committed to reduce the borrowing cost of struggling countries like Greece by buying their bonds,” suggested a Partner in France.

Do you expect any European country to leave the Eurozone?

Yes

No

73%

27%



Only 33% of respondents think that the EU fiscal compact is a feasible long-term solution to the Eurozone’s problems, with concerns over the lack of a counter-balancing strategy for promoting growth.

“The fiscal compact is surrounded by austerity and spending cuts and I think austerity is not the right solution to bring the economy back on track,” suggested a partner in France.

“The European governments should come together to implement development measures and remove uncertainty,” added a Director in the UK.

Do you think the EU fiscal compact is a feasible long-term solution?

No

Yes33%

67%

A slight majority (53%) of respondents believe that the Eurozone sovereign debt crisis has peaked, although 47% of the private equity investors surveyed think that there is worse to come.

“Unless the debt crisis is over we cannot say that the worst is over,” suggested a Chief Financial Officer in Italy.

Has the worst passed in the European sovereign debt crisis?

No

Yes

53%

47%

39

pr

iVate equ

ity sur

Vey

Some 83% of respondents expect domestic bank funding gaps to be a trigger for restructuring in the year ahead, up from 37% of respondents in 2012. Sixty-seven percent of respondents pointed to suppressed demand as a result of austerity measures, up from 23% last year.

Only 33% of respondents cited reduced lending from foreign banks, a big reversal from 2012 when this was seen as the most likely trigger cited by 67% of respondents.

What will be the cause of the restructuring resulting from sovereign risk issues?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Foreign banks having to takeheavy write-downs on stressed

sovereign bond holdingsand having to reduce lending

Austerity measures curbingdemand and impacting trading

Domestic banks struggling tofund themselves as a result oftheir governments’ difficulties,

curbing lending 83%

67%

33%

Only 7% of respondents stated that none of their portfolio companies underwent a covenant reset, amendment or maturity extension in 2012, compared to a figure of 36% in last year’s survey. Some 20% of respondents had to take these actions in over 25% of their portfolio, compared to a figure of 10% in 2011. A third of respondents resorted to these measures for 6-15% of their portfolio while 37% were required to take one of these actions for 16-25% of their portfolio.

What percentage of your portfolio underwent a covenant reset, covenant amendment or maturity extension in 2012?

0

1-5%

6-15%

16- 25%

Above 25%

20%7%

3%

33%

37%



Fifty percent of respondents say that European restructuring activity will peak in 2013, with 20% opting for the first half of the year and 30% opting for the second half. Around a third of respondents suggest that the top will not occur until H1 2014, while 10% say that the peak will not occur until 2015.

“Restructuring in 2012 has already jumped significantly, but the challenges for the coming year are also significant,” a partner in Sweden commented. “The debt crisis is not yet over and companies will still find it difficult to access capital either through debt or through private finance.”

When do you expect the volume of European restructurings to hit its next peak or has this already happened?

H2 2012

H1 2013

H2 2013

H1 2014

H2 2014

2015

20%

11%

3% 3%

33%

30%

Some 32% of private equity respondents say that over 25% of their portfolio underwent some form of financial restructuring in 2012, compared to a figure of just 11% in 2011. Only 11% of respondents said that 0-5% of their portfolio underwent financial restructuring in 2012, while in the 2011 edition of this report 39% said that none of their portfolio had undergone restructuring.

What percentage of your portfolio underwent some form of financial restructuring in 2012?

0-5%

6-5%

16-25%

Above 25%

32%

11%

36%

21%

41

pr

iVate equ

ity sur

Vey

Respondents point to overleveraged structures (30%), failure to refinance (30%) and liquidity shortfalls (27%) as the largest contributing factors to restructurings. Difficulties amending covenants are seen as a less important factor, cited by 13% of investors.

“Not [being] able to refinance debt, will be the core reason for restructuring,” suggested a Managing Partner in the Netherlands. “Financing parameters have become tough and many companies will find it impossible to meet the conditions of refinancing.”

“Private equity firms have entered into hostile territory by over-leveraging their investments and thus they will be forced to restructure their portfolios,” suggested a Partner in Sweden.

What do you expect to be the single largest contributing factor to trigger restructurings for private equity portfolio companies?

0% 5% 10% 15% 20% 25% 30% 35%

Failure to amend covenants

Liquidity shortfall

Failure to refinance

Over-leveraged 30%

30%

27%

13%

0% 10% 20% 30% 40% 50% 60% 70%

Unworkable business modelin current climate

Low valuations

Lender perception of sponsors’available funds/track record

Divergent creditor attitudes

Availability of funds 67%

50%

43%

33%

27%

In 2012 the availability of funds was seen as the main stumbling block to completing financial restructurings. This has been repeated in 2013, with 67% of respondents citing it as one of the greatest challenges.

Divergent creditor attitudes (50%) and lender perceptions of sponsors' available funds/track record (43%) are regarded as the other key obstacles to completing restructurings.

What are the greatest challenges to completing financial restructuring?

Percentage of respondents Percentage of respondents


0% 10% 20% 30% 40% 50% 60%

Approach lending syndicatesearly in the event of stress

Build a relationshipwith your syndicate

Be flexible

Work on contingency plans

Focus on management/operational issues

Avoid over-aggressive valuationsin a competitive bid process

Avoid maintaining high leverage 33% 17%

17% 13%

20% 10%

13% 13%

7% 13%

20%

7% 10%

The survey results suggest that the number of portfolio companies needing additional equity in 2013 will be higher than in 2012. Only 20% of respondents believe that none of their portfolio companies will need additional equity in 2013 compared to 37% a year ago. Twenty percent of respondents indicated that between 0% and 10% of their portfolio would need additional equity compared to 47% in the 2012 survey. Some 37% said that they will need to stump up extra investment for 11-25% of their portfolio, while 23% think that 26%-50% of their portfolio will need extra funding.

For what percentage of your portfolio companies will you have to consider additional equity injections in 2013?

0%

1-10%

11-25%

26-50%

23%

20%

20%

37%

The key lesson private equity investors took from restructurings completed in 2012 was to avoid sustained high leverage, according to the survey respondents. Some 30% of respondents pointed to the need to avoid aggressive valuations during competitive bidding processes and 30% also cited the need to focus on management and operational issues.

What lessons has the private equity industry learned from restructurings completed in 2012?

1st Choice 2nd Choice


43

pr

iVate equ

ity sur

Vey

A clear majority (67%) of survey respondents indicated that they would be more likely to inject additional equity into their portfolio companies this year compared to last year. This answer differs from the 2012 survey when only 47% of investors said they were more likely to stump up new money than the year before.

Are you more or less likely to consider injecting additional equity into portfolio companies this year compared to last year?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Availability of co-investors

Returns already achievedby the fund

Amount of equityinvested to date

Ability to obtain securityand/or priority ranking on

new monies

Management

Dry powder remainingin the fund

Expected return on new monies 38% 24% 21% 11% 3%3%

17% 14% 17% 17% 12% 7% 17%

17% 7% 17% 17% 7% 14% 21%

10% 18% 14% 14% 24% 10% 10%

10% 21% 7% 34% 14% 7% 7%

10% 10% 7% 21% 24% 21%7%

14%7% 24% 34% 21%

More likely to inject additional equity

Less likely to inject additional equity33%

67%

The expected return on additional investment was the most important consideration when providing extra funding for 38% of respondents, followed by dry powder remaining in the fund (17%). The quality of the management was considered the third most important consideration in last year’s survey and maintained this position in 2013, with 17% of respondents making this the key priority. The ability to obtain security/priority ranking was the second most important consideration in the 2012 survey but fell to fourth place this year, chosen by 10% of respondents as the most important factor.

In a restructuring scenario, what are the main considerations when you review new investment in portfolio companies?

Most important Second most important Third most important

Fourth most important Fifth most important Sixth most important

Seventh most important



0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Equity cure rights

Write-down of existing debt

Change of amortisation/maturity profile on existing debt

Renegotiate better covenants

Priority return for new money

Covenant holiday 38% 21% 17% 14% 10%

28% 21% 7% 10% 10% 24%

24% 10% 28% 10% 10% 18%

7% 21% 17% 17% 24% 11% 3%

3% 7% 14% 17% 17% 28% 14%

14% 14% 24% 27% 7%14%

A majority (60%) of private equity investors surveyed expect lenders to be more willing to accept debt write-downs or equitisations in 2013 than in 2012. This represents an increase on the 55% of respondents who expected lenders to be more willing to take a haircut in 2012 than in 2011 and the 37% who anticipated greater leniency in 2011 compared to 2010.

Do you expect lenders to be more open to write-down/equitisation in 2013 versus 2012?

No

Yes

60%

40%

In return for additional investment private equity respondents view a covenant holiday as the highest priority leniency from lenders (38%) followed by priority return for new money (28%). The ability to renegotiate better covenants was cited as the third most important leniency (24%) while a change in the amortisation/maturity profile on existing debt dropped from second place in last year’s survey to fourth place in this year’s cited by just 7% of respondents.

What leniencies do you expect from lenders in return for new money injections?

Highest Priority Second Highest Priority Third Highest Priority

Fourth Highest Priority Fifth Highest Priority Sixth Highest Priority

Seventh Highest Priority


45

pr

iVate equ

ity sur

Vey

Private equity investors expect the highest returns from common equity, with 94% of investors targeting returns of 11-25%. Preferred equity is expected to yield the second highest return, with 84% of investors targeting returns of 11-25%. Super senior debt is expected to offer the lowest return, with 41% of respondents targeting a return of 10% or less from these instruments.

In last year’s survey investors were more bullish. Private equity professionals expected to make the highest returns investing in common equity, with 73% of the respondents targeting returns greater than 20%, and 23% aiming for returns above 30%.

When allocating new money in a restructuring scenario, what annual returns (%) do you expect from investment in the following instruments?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Super senior debt (%)

Subordinated PIK loans (%)

Preferred equity (%)

Common equity (%) 3% 94% 3%

13% 84% 3%

38% 62%

41% 59%

Increased

Stayed the same

Decreased

33%

3%

64%

The targeted return on additional cash injections has increased for a majority (64%) of respondents. This represents an upwards shift in expectations from last year when only 17% of respondents said that their required return had increased and the majority (66%) had kept their requirements the same.

Has the return you require on new money injections increased, decreased or stayed the same from last year?

0-10% 11-25% 26-50%



Over half of respondents (57%) think that they will need to restructure at least one of their portfolio companies in 2013, up from 47% in last year’s survey.

Do you expect that you may need to restructure one or more of your own portfolio companies in the next 12 months?

No

Yes

Increase

Stay the same

Decrease

57%

43%

20%

13%

67%

Around two-thirds of private equity respondents expect the number of amend & extend transactions to increase in 2013. Only 13% of respondents expect there to be a reduction while 20% of respondents expect the number to remain the same.

“The volume of debt maturing in 2013 is significant and in order to avoid defaults amend and extend is the only solution as companies certainly do not have the money to pay off debt,” commented a Partner in France.

Do you think the amount of ‘Amend & Extends’ next year will increase, decrease or stay the same?

47

pr

iVate equ

ity sur

Vey

Some 43% of respondents said that more than 15% of their portfolio was underperforming their original business plans, including 13% who revealed that a least a quarter of their investments were lagging behind their targets. Thirty-seven percent of private equity investors said that 6-15% of their portfolio was underperforming its original targets; while 20% said that 0-5% of their portfolio was off-track.

This year’s results represent an improvement on last year's when 63% of respondents said that more than 20% of their portfolio was underperforming their acquisition business plans, while a third admitted that more than half of their investments were lagging behind their targets.

What percentage of your portfolio is performing below the level of the acquisition business plan?

0-9%

10-19%

20-29%

More than 30%

0-%

6-15%

16-25%

More than 25%

27%

27%26%

20%

30%

13%

20%

37%

Twenty six percent of respondents think that less than 10% of their underperforming portfolio companies will become stressed debt or restructuring candidates over the next 12 months. Forty-seven percent of respondents think that 10-29% of their underperforming companies will progress in this way while 27% believe that more than 30% will undergo some kind of restructuring or become stressed.

Last year’s result was less mixed with two-thirds of the respondents expecting less than 10% of their underperforming portfolio companies to become stressed or restructuring candidates over the next 12 months. Ten percent of the respondents expected over half of their investments' lagging budgets to turn into stressed debt or undergo balance sheet work-outs.

How many of these underperforming portfolio companies represent potential stressed debt/restructuring candidates in the next 12 months?


Outlook remains bearish among private equity investors. This year’s survey tells us that 67% of the professionals surveyed anticipate a tougher fundraising environment due to the rise in equitisations. In 2012 70% of respondents expected a tougher fundraising environment indicating that pessimism remains at a similar level from a year ago.

Do you anticipate a tougher fundraising environment following the increased number of debt equitisations in recent years?

No

Yes

67%

33%

Over the past year attitudes toward restructuring portfolio companies have changed. While last year changing the management was seen by 39% of respondents as the most important step, this year operational changes are in the in top spot with 25% of respondents choosing this as the most likely step and 21% as the second most likely. New equity injections were chosen by a quarter of respondents as the most likely action.

Although only 8% of respondents now view changing the management team as the most important step, 46% of respondents in total placed this method of restructuring among their top two options, indicating that it remains a key tool for private equity managers looking to get a portfolio company back on track.

For those companies in your portfolio which may be restructured, please rank the following method of restructuring in order of likelihood.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Asset disposals

New management

Equitisation / deleveraging

Covenant reset

New equity injection

Operational changes 25% 21% 12% 18% 12% 12%

25% 8% 33% 17% 4% 13%

21% 25% 13% 21% 12% 8%

17% 17% 25% 12% 29%

8% 38% 21% 4% 17% 12%

4% 4% 17%8% 42% 25%

Most Likely Second Most Likely Third Most Likely

Fourth Most Likely Fifth Most Likely Sixth Most Likely


49

pr

iVate equ

ity sur

Vey

Just over half (53%) of private equity respondents expect an increase in the number of portfolio exits in 2013, down sharply from the 83% of respondents who anticipated more exits in 2012 compared to 2011.

Do you expect an increase in the number of private equity portfolio exits in 2013 ahead of new fundraising plans?

Private equity buyer

Trade buyer

Refinancing

IPO

No

Yes

40%

3% 3%

54%

53%47%

Private equity professionals will rely mostly on buyouts from other private equity houses as a route to exit investments. Some 54% of respondents expect this route to be most prevalent in 2013, compared to just 18% in 2012.

Forty percent of respondents expect trade buyers to be the most likely exit route, down from 71% in 2012, while just 3% think that IPOs will be the most prevalent exit, a reduction from 11% in 2012.

What type of exit do you think will be most prevalent in 2013?


Winding down was the most common option for restructured companies in 2012, according to 30% of private equity professionals interviewed for this survey.

Equity dilution and additional investment were also widely observed as the most likely financial restructuring outcomes with each of these measures chosen as the most common option by 27% of respondents.

The credit crisis impacted exit strategies across asset classes. In the wider European market, please rank these financial restructuring outomes as most and least common in 2012.

Less

More

73%

27%

A large majority (73%) of respondents think that the market will be more supportive of second and tertiary buyouts in 2013 relative to 2012. Similarly last year, two-thirds of respondents expected the market to be more supportive of secondary and tertiary buyouts compared to 2011.

Do you expect the market will be more or less supportive of secondary and tertiary buyouts in 2013 relative to 2012?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Covenant reset

Incremental investments(new money)

Equity dilution

Insolvency - company rescued

Insolvency -company wound down

30% 26% 30% 7% 7%

27% 17% 10% 33% 13%

27% 20% 23% 20% 10%

10% 30% 30% 13% 17%

7% 7% 7% 26% 57%

Least Common Less Common Common

More Common Most Common


51

pr

iVate equ

ity sur

Vey

Less than half (43%) of private equity respondents expect to take an active role in the financial restructuring of non-portfolio companies in 2013. This represents a similar level to 2012 when 47% of respondents were expecting to take advantage of these opportunities.

Do you expect to play an active role in the restructuring of non-portfolio companies in 2013?

0-10%

10-30%

30-50%

50-75%

Yes

No

43%

10% 10%

37%57%

43%

Private equity respondents anticipate that deal volumes will rise substantially in 2013, with 43% expecting the number of deals to increase by 30-50% and 37% expecting the number of deals to increase by 10-30%.

This is in marked contrast to 2012 when a large majority (70%) of respondents expected the number of deals to increase by less than 10%.

On what scale (in percentage terms) do you anticipate LBO deal volumes' to increase in 2013?


Improving internal systems/financial reporting is seen as the most important priority for 40% of survey respondents, a big change from 2012 when only 14% of respondents listed it as a priority. Taking costs out of the business is again near the top of the list, with 23% of respondents choosing it, compared to 24% last year. In 2012 dealing with specific underperforming units was cited as the most important operational priority but it has now slipped to third place. Bolt-on acquisitions are considered the least important priority in 2013, as they were in 2012.

What are your key operational priorities in managing your current portfolio?

0-10%

10-30%

30-50%

50-75%

75-100%

53%

17%3%

7%

20%

Survey respondents think a large number of restructurings would have been resolved differently if action was taken earlier. Just over half of respondents (53%) believe that an earlier intervention would have produced a different outcome in 50-75% of restructurings. Some 17% of respondents think that tackling the problem sooner would have changed the outcome in 75-100% of restructurings while 20% think that earlier action would alter the outcome in 30-50% of cases.

How many restructurings do you believe would have resolved differently if action had been taken earlier?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Bolt-on acquisitions

Managing cash flows/liquidity/working capital

Improving the top line

Dealing with specificunderperforming divisions/

geographies

Taking cost out of the business

Improving internal systems/financial reporting 40% 13% 13% 17% 17%

23% 20% 17% 10% 17% 13%

17% 13% 13% 17% 13% 27%

10% 7% 13% 17% 30% 23%

6% 27% 13% 17% 20% 17%

3% 30% 24%20% 3% 20%

Most Important More Important Important

Not Important Less Important Least Important


53

pr

iVate equ

ity sur

Vey

In line with the previous question, 70% of respondents expect to devote just 0-25% of their time to the pursuit of bolt-on acquisitions for portfolio companies with the majority of time instead spent on developing new investments.

What percentage of activity will be devoted to developing the existing portfolio through bolt-on acquisitions rather than new investments in 2013?

Less than 25%

25-50%

0-25%

26-50%

51%+

30%

70%

23%

7%

70%

The willingness to relocate outside of the UK if the taxation environment were to become less favourable has fallen, with no respondents in this year’s survey putting the probability of relocation above 50% compared to nearly a quarter in last year’s survey. Some 70% of respondents put the likelihood of relocation at less than 25% which represents an increase on the 65% within this range in 2012.

In circumstances where the taxation environment were to accelerate for investment firms, what probability do you ascribe to relocating outside of the United Kingdom?


In line with the previous question a majority (57%) of private equity respondents are planning to seek a dividend recap for at least one of their portfolio companies.

Are you planning to seek a dividend recap for one of your portfolio companies?

Yes

No

Yes

No40%

60%

43%

57%

A majority of respondents (60%) expect dividend recaps to increase in 2013, allowing private equity investors to realise value from portfolio companies without having to find a buyer for their equity interest.

Do you expect dividend recaps to increase in the coming months?

55

pr

iVate equ

ity sur

Vey

Slightly less than half (47%) of private equity investor respondents are looking to use unitranche debt to finance LBO deals, pointing to the increased popularity of this type of instrument which combines senior and subordinated debt from a single issuer.

Are you looking at unitranches to finance LBO deals?

0-25%

25-50%

More than 50%

Yes

No

20%13%

67%

53%

47%

The introduction of Basel III rules has reduced banks' ability to lend new money or extend debt facilities by 25-50% according to a majority (67%) of respondents. Some 13% of survey respondents think that lending has been curtailed by more than 50% while 20% think that the ability to lend has been reduced by 0-25%.

In percentage terms, to what degree do you think banks’ ability to lend new money or to extend existing debt facilities has diminished as a result of Basel III rules?


Yes

No

67%

33%

Hedge funds will not fill the funding gap left by Basel III, according to 67% of respondents.

“Hedge funds have become a major source of funding and have played an important role but the gap is big and current lending from hedge funds is not enough to fill it,” suggested a Principal from Spain.

Do you expect hedge funds to fill the lending gap?

interView with james roome, barry russell and james terry oF bingham mcCutChen llp

In the first round of restructurings between 2009 and 2011, out-of-the money junior creditors were often wiped out by senior lender enforcement. In recent cases, however, in-the-money junior creditors have been faced with threats of enforcement sales at values that would repay the senior debt in full but leave the junior lenders unpaid. What has changed? What is behind the increased willingness of senior lenders to enforce their security even where value breaks above the senior debt?

“At the beginning of the crisis in early 2009 there was reluctance among banks and CLOs to enforce on their claims. It took a while for these creditors to get comfortable with the reputational and legal risks of security enforcement,” said James Roome, Financial Restructuring partner at Bingham McCutchen.

Following numerous situations where junior creditors were deeply out of the money, consensual deals were achieved in the face of threats of enforcement during the workout process. Subsequently, banks and CLOs began to enforce more frequently where out-of-the-money junior creditors would not back down, or where enforcement was the best means of implementing an agreed deal.

Three years down the line, the situation has changed. “Even when junior creditors are in the money, there is a greater willingness on the senior lenders’ side to go for enforcement, perhaps due to a cultural shift and to changes in syndicate composition,” Roome explained.

Banks and CLOs have a better understanding today of their rights and think more in terms of 'We want to be paid out; if junior creditors won’t refinance the senior debt, we will enforce our security and get repaid that way'. Moreover, CLOs have become an increasingly large component of bank syndicates in leveraged debt restructurings, reflecting the expansion of institutional participations in the years leading up to the financial crisis. As syndicate compositions have changed, so has their behaviour in restructuring situations.

An increased flexibility on the senior lenders' side in the structuring of workout deals has also played an important part in boosting first lien willingness to go down the enforcement route, says James Terry, Financial Restructuring partner at Bingham McCutchen.

A cultural change has also occurred on the mezzanine lenders’ side, notes Barry Russell, Financial Restructuring partner at Bingham McCutchen.

“Ten years ago, there was a sense of denial among junior creditors. They used to think, 'The banks cannot do this to us; we have our rights'. Our advice was always to have a plan ready and, if possible, new money underwritten,” Russell noted. Now, junior creditors have plenty of experience to demonstrate the risks they face where value breaks in the senior debt.

The outcomes in Klöckner Pentaplast and Findus Group are examples of the cultural change on both the senior and junior lender’s side.

Following numerous refinancing deals, senior bonds and loans co exist pari passu in the same capital structure. It all works fine until the company goes into distress when differences become more marked. What are the main weaknesses for bondholders in terms of rights? How different will bond restructurings be from loan restructurings? What kind of challenges does this pose to creditors and their legal and financial advisers?

“In the past couple of years there has been a huge weight of money coming from pension funds in search of yield,” Terry says. “This money has flowed into the high yield market where new deals are being fuelled by banks’ need to get out of over-leveraged situations.”

Where bonds and loans coexist in the same debt structure, the rights of these instruments are very different.

“One problem is that bonds mostly have just incurrence covenants while the bank debt has the benefit of maintenance covenants, which are constantly monitored and triggered much earlier. This means that bank lenders get an early warning of nine to twelve months when the company begins to show signs of underperformance. Consequently, they can begin to organise earlier than bondholders, lay out a strategy and ultimately negotiate better conditions with the borrowers. In practice, the banks are able to negotiate debt pay downs and other preferential terms while the bondholders and change are unable to get to the table,” Terry said.

A further important distinction in these side-by-side structures is that banks generally insist on keeping control of security enforcement rights, further diminishing senior secured bondholders’ rights.

“The high yield community has been fighting back for the past two, three years and have been pressing for a ‘One Euro, One Vote’ rule in structures made up of both senior loans and senior secured bonds,” Russell noted.

“One main difference between loans and bonds in a restructuring process is that with loans it is at least theoretically possible to achieve a consensual deal. With New York law-governed high yield bonds it is almost impossible and you need some kind of process in court to implement a deal,” Russell adds.

As most bond documentation is written under New York law, US Chapter 11 may well become the preferred legal venue, says Roome.

UK schemes of arrangement and pre packs can work as an alternative route but often still need a parallel process in the US, and may require a COMI shift. US courts, on the other hand, accept cases so long the company applicant has some kind of US connection including bank accounts, as recently shown in shipping cases such as Omega Navigation and Marco Polo.

“You are going to take a long look as to whether you can take a deal to a US court. However, in some of these bond issues where debt is spread across geographies, there is a risk that some bondholders and trade creditors may file in local courts,” James Roome noted.

inter

View w

ith ja

mes r

oo

me, b

ar

ry r

ussell a

nd

jam

es terr

y oF b

ing

ha

m m

cCu

tCh

en llp

57

For some time now, distressed investors have been looking into shipping opportunities, but so far very few interesting deals have materialised. What are the reasons for this? A number of shipping companies that entered distress territory eventually filed for Chapter 11 to restructure their liabilities. Is Chapter 11 likely to factor in European and other non-US shipping restructurings? And why?

“In the past few years, lack of liquidity has prevented distressed investors from getting involved in shipping deals,” said James Terry.

Shipping loans are often held by German, French and Scandinavian banks, and managed by units in those banks dealing specifically with shipping.

As many of these institutions have an historical relationship with their borrowers, they are often unwilling to sell out to alternative investors and banks willing to sell, have often been seeking prices that surpassed the value of the assets and that alternative investors would not pay. “Banks have also worried that writing off the value of one asset might have a knock-on effect on other loans in the same asset class, forcing unwanted write downs,” Terry said. This, together with the cyclicality of the sector, has meant that banks have so far preferred to keep their loans, and amend and extend them, waiting for a market rebound, Terry explained. However, some banks have come to the conclusion that the shipping sector may never get back to its glory days, or is now non-core for them, and things are beginning to change and some institutions are starting to explore portfolio sales, Terry explained.

As for the implementation of shipping workouts, the choice has so far fallen on either fully consensual out-of-court agreements or restructuring through Chapter 11 of the US Bankruptcy Code. Although Chapter 11, with its worldwide automatic stay and global reach, is often the best alternative, there are some issues.

It is not clear whether Chapter 11 is effective in practice to prevent enforcement of claims by local suppliers and creditors outside the US, as some may argue that the Chapter 11 automatic stay does not apply to them.

Another issue that discourages the use of Chapter 11 to implement restructurings is a cultural one. In the US, bankruptcy is seen as a tool to reorganise a company and move on. But this is not the case in many other countries where bankruptcy carries a stigma and can ultimately affect relationships with lenders, customers and suppliers. This, of course, also applies to non-US companies in other sectors which are contemplating a restructuring.

New banking rules and capital requirements mean bank lending activity has contracted significantly. As a result, European companies are increasingly accessing alternative types of financing, notably in the institutional private placement market. What does this mean for restructurings in the future? What are some of the characteristics of these financings? How are noteholders typically treated in these restructurings? Are these attractive investments for secondary purchasers?

Private placement notes (PPN) are a typical investment class for institutional investors such as insurers or big fund managers and have experienced a rise in popularity in the past few years.

In 2012 alone, more than USD 50bn was issued globally in the US private placement market.

These instruments are used by both large cap companies, who may prefer them because the investor base is known at the outset and only rarely changes significantly, unlike public bonds, and medium/small cap companies that cannot easily access the public corporate bond markets.

For investors, the advantages are clear, explains Barry Russell. PPNs typically have the same covenants, asset sale protection and structural ranking as bank debt.

For borrowers, one main advantage is that the terms of the notes are private, as opposed to bonds, which are public.

Moreover, Most Favoured Lender clauses often embedded in the PPN documentation ensure that if bank covenants are changed, the private placement notes will adjust automatically.

Ultimately, private placement noteholders tend to fare much better in restructurings than high yield bondholders as their benefits are shared with banks. Indeed, when and if PPNs go into a restructuring process they are often treated like bank debt as “companies realise that they cannot just negotiate with banks” Barry Russell explained. “A great example of this is the restructuring of Quinn Group, where bank lenders and private placement noteholders had substantially similar treatment in the restructuring with banks,” Russell explained.

As banks continue to pull back, it is likely more and more unrated middle sized companies will come to the PPN market for issuances in the EUR 100m to EUR 600m range in the next few years, taking advantage of the increasing liquidity in this asset class, commented Russell.

Att

orn

ey

Ad

vert

isin

g

© 2

013

Bin

gha

m M

cCu

tch

en

LLP

O

ne

Fe

de

ral

Str

ee

t, B

ost

on

MA

02

110

T.

617

.951

.80

00

P

rio

r re

sult

s d

o n

ot

gua

ran

tee

a s

imil

ar

ou

tco

me

. B

ingh

am

McC

utc

he

n®

Bin

gha

m M

cCu

tch

en

(Lo

nd

on

) LL

P,

a M

ass

ach

use

tts

lim

ite

d l

iab

ilit

y p

art

ne

rsh

ip a

uth

ori

sed

an

d r

egu

late

d b

y th

e S

oli

cito

rs R

egu

lati

on

Au

tho

rity

(re

gist

ere

d n

um

be

r: 0

03

28

38

8),

is

th

e l

ega

l e

nti

ty w

hic

h o

pe

rate

s in

th

e U

K a

s B

ingh

am

. A

lis

t o

f th

e n

am

es

of

its

pa

rtn

ers

an

d t

he

ir q

ua

lifi

cati

on

s is

op

en

fo

r in

spe

ctio

n a

t th

e a

dd

ress

ab

ove

. A

ll p

art

ne

rs o

f

Bin

gha

m M

cCu

tch

en

(Lo

nd

on

) LL

P a

re e

ith

er

soli

cito

rs o

r re

gist

ere

d f

ore

ign

la

wye

rs.

Navigate the titanic challenges of today’s global financial markets.

bingham.com

Bingham’s Financial Restructuring Partners

Michael J. Reilly [email protected] +1.212.705.7763

Jeffrey S. Sabin [email protected] +1.212.705.7747

Edwin E. Smith [email protected] +1.212.705.7044

Jonathan B. Alter [email protected] +1.860.240.2969

Jared R. Clark [email protected] +1.212.705.7770

Timothy B. DeSieno [email protected] +1.212.705.7426

Mark W. Deveno [email protected] +1.212.705.7846

Robert M. Dombroff [email protected] +1.212.705.7757

Joshua Dorchak [email protected] +1.212.705.7784

Scott A. Falk [email protected] +1.860.240.2763

Julia Frost-Davies [email protected] +1.617.951.8422

Andrew J. Gallo [email protected] +1.617.951.8117

William D. Goddard [email protected] +1.860.240.2856

Harold S. Horwich [email protected] +1.860.240.2722

Amy L. Kyle [email protected] +1.617.951.8288

Jeffrey S. MacDonald [email protected] +1.860.240.2996

Ronald J. Silverman [email protected] +1.212.705.7868

Steven Wilamowsky [email protected] +1.212.705.7960

P. Sabin Willett [email protected] +1.617.951.8775

James Roome [email protected] +44.20.7661.5317

Barry G. Russell [email protected] +44.20.7661.5316

Elisabeth Baltay [email protected] +44.20.7661.5366

Tom Bannister [email protected] +44.20.7661.5319

Jan D. Bayer [email protected] +49.69.677766.101

Neil Devaney [email protected] +44.20.7661.5430

Christian Halász [email protected] +49.69.677766.102

Natasha Harrison [email protected] +44.20.7661.5335

Liz Osborne [email protected] +44.20.7661.5347

Stephen Peppiatt [email protected] +44.20.7661.5412

Emma Simmonds [email protected] +44.20.7661.5420

Sarah Smith [email protected] +44.20.7661.5370

James Terry [email protected] +44.20.7661.5310

Axel Vogelmann [email protected] +49.69.677766.103

Hideyuki Sakai [email protected] +81.3.6721.3111

F. Mark Fucci [email protected] +852.3182.1778

Mitsue Aizawa [email protected] +81.3.6721.3132

Yuri Ide [email protected] +81.3.6721.3160

Fujiaki Mimura [email protected] +81.3.6721.3133

Naomi Moore [email protected] +852.3182.1706

Matthew Puhar [email protected] +852.3182.1788

Yoshihito Shibata [email protected] +81.3.6721.3143

Lisa Valentovish [email protected] +81.3.6721.3247

Shinichiro Yamamiya [email protected] +81.3.6721.3139

Xiaowei Ye [email protected] +86.10.6535.2818

bingham.com/restructuring

USA—New York/Boston/Hartford

EUROPE—London/Frankfurt

ASIA—Tokyo/Hong Kong/Beijing

Bingham’s Financial Restructuring Partners

Michael J. Reilly [email protected] +1.212.705.7763

Jeffrey S. Sabin [email protected] +1.212.705.7747

Edwin E. Smith [email protected] +1.212.705.7044

Jonathan B. Alter [email protected] +1.860.240.2969

Jared R. Clark [email protected] +1.212.705.7770

Timothy B. DeSieno [email protected] +1.212.705.7426

Mark W. Deveno [email protected] +1.212.705.7846

Robert M. Dombroff [email protected] +1.212.705.7757

Joshua Dorchak [email protected] +1.212.705.7784

Scott A. Falk [email protected] +1.860.240.2763

Julia Frost-Davies [email protected] +1.617.951.8422

Andrew J. Gallo [email protected] +1.617.951.8117

William D. Goddard [email protected] +1.860.240.2856

Harold S. Horwich [email protected] +1.860.240.2722

Amy L. Kyle [email protected] +1.617.951.8288

Jeffrey S. MacDonald [email protected] +1.860.240.2996

Ronald J. Silverman [email protected] +1.212.705.7868

Steven Wilamowsky [email protected] +1.212.705.7960

P. Sabin Willett [email protected] +1.617.951.8775

James Roome [email protected] +44.20.7661.5317

Barry G. Russell [email protected] +44.20.7661.5316

Elisabeth Baltay [email protected] +44.20.7661.5366

Tom Bannister [email protected] +44.20.7661.5319

Jan D. Bayer [email protected] +49.69.677766.101

Neil Devaney [email protected] +44.20.7661.5430

Christian Halász [email protected] +49.69.677766.102

Natasha Harrison [email protected] +44.20.7661.5335

Liz Osborne [email protected] +44.20.7661.5347

Stephen Peppiatt [email protected] +44.20.7661.5412

Emma Simmonds [email protected] +44.20.7661.5420

Sarah Smith [email protected] +44.20.7661.5370

James Terry [email protected] +44.20.7661.5310

Axel Vogelmann [email protected] +49.69.677766.103

Hideyuki Sakai [email protected] +81.3.6721.3111

F. Mark Fucci [email protected] +852.3182.1778

Mitsue Aizawa [email protected] +81.3.6721.3132

Yuri Ide [email protected] +81.3.6721.3160

Fujiaki Mimura [email protected] +81.3.6721.3133

Naomi Moore [email protected] +852.3182.1706

Matthew Puhar [email protected] +852.3182.1788

Yoshihito Shibata [email protected] +81.3.6721.3143

Lisa Valentovish [email protected] +81.3.6721.3247

Shinichiro Yamamiya [email protected] +81.3.6721.3139

Xiaowei Ye [email protected] +86.10.6535.2818

bingham.com/restructuring

USA—New York/Boston/Hartford

EUROPE—London/Frankfurt

ASIA—Tokyo/Hong Kong/Beijing

rothsChild ContaCts

Rothschild

Andrew MerrettEuropean Head of RestructuringCo-Head Financing Advisory – [email protected]+44 20 7280 5728

Glen CroninManaging Director, Restructuring [email protected] +44 20 7280 5506

Richard MillwardManaging Director, [email protected]+44 20 7280 5778

Dacre Barrett-LennardDirector, Restructuring [email protected] +44 20 7280 5717

Hamish MackenzieDirector, Restructuring [email protected] +44 20 7280 5127

Vincent DanjouxManaging Director, [email protected]+33 1 40 74 42 43

Arnaud JoubertManaging Director, [email protected]+33 1 40 74 98 36

Heinrich KerstienManaging Director, [email protected]+49 69 299 884-300

Alessio de ComiteManaging Director, [email protected]+39 02 7244 3338

Beltran ParedesManaging Director, [email protected]+34 91 702 2573

Todd SnyderGlobal Co-Head of [email protected]+1 (212) 403 5247

Neil AugustineGlobal Co-Head of [email protected]+1 (212) 403 5411

Rothschild provides impartial, expert advice to corporations, governments, institutions and individuals. With 900 advisers in 40 countries around the world, our scale, reach, intellectual capital and local knowledge enable us to develop relationships and deliver effective solutions to our clients, wherever their business takes them. This is why we are leaders in financial advice, worldwide.

www.rothschild.com

ro

thsC

hild

Co

nta

Cts

61

NOTES:

63

For more information regarding this report please contact:

Karina RossPublisher, Remark

[email protected] PH: +44 20 7059 6327

Ben Thorne Publisher, Remark

[email protected] PH: +44 20 7059 6341

© Debtwire/Remark

80 StrandLondon, WC2R 0RLTelephone: +44 (0)20 7059 6100www.debtwire.comwww.mergermarket.com/remark

This publication contains general information and is not intended to be comprehensive nor to provide

financial, investment, legal, tax or other professional advice or services.

This publication is not a substitute for such professional advice or services, and it should not be acted on

or relied upon or used as a basis for any investment or other decision or action that may affect you or your

business. Before taking any such decision you should consult a suitably qualified professional adviser.

Whilst reasonable effort has been made ensure the accuracy of the information contained in this

publication, this cannot be guaranteed, and neither Debtwire, Bingham nor Rothschild nor any

affiliate thereof or other related entity shall have any liability to any person or entity which relies on the

information contained in this publication. Any such reliance is solely at the user’s risk.

Documents

european distressed debt market outlook 2013 · 2011 legacy workouts like eircom and Seat Pagine Gialle and new ones such as Klöckner Pentaplast, Findus Group, Fitness First, Travelodge