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Restructuring Market Outlook
September 2013
The Road Ahead
Martin GudgeonHead of European Restructuring
Confidential
C:\Users\riversod\AppData\Local\Temp\17\Presentation2.pptx 3/19/2013 4:52:55 PMC:\Users\riversod\AppData\Local\Temp\17\Presentation2.pptx 3/19/2013 4:52:55 PM
I. Is Stabilisation Complete?
II. Where in the Restructuring Cycle Are We?
III. What Lessons Have We Not Yet Learned?
Appendix
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Blackstone. 3
Restructuring Market Outlook
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Where Are We?I. Is Stabilisation Complete?
LiquidityInjection
BankDeleveraging
InputCosts
ConsumerDemand
Financial Markets Real Economy
Stimulus Asset value Sovereign vs. Bank
balance sheets Cost of funding
Non-performing Loans
Lack of credit-worthy borrowers
HY and non-bank refinancings
Commodities reversal Low cost of Funding Recovering
production Inflationary
pressures?
High debt levels and low debt service
Low wage growth Margin and capex
pressure
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Blackstone. 4
Restructuring Market Outlook
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-
10%
20%
30%
40%
50%
60%
70%
1987 1990 1993 1996 1999 2002 2005 2008 2011
Overseas BoE APFInsurance and Pension Funds Other
$0.0
$1.0
$2.0
$3.0
$4.0
2006 2007 2008 2009 2010 2011 2012 1H2013
FED ECB BOE
Financial Markets: Liquidity Injection
Unprecedented global stimulus has expanded government balance sheets…
I. Is Stabilisation Complete?
Monetary Authority Total Assets(USD in Trillions)
UK: Holdings of UK Gilts(% of Gilt Holdings)
BoE Acquires 28.6% of All Gilts
Source: Federal Reserve, ECB, and BoE. Source: UK ONS.
Total Assets1H2013 vs. 2006
FED 4.1xECB 2.1xBoE 3.7x
2013
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Blackstone. 5
Restructuring Market Outlook
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2%
6%
10%
14%
B BB
Financial Markets: Liquidity Bubble
…And driven down the cost of borrowing to near-record lows.
I. Is Stabilisation Complete?
Trends in Official Policy Rates(%, GDP-weighted average (both scales))
Average Primary Yield by Rating(Euro Issuance Yield in %)
High Yield Risk Spread Falling(BAML HY BB O.A. Spread less 10 US Treasury Yields, in % - %)
Source: S&P LCD. Source: St. Louis Fed, BofA Merrill Lynch.
Source: IIF.
NA
NA
0%
2%
4%
6%
8%
10%
12%
14%
16%
4%
5%
6%
7%
8%
9%
-
1%
2%
3%
4%
5%
2006 2007 2008 2009 2010 2011 2012 2013Mature Economies Emerging Economies (rhs)
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Blackstone. 6
Restructuring Market Outlook
C:\Users\riversod\AppData\Local\Temp\17\Presentation2.pptx 3/19/2013 4:52:55 PM
-2%
2%
6%
10%
14%
18%
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
G3 Emerging Economies
Real Economy: Input Costs
Inflation has been muted to date, although high oil prices remain a risk.
I. Is Stabilisation Complete?
Headline Inflation: Mature and EM(in %, year on year)
Real Commodity Prices(Index, 1 Jan 2007 = 100)
Source: IIF. Source: IIF.
60
100
140
180
220
260
2007 2008 2009 2010 2011 2012 2013
Oil Prices Agricultural Prices Metal Prices
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Blackstone. 7
Restructuring Market Outlook
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Real Economy: Consumer DemandConsumers have deleveraged since 2007. Falling rates have mitigated the impact to debt service ratios, despite recent low wage growth.
I. Is Stabilisation Complete?
Household Debt - UK(Total Financial Liabilities to Total Household Income and DSR (1))
Wage Growth - UK(% 3m year on year)
Sources: UK ONS and BIS. Source: UK ONS.
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
1.0x
1.1x
1.2x
1.3x
1.4x
1.5x
1.6x
1.7x
1.8x
1988 1992 1996 2000 2004 2008 2012
Financial Liabilities to Income (x) Debt Service Ratio (%)
(4%)
(2%)
-
2%
4%
6%
8%
Whole Economy Public Sector Private Sector
(1) Debt Service Ratio defined by the BIS as total interest and debt repayments, divided by income.
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Blackstone. 8
Restructuring Market Outlook
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Bank Deleveraging in Europe: Larger Than The US (Relatively)
As a multiple of GDP, the Euro Area has a 4.1x larger banking system than the United States.
I. Is Stabilisation Complete?
Source: ECB, IMF, RBA, BoJ, US Fed, BOE, RBS Credit Strategy.
Total Bank Assets(As a Multiple of GDP)
7.2x 7.2x
5.0x
4.0x
3.4x 3.4x 3.2x 3.1x 2.7x
2.2x 2.0x 1.9x 1.4x
0.8x
4.7x 4.7x
3.4x
2.7x 2.6x
1.9x 1.9x
3.0x
1.6x 1.5x 1.3x 1.5x 1.0x
0.7x -
1.0x
2.0x
3.0x
4.0x
5.0x
6.0x
7.0x
8.0x
Ireland Cyprus UK France Euro Area Spain GIIPS Germany Italy Canada Australia Japan Slovenia US
2012 2002
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Blackstone. 9
Restructuring Market Outlook
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Bank Deleveraging in Europe: Still A Long Way To GoEuropean banks remain significantly overleveraged and have enormous amounts of commercial real estate debt on balance sheet.
Liabilities and Equity: Europe vs. US(2)Overleveraged Banks(1)
European banks have 2-3x the leverage of U.S. banks Europe 200% of GDP vs. US at 100% of GDP.
Source: Barclays Capital research 2012.
I. Is Stabilisation Complete?
Aggregate Loan to Deposit Ratio: 117%
Aggregate Loan to Deposit Ratio: 77%
U.S. U.K. France Germany
14.0x
24.0x
40.0x
45.0x
Source: Goldman Sachs. (1) Barclays Capital research 2012; U.S. includes GSE and banking system assets.(2) Goldman Sachs. Excludes Derivatives. Figures in Trillions.
Top 25 EuropeanBanks Top 25 U.S. Banks
6%12%
18%
12%
41%
67%
9%11%
2%
14%
6%
€21.1
€8.1
Equity Debt Securities Customer Deposits Trading Liabilities Interbank Other
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Blackstone. 10
Restructuring Market Outlook
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-
1%
2%
3%
4%
5%
6%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Actual 2009 Forecast Curve2010 Forecast Curve 2011 Forecast Curve2012 Forecast Curve 2013 Forecast Curve
Recent Interest Rate Expectations
Over the last 2 years, investors continued to look for a near-term increase in US and European interest rates, although no significant tightening has occurred yet.
I. Is Stabilisation Complete?
US Rate expectations(FED Overnight Rate and USD OIS Swap Curves in %)
European Rate expectations(Eonia Overnight Rate and Eonia Curves in %)
Source: Bloomberg as of 10 September 2013.
-
1%
2%
3%
4%
5%
6%
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Actual 2009 Forecast Curve2010 Forecast Curve 2011 Forecast Curve2012 Forecast Curve 2013 Forecast Curve
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I. Is Stabilisation Complete?
II. Where in the Restructuring Cycle Are We?
III. What Lessons Have We Not Yet Learned?
Appendix
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Blackstone. 12
Restructuring Market Outlook
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70
80
90
100
110
2Q 2007 2Q 2008 2Q 2009 2Q 2010 2Q 2011 2Q 2012 2Q 2013Euro Area Germany France Italy Spain
8.0%
5.3%
3.3% 3.4%
1.9%
0.7% 0.6%
(0.3%)
8.2%
5.7%
4.0% 3.9%
3.0%
1.5%1.5% 1.1%
(1%)
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
(% Y
oY)
IMF 2013 IMF 2014
While the growth cycle appears to be picking up across the world, Europe remains polarised. China and the U.S. remain key engines of global growth.
Growth CycleII. Where in the Restructuring Cycle Are We?
(1) “DM” = Developed Markets, EM = “Emerging Markets”, “EA” = Euro Area; (2) Estimated impact on real GDP growth, based on 2000–1Q 2013 data.
Source: IMF and Haver Analytics .
GDP Growth Projections(1) 3m Rolling Industrial Production
Indexed to 100 in 2Q2007
DE
EA
FR
IT
ES
CHN EM World LatAm U.S. UK Germany EA
Source: Eurostat.
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Blackstone. 13
Restructuring Market Outlook
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Defaults are forecast to be at 3.0% in 2013, above the average 1920-2013 (2.7%) but below recent peaks. To date, the fix has been “Amend & Extend”.
Default CycleII. Where in the Restructuring Cycle Are We?
Cumulative Amendments by TypeDefaults Off Recent PeaksDefaults peaked in 2009 (13.1%) and 2001 (10.0%) Since ’09, Shift Away From Restructurings
Source: Moody’s Default Rate Analysis.
-
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
Default/Restructuring Covenant Amendment Requests
Source: S&P LCD.
-
2%
4%
6%
8%
10%
12%
14%
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
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Blackstone. 14
Restructuring Market Outlook
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0
20
40
60
80
100
120
140
160
180
Having to negotiate payment terms with creditorsUnable to repay debts if small increases in interest ratesStruggling to pay debts when they fall dueJust paying interest on debts
Record low rates and insolvency reform have mitigated the severity of the downturn, at the expense of creating ‘zombie companies’.
The Rise of The ZombiesII. Where in the Restructuring Cycle Are We?
‘Zombie’ companies in the UKLower insolvencies despite higher losses (UK)
(1) Data as of May 2013 and October 2013 from R3 and the Office of National Statistics respectively. We include all companies in the four categories in the corresponding graph, versus the total companies with turnover over £50k.
Source: R3.
Approximately 1 in 8 (1) UK companies with turnover of £50k or more are either negotiating with their creditors or struggling to pay debts when they fall due
in ‘000s
Source: Bank of England, Bureau van Dijk, The Insolvency Service.
-
5%
10%
15%
20%
25%
30%
35%
40%
0
5,000
10,000
15,000
20,000
25,000
30,000
Liquidations (LHS) Loss-making companies (RHS)
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Blackstone. 15
Restructuring Market Outlook
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Bond Seasoning
Work-outs typically peak 3 years after issuance, although in today’s world awash with liquidity this is being deferred until c.5.1 years post issuance.
Avg. Age of Distressed CreditYears to get into distress(1)
Defaults peak 3 years after issuance Average age increasing
Source: S&P LCD.
II. Where in the Restructuring Cycle Are We?
European Bond IssuanceAt All-Time Highs (€ in billions)
-
5
10
15
20
25
30
35
40
45
Secured Unsecured Subordinated
–
10
20
30
40
50
60
70
–
1
2
3
4
5
6
(1) 2004-present.
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I. Is Stabilisation Complete?
II. Where in the Restructuring Cycle Are We?
III. What Lessons Have We Not Yet Learned?
Appendix
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Blackstone. 17
Restructuring Market Outlook
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Pan-European Restructuring Regime Remains Work in ProgressIII. What Lessons Have We Not Yet Learned?
Select Large European Restructurings(2)Select Large US Restructurings(1)
Typically In-Court via Chapter 11 Typically Out of Court – and Unpredictable
Source: S&P LCD, Debtwire, Capital IQ, and Bankruptcydata.com.
Lack of uniform restructuring regime in Europe and primarily out-of-court settlements result in less predictable process outcomes.
Date Total Assets (1) Issuer Process
2009 $860.4bn AIG - Bailout Out of Court2008 $691.1bn Lehman Brothers Holdings In Court2008 $327.9bn Washington Mutual In Court2009 $218.3bn Ford Out of Court2002 $91.9bn Worldcom Group In Court2009 $91.0bn General Motors In Court2009 $80.4bn CIT Group Inc In Court2001 $65.5bn Enron In Court2009 $59.3bn Energy Future Holdings On-Going2010 $46.1bn International Lease Fin. Corp Out of Court2011 $46.0bn PG& E In Court2011 $40.5bn MF Global In Court2009 $39.3bn Chrysler LLC In Court2009 $36.3bn Thornburg Mortgage In Court2012 $32.9bn Conseco Inc. In Court2009 $32.7bn Indymac Bancorp In Court2009 $28.7bn LyondellBasell In Court2010 $28.1bn General Growth Properties Inc In Court2011 $22.4bn American Airlines In Court2001 $22.0bn Pacific Gas & Electric In Court
Date Total Debt Issuer Country Process
2012 €206.0bn Greece Greece Out-of-court2003 €14.0bn Parmalat Italy In-Court2007 £6.2bn Eurotunnel France Out-of-court2008 €5.2bn Martinsa Fadesa Spain In-Court2010 €5.0bn Actavis Iceland Out-of-court
On-going €4.8bn IVG Immobilien Germany In-Court2012 €4.3bn Deutsche Annington Germany Out-of-court2012 €4.3bn Eircom Ireland Out-of-court2013 €3.7bn Mediannuaire France Out-of-court2010 £2.8bn Gala Coral UK Out-of-court2012 £2.6bn SEAT Pagine Gialle Italy Out-of-court2012 £2.5bn Viridian Ireland Out-of-court
On-going £2.5bn Punch UK On-going2011 £2.4bn EMI Group UK Out-of-court
On-going £2.3bn Yell Group (Hibu) UK On-going2013 €2.7bn Ceva Group Netherlands Out-of-court2011 $3.7bn Preem Sweden Out-of-court2012 €2.4bn Endemol Netherlands Out-of-court2010 €1.8bn Hellas Telecom Greece Out-of-court2013 €1.8bn AfriSam South Africa Out-of-court
(1) Total Assets sourced from the latest available information prior to restructuring.
Source: S&P LCD, Debtwire and other publically available news sources.
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Blackstone. 18
Restructuring Market Outlook
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UK Scheme of Arrangement Has Become Implementation Route of Choice
UK Scheme of Arrangement is becoming the restructuring tool of choice for companies across Europe.
III. What Lessons Have We Not Yet Learned?
Selected European RestructuringsUK Scheme of Arrangement Scope Increases
Year Issuer Issuer Country Law of Obligation
2013 Icopal Denmark English Law2013 Orizonia Spain English Law2013 Estro Group Netherlands English Law2013 Biffa United Kingdom English Law2012 Fitness First United Kingdom English Law2009 Vivacom Bulgaria English Law2012 PrimaCom Germany English Law2012 Deutsche Annington Germany English Law2012 Cortefiel Spain English Law
2012 PrimaCom Germany English Law
2012 Seat Pagine Gialle Italy English Law
2012 Eircom Ireland English Law
2011 Metrovacesa Spain English Law
2011 TeleColumbus Germany English Law
2011 Rodenstock Germany English Law2010 La Seda de Barcelona Spain English Law
Source: Debtwire and S&P LCD.
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Blackstone. 19
Restructuring Market Outlook
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Issuer Industry # of Filings
Dex Media Publishing 2 (5/09, 3/13)
Hayes Lemmerz Auto Parts 2 (12/01, 5/09)
SuperMedia Publishing 2 (11/05, 3/13)
Pliant Packaging 2 (5/06, 2/09)
Vertis Advertising 3 (7/08, 11/10, 10/12)
Global Aviation Airlines 2 (10/04, 2/12)
Ballys Leisure 2 (7/07, 12/08)
Journal Register Co. Publishing 2 (2/09, 9/12)
Graphics Properties Electronics 2 (5/06, 4/09)
Goody's Family Clothing Apparel Retail 2 (6/08, 1/09)
Imperial Home Decor Furnishings 2 (1/00, 5/07)
Constar International Packaging 2 (12/08, 1/11)
NBTY Personal Care 2 (2/02, 3/08)
Key Plastics Manufacturing 2 (3/00, 12/08)
Insight Health Services Healthcare 2 (1/10, 12/10)
Citation Corporation Manufacturing 2 (9/04, 3/07)
Arrow Air Transportation 3 (9/00, 1/04, 6/10)
Amend & Extend Does Not Improve Value
Amend & Extend, & Extend, & Extend…Selected US “Chapter 22’s”US Businesses Emerge Undercapitalised, And Re-
Restructure A&E Defers But Does Not Improve Value
III. What Lessons Have We Not Yet Learned?
Source: Thomson Reuters, S&P LCD, Debtwire, and Capital IQ.
Issuer Industry # of Amendments
Biomet Inc Healthcare 2 (8/12, 10/12)
Capio Healthcare 2 (6/12, 5/13)
Codere Gaming 2 (6/10, 6/13)
EliorFood & Beverage 2 (3/12, 3/13)
Elster Electronics 2 (5/9, 12/9)
Formula One Leisure 2 (3/12, 10/12)
ISS Global Services 2 (6/11, 3/13)
Iglo Birds EyeFood & Beverage 2 (8/10, 4/11)
Kabel Deutschland Telecoms 3 (1/10,11/10,1/12)
Monier Construction 2 (4/12,7/13)
Numericable Telecoms 2 (7/11,7/13)
Mediannuaire Directories 2 (4/11,7/12)
ProSieben Media 4 (7/11, 6/12, 5/13, 7/13)
Smurfit Kappa Paper 2 (6/9, 2/12)
Telenet Telecoms 3 (8/9, 7/10, 6/11)
UPC Holdings Telecoms 3 (3/9, 4/10, 2/12)
Van Gensewinkel Waste 2 (3/11, 4/13)
Some companies have a tendency to defer meaningful restructurings, to the detriment of overall value as they enter a cycle of distress.
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I. Is Stabilisation Complete?
II. Where in the Restructuring Cycle Are We?
III. What Lessons Have We Not Yet Learned?
Appendix
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Blackstone. 21
Restructuring Market Outlook
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Blackstone is the pre-eminent adviser to companies, governments and creditors; and has advised in more than 375 restructurings involving over $1.6 trillion of liabilities.
Blackstone: The Leading Global Restructuring AdviserAppendix
Award Winning
Attributed the most prestigious industry awards: IFR Restructuring
Adviser of the Year 2012
2013 Innovation in Investment Banking Award – The Banker and 2012 Deal of the Year – The Banker (Deutsche Annington)
IFR restructuring house or deal winner in 2004, 2005, 2008, 2009 and 2011
Acquisitions Monthly Sovereign Adviser of the Year 2010
Selected Global Restructuring Experience
Adviser to the Company
Airlines2005
$21.8bn
Adviser to the CompanyInsurance
2010$182.3bn
Adviser to the Creditors
Real EstateOn-going€4.8bn
iVG
Adviser to the PCIC SteerCo
Sovereign2012
€206bn
Adviser to the Company
FIG2008
£100bn
Adviser to a Creditor
Infrastructure2006
£6.2bn
Adviser to the Company
Real Estate2012
€4.3bn
Adviser to the CreditorsOil & Gas
2010€2bn
Adviser to the Company
Energy2012
£2.5bn
Adviser to the Company
RetailOn-going, 2010
£2.5bn
Adviser to the CompanyIndustrials
2010CHF2.5bn
Adviser to the Company
Energy2002
$63.4bn
Adviser to the Company
Automotive2009
$35bn
Adviser to the Creditors
Media2012
$8.6bn
Adviser to the Minsters of Ukraine
Sovereign2009N/A
Adviser to the CompanyOil & Gas
2013$1bn
Adviser to the Company
Infrastructure2013
£385bn
Adviser to the Company
Pharmaceuticals2010N/A
Adviser to the Creditors
TransportationOn-going£770m
Adviser to the Company
FIG2013
$1.7bn
Adviser to a Creditor
AutomotiveOn-going€600m
Adviser to the Creditors
Transportation2013
$1.5bn
Adviser to the Company
FIG2012
$7.6bn
Adviser to the CompanyUtilities
On-going$37.8bn
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Blackstone. 22
Restructuring Market Outlook
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Blackstone has recently advised on some of the most innovative restructurings in every geography, stakeholder constituency, and asset class
Blackstone: A Strong Track Record of InnovationAppendix
Transaction Key InnovationsAdviser to Deutsche Annington on the €4.3bn Amend & Extend of the GRAND CMBS Transaction recognised as the 2012 Deal of the Year by The Banker Magazine Precedent: The largest rescheduling of a European CMBS to date Process: First time that negotiations to refinance a European CMBS have been successfully conducted directly between principals, rather than with a
servicer or special servicer Implementation: First time that an English Scheme of Arrangement procedure has been used to implement a CMBS rescheduling
Adviser to Dana Gas on Middle East’s first and largest (US$1bn) all-private sector Sukuk instrument restructuring Process: First time in the Middle East that direct Company – Bondholder negotiations in a private sector context have been successful on this scale Structuring: Designed a bespoke “cash-settled” convertible instrument to overcome local law prohibition on issue of shares below par; 5 year refinancing
achieved with no equity contribution from shareholders, with only 0.5% increase in blended financing costs; dilution to shareholders substantially similar to that in the previous financing
Adviser to Enterprise plc on its sale to Ferrovial and concurrent debt restructuring Precedent: Active Strategic buyer interest in restructuring process rather than typical tendency to wait until completion of restructuring Process: Competitive tension was created in an otherwise bilateral sale process by pursuing a parallel debt-for-equity transaction Structuring: Value distribution between the sponsor and lenders was pre-agreed in an innovative Umbrella Agreement which aligned sponsor and lender
interests though the complex and extensive negotiations with the buyer Implementation: Innovative solution avoided traditional restructuring implementation routes to ensure the preservation of critical customer contracts
Precedent: In a highly complex financial restructuring, successfully advised Russian strategic buyer who received 100% of the post restructured equity via a US Chapter 11 process. One of the quickest pre-packaged CH. 11 processes ever
Process: Secured lender support of different creditor classes through parallel negotiations involving a private offering outside and a US Chapter 11 plan of reorganization
Implementation: Prepackaged bankruptcy (of 36 days) which received the support of ~99.9% and ~97% of the unsecured and secured debt, respectively
Precedent: Amended, exchanged, or equitized every security at operating and holding companies, requiring certain minimum participation thresholds as high as 95 and 100%
Process: Each step of complicated multi-security exchange offer was conditioned on each other, utilizing the benefits created from addressing other obligations to motivate all shareholders to exchange
Structuring: Used attractive, high-yielding second lien term loan as currency, and equitized overhanging holding company loans, in order to encourage bondholders to extend maturities and settle litigation
Implementation: Achieved >95% participation on all exchanging securities, as subordinated debt traded up from ~30% to near par