FTI Corporate Finance

European Restructuring Trends

29 September 2010
Page 1
Looking back on 2010
Current Trends
Junior debt holder battles
UK Case studies
Looking forward for 2011
Irish implications
Agenda
Page 2
Looking back on 2010 European Restructuring Market
2009 was a game of two halves:
- Debt to equity swaps
- Amendments
Expected to see in 2010:
- More complex restructurings (operational as well as financial)
- Wave of refinancing / restructurings from the amendment behaviour in 2009
- Higher insolvency rate as lenders walked away
- Distressed M&A as an exit route
- Country crisis (Dubai, Iceland, others?)
What we have actually experienced in 2010 (so far...)
- Benign corporate restructuring environment (ie boring)
- A couple of high profile financial restructurings (eg Gala Coral)
- Valuation battles (eg IMO car wash, Almatis)
- The old names recycled (eg Wind Hellas, Treofan, Stahl)
- A few high profile casualties (eg Connaught, Cattles (?))
- Country issues (Greece, Portugal, Spain, Dubai)
As a result, market participants are having to look wider for deal opportunities
Page 3 Page 3
Depending on where the value breaks, lenders have a choice between a range of short and medium term solutions
Bank Options
Re-pricing
Restructure
existing
facilities
Control via the
debt
Trading
insolvency
Sell debt
Debt for equity
swap
M&A process
Covenant reset
Exit Now
Maintain Bank Relationship
Covenant reset
A reset of financial covenants with the term and structure of the
facilities remaining unaltered.
Re-pricing
A change in the effective return on the debt to a higher rate
through a re pricing of the debt instrument to reflect increased
risk and any underlying market movement.
Restructure existing facilities
Imposition of a tiered pricing structure and a restructure of the
existing facilities to reflect value, leverage and risk.
M&A process
Agree with the Board of Directors that they will undertake a sale
process of whole or part of the group as a condition of the
lenders ongoing support.
Sell debt
A sale of the debt instrument to a financial or trade buyer
Trading insolvency
An orderly wind down of the business through a business and
asset sale by administrators.
Control via the debt
Obtain economic and management control without an equity
conversion
Debt for equity swap
A debt for equity conversion involving the equitisation of part of
the existing debt facilities.
.
Restructuring methods - Banks
Page 4
Current state of the debt markets New Issuance
LBO volumes virtually ceased during 2009 no real pick up in 2010
Most activity was related to maturity extensions and not M&A deals
Mezzanine and Second Lien almost non existent with nearly all issuance first lien
Equity portion of enterprise value reducing expected to drop back to normal levels in back end 2010
Pricing of restructured debt increased by minimum 200bps per tranche, with significant up front fees
Pricing of debt in the secondary market has recovered from 2009 levels, yields more attractive on new issuance versus 2007 paper
Investors attracted by strong yields and the need to put wall of cash to work
European LBO Debt Volume ($Bn)
0
20
40
60
80
100
120
140
160
180
2003 2004 2005 2006 2007 2008 2009 YTD 2010 YTD Q209 YTD Q210
25.0
50.0
75.0
100.0
125.0
150.0
175.0
200.0
225.0
250.0
1
Q
0
4
2
Q
0
4
3
Q
0
4
4
Q
0
4
1
Q
0
5
2
Q
0
5
3
Q
0
5
4
Q
0
5
1
Q
0
6
2
Q
0
6
3
Q
0
6
4
Q
0
6
1
Q
0
7
2
Q
0
7
3
Q
0
7
4
Q
0
7
1
Q
0
8
2
Q
0
8
3
Q
0
8
4
Q
0
8

1
Q
0
9
2
Q
0
9

3
Q
0
9
4
Q
0
9
1
Q
1
0

2
Q
1
0

3
Q
1
0
t
d
A
v
e
r
a
g
e

m
a
r
g
in

(
b
p
s
)
European High Grade Average Quarterly Margins
0
2
4
6
8
10
12
14
16
18
20
1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10
Page 5
Current state of the debt markets Bond Issuance
Absence of traditional loan providers led to increased reliance on capital markets for funding
HY provided a real alternative to refinancing through bank debt; Convertibles, investment grade and high yield bonds all being issued
HY market used to refinance short term maturities of bank debt, or conduct exchange offers for other notes that are falling due
Investors attracted by strong yields and the need to put wall of cash to work
Strong benefits to corporates and banks of having an active and open bond market
Still some resistance to European bond market:
- Biannual financial reporting,
- Limited secondary activity,
- Lack of covenant transparency.
European High Yield Issuance ($Bn) Corporate Bond Issuance in 2010
1.5 bn
1.2 bn
$2.6bn
2.1 bn
1.0 bn
1.2 bn
$1.0 bn
1.0 bn
0.2 bn
Page 6
Junior Lender Positions
Value fallen and often breaks in the Senior debt
out of the money junior layers
-buy value or be the solution in restructured capital
- Dispute valuation
- Dispute junior status (structural subordination)
Alongside or in competition with Sponsors
Ability to recover loss
Otherwise risk of being squeezed out
Consensually vs Scheme of Arrangement or Administration
no economic interest eg IMO car wash, McCarthy and Stone
Ransom payments, stub or hope equity value (anti embarrassment)
UK Case Studies
Leverage fall-out driving a debt restructuring
UK betting shop and casino operator - good business but over-levered
Original buy out by Candover and Cinven and later Permira
2.6b debt including 558m of Mezz
Significantly impacted by the UK smoking ban, tighter gaming regulation and
on set of the recession
By July 2009 forecasts predicted leverage covenant breaches in early 2010
Participants - the strategy
Loan to own strategy through the mezzanine by distressed
investors including Apollo, Cerberus, Park Square and York
Capital
100% of mezz converted to 100% equity and full control after
Candover, Cinven and Permira did not take up offered equity
stakes in the restructured group
Sponsors took small cash payment to walk away
Outcome
Page 7
A 588m conversion of mezz to equity giving the new
shareholders control in addition to a 200m cash injection
pushed out:
Permira and loss of their 370m equity; and
Candover and Cinven who had 150m invested
De-levered balance sheet new money paid straight to Senior
The syndicate led by RBS, Lloyds and Alcentra benefitted from
increased fees, 200m debt pay down, no mezz remained;
improved security position.
UK Case Studies
Senior lender drive a rollover scheme and prepack
Acquired by Carlyle in 2006 through a leveraged buy-out for 450m.
Tough trading conditions and high leverage meant that the Group was under pressure to
reduce debt. The Group was breaching covenants and unable to service all interest on senior
debt (313m) and mezz debt (119m).
Group was valued by the senior lender advisors (PWC, Rothschilds) at around 265m, with
value breaking in senior. Market testing for sale performed
Senior debt trading in the 60s, mezz fully subordinated
Participants - the strategy
The Senior strategy was a to restructure the debt package
through a Scheme of Arrangement & pre-pack.
Senior lender intention was to force the 15% non consenting
senior lenders to agree to take control
If all Senior had consented, simple pre-pack to Newco would
have been performed
In so doing so the mezzanine lenders would be excluded from
lender controlled NewCo
Outcome
Page 8
Schemes of arrangement were used to force the 15% of the
non consenting senior to roll-over into NewCo
Mezz argued directors were in breach of duty and that value of
the business was greater than the value of the Groups assets.
L.E.K was engaged who using Monte Carlo simulation valued
the group at in excess of 320m - breaking in Mezz
Senior lenders successful in driving through the rollover and
pre-pack. Important ruling for valuations argued by out of the
money creditor groups
UK Case Studies
Bankruptcy process to drive mezz to equity conversion
Worlds largest producer of alumina products, acquired for $1.2b in 2007 by
owner Dubai International Capitals (DIC)
Following the rapid deterioration of the trading environment in early 2009,
management engaged in discussions with its lenders and shareholders
regarding a financial restructuring of $1bn (639m) of debt
In May 2010, Almatis filed for a pre-packaged Chapter 11, despite not yet having
sufficient lender support for a restructuring plan
Participants - the strategy
Oaktree Capital Management purchased senior debt on
secondary market (controlled 46% of senior debt: 311m)
Sought to take ownership of the Group and restructure debt
Cram down the sponsor and Mezzanine claims
DIC unwilling to walk away from its investment and sought
refinancing of senior debt
Management filed Group for Ch11 protection
Outcome
Page 9
DIC submitted re-financing plan which was approved by the
courts in August 2010 resulting in 40% of equity stake handed
to the junior creditors (Babson Capital, Permira and Alcentra)
Remaining 60% stake retained by DIC post additional $100m
equity injection
New Senior facilities arranged
Senior lenders including UBS, Commerzbank and Bank of
Ireland in addition to Oaktree repaid in full at par with no equity
stake offered
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Page 10
Looking forward for 2011 Restructuring Refinancing Wall
Over 567Bn in LBO debt maturities in 2010 2017 (excludes corporate lending)
Sheer scale will broaden the type of company caught in the restructuring net:
Stressed and distressed businesses
Industry and sector driven issues
Sticking-plaster solutions from FY09 / FY10
2005/2006 buy-outs that are approaching back end amortisation
good businesses that can service debt, but not meet repayments of principle
Valuation issues
Sovereign Issues (Icelandic, Portugal, Greece, Spain etc)
Limited source to meet this demand Basel III implications restricting further lending
European LBO Debt Maturing M
Page 11
Corporate Approach to Beating the Refinancing Wall
Proactive approach required to ensure access to capital:
- Communicate with lenders
- Work on information provision
- Get control of the house-keeping:
- Manage cash flow
- Reduce working capital
- Prudent cost control
- Plan for the unexpected
- Look at other areas of the balance sheet for cash opportunities
For lenders who have exposures to borrowers with pending maturities:
- Encourage the management team to get organised early
- Engage support
- Look at wider opportunities for introduction of capital
Page 12
Implications for Ireland Restructurings
European influence noticeable on Irish restructurings (larger corporate)
-London approach consensual, stakeholders working together
- Debt trading
- Liquidity position driving the urgency of processes
NAMA process hugely influential in the next steps for large restructurings (consensual vs enforcement routes?)
Bilateral banks waiting on direction from NAMA
More to come in 2011?
- Corporates reliant on government spending
- Domestic volume reliant businesses
- Multi nationals looking to reduce footprint
Property related stress different from most of the European names (Industrial, Consumer Goods, Retail etc)
- Difficult to fix operationally
- Market wide deadlock with no sign of easing
New money / liquidity will be the determining factor bank / PE / sovereign investment
Page 13
Mark Dewar
Senior Managing Director, London
Direct Tel: +44 (0)20 3077 0523
Direct Fax: +44 (0)20 3077 0599
E-mail: mark.dewar@fticonsulting.com
Mark has over 14 years of experience in advising stakeholders including
Senior Finance providers, Corporates, Private Equity investors and Junior
debt providers. The industries which Mark has been involved with include
financial services, telecommunications, software, engineering, building and
construction and the automotive sector.
Prior to joining FTI, Mark worked as a Director in the London restructuring
practice of Ernst & Young where he also completed a 15 month secondment
to the Leverage Finance team at the Royal Bank of Scotland. Mark was also
a member of the Ernst & Young working capital management practice where
he worked for a number of corporates assisting management to drive cash
from the balance sheet.
Prior to joining Ernst & Young, Mark worked for a FTSE 100 IT Services
company and in New York for Credit Suisse First Boston. He commenced his
career in Australia where he worked in the audit practice of Ernst & Young,
qualifying as a chartered accountant in 1997.
Curriculum vitae - Mark Dewar
Mark Dewar is a Senior Managing Director in FTIs Corporate Finance
practice and is based in London
Recent experience
Advisor to NAMA on the review of Business Plans for the largest 10
borrowers who are transferring their loans into NAMA.
Advisor to the lenders to Quinn Group, one of Irelands largest private
groups. Advice included review of the business plan and strategy,
advice on financial restructuring options and providing contingency
planning alternatives.
Led a team responsible for managing the liquidity position of a global
mortgage lender (loans written in 2006 c$30bn), during the sub prime
mortgage crisis. Role included diligence of distressed targets on behalf
of equity sponsors and strategic reviews of European subsidiaries.
Led the team appointed by an Icelandic listed Corporate to assist in
executing a full refinancing of the existing 300m of debt facilities.
Advisor to Icelandic Corporate needing to refinance $250m of term and
acquisition facilities following the failure of its current Icelandic lenders.
Led the European team responsible for advising the syndicate of banks
to Lyondell Basell, one of the worlds largest chemical manufacturing
businesses ($25Bn debt), following the Groups Ch11 filing.
Performed the financial review of a listed UK high street specialist retail
chain including strategic review of the store portfolio, identification of
cost reduction opportunities, and liquidity review. Advised the lenders
through the financial restructuring including the pensions restructuring
and the debt for equity conversion process.
Advised the bond holders of Damovo Group SA through the financial
restructuring in 2006. The role included the review of the Italian
operation and resulted in the Bondholder Group gaining control.
Led the team appointed by Mowlem plc, (Global construction business,
2bn turnover), to assist the new management team in preparing
financial forecasts upon which to refinance the business.
Appointed by a blue chip private equity investor to assist a mobile
telecommunications portfolio company with debt of 200m, to rebuild
their business plan and gain greater visibility over existing cash
availability and forecast flows