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Restructuring Market Outlook September 2013 The Road Ahead Martin Gudgeon Head of European Restructuring Confidential.

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Presentation on theme: "Restructuring Market Outlook September 2013 The Road Ahead Martin Gudgeon Head of European Restructuring Confidential."— Presentation transcript:

1 Restructuring Market Outlook September 2013 The Road Ahead Martin Gudgeon Head of European Restructuring Confidential

2 I.Is Stabilisation Complete? II.Where in the Restructuring Cycle Are We? III.What Lessons Have We Not Yet Learned? Appendix

3 Blackstone.2 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook Where Are We? I.Is Stabilisation Complete? Liquidity Injection Bank Deleveraging Input Costs Consumer Demand Financial MarketsReal 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

4 Blackstone.3 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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. 2013

5 Blackstone.4 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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

6 Blackstone.5 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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.

7 Blackstone.6 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook Real Economy: Consumer Demand Consumers 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. (1)Debt Service Ratio defined by the BIS as total interest and debt repayments, divided by income.

8 Blackstone.7 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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)

9 Blackstone.8 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook Bank Deleveraging in Europe: Still A Long Way To Go European 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. banksEurope 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% Source: Goldman Sachs. (1) Barclays Capital research 2012; U.S. includes GSE and banking system assets. (2) Goldman Sachs. Excludes Derivatives. Figures in Trillions.

10 Blackstone.9 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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.

11 I.Is Stabilisation Complete? II.Where in the Restructuring Cycle Are We? III.What Lessons Have We Not Yet Learned? Appendix

12 Blackstone.11 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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 Cycle II.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 CHNEMWorldLatAmU.S.UKGermanyEA Source: Eurostat.

13 Blackstone.12 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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 Cycle II.Where in the Restructuring Cycle Are We? Cumulative Amendments by TypeDefaults Off Recent Peaks Defaults peaked in 2009 (13.1%) and 2001 (10.0%)Since ’09, Shift Away From Restructurings Source: Moody’s Default Rate Analysis. Source: S&P LCD.

14 Blackstone.13 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook Record low rates and insolvency reform have mitigated the severity of the downturn, at the expense of creating ‘zombie companies’. The Rise of The Zombies II.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.

15 Blackstone.14 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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 issuanceAverage age increasing Source: S&P LCD. II.Where in the Restructuring Cycle Are We? European Bond Issuance At All-Time Highs (€ in billions) (1)2004-present.

16 I.Is Stabilisation Complete? II.Where in the Restructuring Cycle Are We? III.What Lessons Have We Not Yet Learned? Appendix

17 Blackstone.16 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook Pan-European Restructuring Regime Remains Work in Progress III.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. (1)Total Assets sourced from the latest available information prior to restructuring. Source: S&P LCD, Debtwire and other publically available news sources.

18 Blackstone.17 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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 Restructurings UK Scheme of Arrangement Scope Increases YearIssuerIssuer CountryLaw of Obligation 2013IcopalDenmarkEnglish Law 2013OrizoniaSpainEnglish Law 2013Estro GroupNetherlandsEnglish Law 2013BiffaUnited KingdomEnglish Law 2012Fitness FirstUnited KingdomEnglish Law 2009VivacomBulgariaEnglish Law 2012PrimaComGermanyEnglish Law 2012Deutsche AnningtonGermanyEnglish Law 2012CortefielSpainEnglish Law 2012PrimaComGermanyEnglish Law 2012Seat Pagine GialleItalyEnglish Law 2012EircomIrelandEnglish Law 2011MetrovacesaSpainEnglish Law 2011TeleColumbusGermanyEnglish Law 2011RodenstockGermanyEnglish Law 2010La Seda de BarcelonaSpainEnglish Law Source: Debtwire and S&P LCD.

19 Blackstone.18 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook IssuerIndustry# of Filings Dex MediaPublishing2 (5/09, 3/13) Hayes LemmerzAuto Parts2 (12/01, 5/09) SuperMediaPublishing2 (11/05, 3/13) PliantPackaging2 (5/06, 2/09) VertisAdvertising3 (7/08, 11/10, 10/12) Global AviationAirlines2 (10/04, 2/12) BallysLeisure2 (7/07, 12/08) Journal Register Co.Publishing2 (2/09, 9/12) Graphics PropertiesElectronics2 (5/06, 4/09) Goody's Family ClothingApparel Retail2 (6/08, 1/09) Imperial Home DecorFurnishings2 (1/00, 5/07) Constar InternationalPackaging2 (12/08, 1/11) NBTYPersonal Care2 (2/02, 3/08) Key PlasticsManufacturing2 (3/00, 12/08) Insight Health ServicesHealthcare2 (1/10, 12/10) Citation CorporationManufacturing2 (9/04, 3/07) Arrow AirTransportation3 (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. IssuerIndustry# of Amendments Biomet IncHealthcare2 (8/12, 10/12) CapioHealthcare2 (6/12, 5/13) CodereGaming2 (6/10, 6/13) EliorFood & Beverage2 (3/12, 3/13) ElsterElectronics2 (5/9, 12/9) Formula OneLeisure2 (3/12, 10/12) ISS GlobalServices2 (6/11, 3/13) Iglo Birds EyeFood & Beverage2 (8/10, 4/11) Kabel DeutschlandTelecoms3 (1/10,11/10,1/12) MonierConstruction2 (4/12,7/13) NumericableTelecoms2 (7/11,7/13) MediannuaireDirectories2 (4/11,7/12) ProSiebenMedia4 (7/11, 6/12, 5/13, 7/13) Smurfit KappaPaper2 (6/9, 2/12) TelenetTelecoms3 (8/9, 7/10, 6/11) UPC HoldingsTelecoms3 (3/9, 4/10, 2/12) Van GensewinkelWaste2 (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.

20 I.Is Stabilisation Complete? II.Where in the Restructuring Cycle Are We? III.What Lessons Have We Not Yet Learned? Appendix

21 Blackstone.20 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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 Adviser Appendix 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 Airlines 2005 $21.8bn Adviser to the Company Insurance 2010 $182.3bn Adviser to the Creditors Real Estate On-going €4.8bn i VG Adviser to the PCIC SteerCo Sovereign 2012 €206bn Adviser to the Company FIG 2008 £100bn Adviser to a Creditor Infrastructure 2006 £6.2bn Adviser to the Company Real Estate 2012 €4.3bn Adviser to the Creditors Oil & Gas 2010 €2bn Adviser to the Company Energy 2012 £2.5bn Adviser to the Company Retail On-going, 2010 £2.5bn Adviser to the Company Industrials 2010 CHF2.5bn Adviser to the Company Energy 2002 $63.4bn Adviser to the Company Automotive 2009 $35bn Adviser to the Creditors Media 2012 $8.6bn Adviser to the Minsters of Ukraine Sovereign 2009 N/A Adviser to the Company Oil & Gas 2013 $1bn Adviser to the Company Infrastructure 2013 £385bn Adviser to the Company Pharmaceuticals 2010 N/A Adviser to the Creditors Transportation On-going £770m Adviser to the Company FIG 2013 $1.7bn Adviser to a Creditor Automotive On-going €600m Adviser to the Creditors Transportation 2013 $1.5bn Adviser to the Company FIG 2012 $7.6bn Adviser to the Company Utilities On-going $37.8bn

22 Blackstone.21 184 0 92 102 0 70 0 152 19599 206 202201 221 30 103 120 Restructuring Market Outlook 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 Innovation Appendix TransactionKey Innovations Adviser 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


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