Welcoming note from the conference chairman
There can have been few so challenging years for predicting markets as the immediate future. Only the realities of Brexit, the Trump Presidency and this year’s wave of elections in Europe can now show us the way forward. The economic, business and legal changes they bring come at a time when bankruptcy, corporate reorganisation and the distressed debt it generates in Europe have matured into part of mainstream corporate finance and law, growing more rapidly than either M&A or private equity and achieving double digit returns over more than a decade, which stands up well in a very low interest rate environment.
This, and the cross-border funds the market now sees, is all the more remarkable considering the continuing lack of homogeneity in European insolvency law across such issues as valuation frameworks, the role of creditors, and the availability of debtor-in-possession financing – and just as importantly, how bankruptcies are handled in the courts – all of which mean that contrasts in results and how they are achieved vary significantly across European jurisdictions.
In surmounting these persistent difficulties, more European and US firms have launched initiatives, resulting in competition in the European restructuring market being now intense, with distressed debt fund managers having record levels of capital available for investment. Most recently, tough conditions in Europe have seen funds raised more narrowly for specific opportunities, including direct lending, in particular to distressed commodity, real estate and energy firms. Smaller funds in particular have needed clear differentiation in strategy to succeed.
The managers of this record level of investment to place, and the funds jockeying for position, have a complex environment with which to reckon. On the one hand, the market has seen borrowers refinancing, repricing and dividend recapitalising, driving up high yield bond issuance to record levels even as still low interest rates are creating opportunities for switches into bank debt, often with few covenants and considerable risk. Indeed, cov-lite is establishing itself as the market standard, reaching down to smaller deals and driving convergence between the capital and loan markets.
There are plenty of non-performing loans that represent opportunities, for example for debt-equity swaps. On the other hand, recent months have seen a flight to quality in debt issuance in an otherwise resilient market, driving down pricing and increasing the appetite for intensive due diligence even as default levels remain significantly lower (at around 2%) than the average of the last decade, and even than in the United States where they are running at twice that level. This has been reinforced by the need for restructuring operations to continue at businesses that will need the long haul to generate renewed profitability.
Going forward, spotting the losers will involve analysing macro funding dynamics, the comparative prospects of UK and Eurozone economic growth and the implications of Brexit: those UK businesses with high leverage yet especially dependent on EU funding will obviously be particularly at risk. Experts have concurred that loan sizes will allow mid-sized funds to enter the market, whilst the servicing industry is developing.
There is little doubt either about the enthusiasm of both banks and governments which are eager to jumpstart in Europe for the further development of the market. Equally, countries throughout Europe are very likely to face further pressure on key sectors – retail especially, pushed by technology and pulled by currency volatility and inflation, notwithstanding much cov-lite bond finance - but also construction, especially building suppliers and sub-contractors, commodities, particularly still oil and gas but also steel, and trading organisations, as well as shipping, where dry bulk and container segments especially are experiencing idle capacity with freight rates under pressure.
In the UK oil and gas sector, for example, which has been generally highly geared, restructuring choices made by both exploration & production and oilfield services companies that were hastily adopted in the past two years in the expectation, or at least the fervent hope, that the decline in commodity prices would prove temporary, must now be unwound and replaced by ‘lower for longer’ regimes – more enduring solutions that better forecasting and more realistic expectations could have brought about earlier.
Similar problems have been experienced by the mining and waste sectors. Meanwhile banks throughout Europe have continued to divest themselves of assets, a trend which has grown every year since 2010, all of which seem highly likely to continue. This will combine with legal and interest rate uncertainty, declining asset prices in some cases, and higher hedging costs into dollars with volatility on both sides of the Atlantic greater than in previous years.
In this demanding and challenging environment, restructuring professionals will need all the expertise they can muster to surmount the many challenges that will continue to emerge for the sector. The importance of listening to and questioning those at the forefront of the profession has never been greater. This conference therefore draws together key practitioners and experts who will share their expertise and point the way forward and I am delighted to have the opportunity of chairing what will I am sure be an exciting and rewarding day.
I very much look forward to welcoming you at what will undoubtedly be an important and influential conference.