european distressed debt market outlook 2019...project fino, a €17.7 billion npl securitization,...

EUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019

2 Methodology

3 Foreword

4 Executive summaries

8 On the brink of Brexit

12 Policy outlook

16 Market outlook: Investment opportunities

30 Market outlook: Debt renegotiation

36 Market outlook: Restructuring

41 Market outlook: Fundraising

43 PE: Portfolio performance and equity injections

46 Assets, capital and credit solutions

49 Conclusion

50 Orrick contacts

53 THM Partners contacts

CONTENTS

In the fourth quarter of 2018, Debtwire canvassed the opinion of 80 distressed debt investors and 50 private equity executives in two separate surveys to gain insight into their views on the European distressed debt market in 2018 and expectations for the market in 2019 and beyond.

The interviews were conducted by phone and respondents were assured anonymity. Results are presented in aggregate.

METHODOLOGY

2

FOREWORD

Robert Schach Managing Editor Debtwire Europe [email protected]

many reckonings this year for over-indebted credits facing increasingly insurmountable headwinds.

There are also plenty of macroeconomic signs that the long running up-cycle is approaching its end. Central banks are slowly beginning to push up interest rates and either halt or wind down quantitative easing programmes, while geopolitical uncertainty may finally start to dent business confidence. Brexit is now just weeks away, with still no clarity on what the UK’s future relationship with the EU will look like after it breaks from the bloc, while the US trade war with China is having an impact on Chinese economic growth, which has knock-on effects for companies selling into the world’s second largest economy.

This uncertainty is already slowing down companies in the automotive and construction sectors, where executives are holding off from making investment decisions and taking on long-term projects until the macroeconomic picture is clearer.

The retail and consumer space, meanwhile, which has looked shaky for some time, is also running out of road as a number of high-profile names like Marcus Nieman, House of Fraser, Byron and Sears fall into financial difficulty. More distress in this space looks likely to follow, with CVAs not a cure-all for the sector.

Against that backdrop, the virtuous cycle of recent years, with ever-tighter spreads in credit markets and hence falling funding costs, looks to be reversing, pushing up interest rate burdens for many issuers as they refinance maturities, who in a rising number of cases can no longer access capital markets at all. The European leveraged loan market is still in first gear, while the high yield market has still not fully re-opened.

Distressed debt investors and advisors have had to remain patient for many years, but it looks like the long wait is coming to an end.

2018 proved another slow year for the distressed debt community, with dovish monetary policy keeping credit markets saturated with liquidity. But the mood changed by year-end as increasing earnings misses triggered a string of steep selloffs in the secondary markets, resulting in investors finally repricing risk, which is bringing an end to the long run of easy refinancing conditions that sustained many problem credits. Together with increased event-driven macroeconomic risks, this suggests the tide is finally turning and the distressed market is coming back.

For the last couple of years the distressed debt industry has been struggling to deploy cash, picking over a few retail and consumer opportunities, legacy deals in the oil and gas and packaging sectors; and stressed banking assets and non-performing loan portfolios in Germany and the Mediterranean. Most of the respondents to this year’s survey expect another tough year trying to originate deal flow. But there are clear signs that their continued pessimism could be misplaced.

The number of new stressed situations increased markedly in December, while UK discount fashion retailer New Look’s unexpected restructuring in January looks set to be the first of

EUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 3

EXECUTIVE SUMMARY: THM PARTNERS

Thus far, 2019 has opened no differently to each of the last few years: a number of experts predict that this must be the year where the bear overpowers the bull and other macroeconomic and political factors create the conditions for an increase in default rates and a significant uptake in distressed investment opportunities and restructuring activity. Can the rest of 2019 buck the trend of gloomy forecasts being followed by largely benign conditions in debt and equity markets?

Looking back at 2018, it was a year dominated by political uncertainty on a global basis. Brexit overshadowed the European landscape and the potential for a damaging trade war between the USA and China loomed large. While there were some notably large restructurings, these were driven primarily by either company-specific or sectoral challenges rather than a structural market correction. Equally, competition to deploy capital in a market with limited opportunities meant expected returns for distressed investors were not always attractive.

What of 2019? Fragile investor confidence in the world’s largest stock markets, increasing political uncertainty and the threat of tightening monetary policy all appear to support a view that 2019 is likely to be more challenging than recent years for both corporates and investors.

In December 2018, we also witnessed what market experts consider to be a bellwether for economic slowdown: an inversion of yields on short-term and long-

term US Treasuries for the first time in a decade.

Focusing on Europe, we see increasing uncertainty surrounding Brexit and the likelihood of a protracted and messy divorce. This is coupled with uninspiring growth and output signals from Germany, and concerns over Italian budget deficits. While negative fallout from Brexit would first hit the UK, contagion risk exists. Further afield, the possibility of unexpected political interventions from the USA and the threat that would pose to global trade remain ever harder to predict.

Which brings us to credit markets (and associated monetary policy) as the potential driver of a more fundamental change. A correction in capital markets is overdue; this would undoubtedly impact both corporates and households accustomed to cheap and abundant credit.

Corporates have long benefited from favourable capital market conditions, which have allowed structurally challenged businesses to find solutions that have merely put a plaster on the break. This may change this year when we expect increasing numbers of “second time” restructurings, as credit markets tighten and more intensive care is required. The question will be whether this creates the right conditions for distressed investing. The abundance of capital in the distressed market means that pricing might still be a challenge for investors without a significant increase in deal flow.

Sector-wise, and largely consistent with the survey results, we anticipate that retail, construction/infrastructure, oil and gas and automotive, as well as their associated supply chains, will continue to face significant challenges. These are sectors where an in-depth understanding of a company’s reason to exist is needed to identify attractive opportunities.

We have also seen several large property assignments where the value in the property is intrinsically linked to the tenant business. The critical success factors for the deployment of capital in these situations have been the ability to transact rapidly, be innovative in thinking and, more often than not, take a medium-term view.

History teaches us that predicting future activity levels is hard, but we believe that the volume of distressed opportunities coming to market in 2019 will start to increase. If you can transact quickly and hold your nerve in the short term, we see no reason why 2019 should not offer some interesting investment possibilities. Strengthening corporate governance and ensuring stakeholders’ agendas are pursued following proper processes are key contributors to a successful restructuring but also to subsequently successful outcomes.

4

Andrea Trozzi Partner, THM Partners E [email protected]

Anthony Place Partner, THM Partners E [email protected]

Registered in England No OC 340120. Registered Offi ce : 25 Watling Street, London EC4M 9BR

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AMERICAS | EUROPE | AFRICA | ASIAhttp://blogs.orrick.com/distressed-download/

European corporates and investors now face increasing volatility, geopolitical tensions and tighter credit conditions.

With a strong European network, our experienced restructuring team is ready to assist you to adapt and thrive in challenging times.

OUR TRACK RECORD SPEAKS FOR ITSELF

Restructuring of the Year ($1-$5 billion) 2018 for the restructuring of Ocean Rig

Global Finance Deal of the Year 2017 African Insolvency and Restructuring for the $2.2 billion debt restructuring of Edcon

Finance Deal of the Year 2018 for Project FINO, a €17.7 billion NPL securitization, one of the largest in Europe

Recognised in the 2017 Innovative Lawyers Report Europe for the creation of a new insolvency restructuring plan for SoLocal

EXECUTIVE SUMMARY: ORRICK

For years following the global financial crisis, there was much speculation about an impending leveraged finance “maturity wall” – a mirage that always seemed two years out, yet never materialised. The refinancing market recovered strongly, enabling a wave of refinancing and dividend recapitalisations in recent years.

While there have been isolated default spikes since 2008, particularly in the oil and gas, construction and retail sectors, accommodative monetary policy has led to a culture of kicking the can down the road. Defaults and insolvencies (with some spectacular exceptions) have, accordingly, stayed flat since 2008.

Reflecting an assumed continuation of this trend, over half of the respondents in this year’s report claim it will be more difficult to find distressed opportunities in 2019 than in 2018. On the face of it, this is an unusual result. Geopolitical risks in the shape of trade tensions, Brexit, a populist insurgency in certain European countries, slow-downs in major markets and distress in some emerging markets point to more difficult times ahead, which are likely to translate into financial distress.

It is interesting to speculate whether respondents would have changed their outlook had they been given the benefit of seeing the most recent European economic growth figures, which have been anaemic.

From Orrick’s perspective, we are beginning to see more activity in the distressed area across the US, Europe and in emerging markets.

This begs the question: are investors, the advisory community and the insolvency systems in Europe ready to cope with an increase in distress?

Europe’s banks are better capitalised and authorities are better prepared to deal with distress in the banking sector than they were in 2008. The EU’s Bank Recovery and Resolution Directive has enabled efficient bank resolutions across Europe. The new regime has been a clear success (albeit imposing bruising solutions from the perspective of investors in the affected banks).

If there is to be an uptick in distress companies in 2019, commentators should look to the leveraged finance market. Solid activity in the global high yield sector and debtor-friendly conditions have led to an enormous expansion of the leveraged finance market. There is now US$9tn-worth of high yield bonds in existence, a 64% increase in a decade. Covenant protection for leveraged loans and high yield bonds has been severely eroded in recent years, and our expectation is that restructuring discussions will start later.

Consequently, corporates are likely to be in greater distress at the start of any process. Creditors should brace themselves for lower recoveries compared to the last down cycle.

Many of the individual insolvency systems of the larger European economies have been substantially improved over the past 15 years. Italy stands to overhaul its system this year. The UK has been the centre of cross-border European restructuring, with English law often providing creative solutions to European problems. Will there be a vacuum in leadership, which may result in a return to the days of uncoordinated European insolvency filings, leading to insolvency trustees in each jurisdiction competing with one another for recoveries?

The survey results remain bullish on the increased use of schemes of arrangement, so perhaps the market still sees a role for the UK. It’s particularly striking that respondents also anticipate an increase in the use of Chapter 11 filings for European competitors.

The survey seems very optimistic regarding the direction of European insolvency reform in the shape of the proposals under the EU’s flagship Capital Markets Union (CMU) initiative. A new Europe-wide insolvency regime is on its way, heralding a new restructuring procedure that provides for a cross-class cram down and a moratorium for solvent companies. We share the survey participants’ sense that these reforms will have a positive impact.

2019 is shaping up to be a year of volatility. If nothing else, it’s going to be interesting.

Stephen Phillips Head of European Restructuring, Orrick [email protected]

6

AMERICAS | EUROPE | AFRICA | ASIAhttp://blogs.orrick.com/distressed-download/

European corporates and investors now face increasing volatility, geopolitical tensions and tighter credit conditions.

With a strong European network, our experienced restructuring team is ready to assist you to adapt and thrive in challenging times.

OUR TRACK RECORD SPEAKS FOR ITSELF

Restructuring of the Year ($1-$5 billion) 2018 for the restructuring of Ocean Rig

Global Finance Deal of the Year 2017 African Insolvency and Restructuring for the $2.2 billion debt restructuring of Edcon

Finance Deal of the Year 2018 for Project FINO, a €17.7 billion NPL securitization, one of the largest in Europe

Recognised in the 2017 Innovative Lawyers Report Europe for the creation of a new insolvency restructuring plan for SoLocal

Private equity (PE) and distressed investors (DI) overwhelmingly agree that Brexit offers the UK no upside. Respondents think Ireland, France and Benelux will also feel the fall-out and expect an impact on their portfolios.

The prolonged uncertainty over whether the UK will exit the EU on 29 March 2019 – and on what terms – has weighed on the British economy over the past 12 months.

According to the IMF, UK GDP growth slipped from 2.2% in 2015, the year before the referendum, to 1.5% in 2018.1 Over the same period, EU GDP growth has been steadier, coming in at 2.4% in 2015 and 2.2% last year.2

UK stock markets and sterling have also been hit by the uncertainty surrounding the Brexit outcome. The FTSE All-Share has shed 5.75% of its value over the past

* Results from a previous year’s survey which asked the same ques-tion to a different respondent pool

ON THE BRINK OF BREXIT

12 months (LTM)3 and has been characterised by volatility, with a 21% swing between its highest and lowest level during the last year.4 Sterling has also softened, losing 7.34% against the US dollar over the LTM, and swung more than 15% between its highest and lowest level during the past year.5

And according to our survey, DI (97%) and PE (100%) respondents overwhelmingly agree on one point: there are no benefits for the UK from Brexit.

“We do not see any immediate benefits for the UK as they are going to seclude their market and will lose valuable business from Europe,” says the partner of a PE firm based in France. “There will be subsequent visa challenges that will see a lot of the labour force stranded in different parts of the continent, which won’t benefit anyone.”

“In contrast to 12 months ago, PE and debt investor views are aligned: Brexit will only have a detrimental impact on the UK,” agrees Matt Hinds, Managing Partner at THM Partners.

Sector focus: the impact of a hard BrexitIn the event of a hard or no-deal Brexit, the majority of PE respondents believe that the manufacturing (58%) and automotive sectors (56%) will be the most negatively affected.

“Without customs arrangements, most of the products imported to this country will become more

expensive. The UK does not possess a strong manufacturing and production base, which will make it difficult for us to support industry in the short term,” says one UK PE partner.

Although 45% of DI respondents also view manufacturing and automotive as vulnerable to a no-deal scenario, a higher proportion (50%) see financial services as the sector most likely to be affected by a hard Brexit.

100%

Private equity: Are there any benefits for the UK from Brexit?

97%

3%

Distressed investors: Are there any benefits for the UK from Brexit?

No Yes

1 knoema.com/pcggtre/uk-gdp-growth-forecast-2018-2020-and-up-to-2060-data-and-charts

2 knoema.com/mewdmh/european-union-gdp-growth-forecast-2018-2020-data-and-charts

3 Start date 1 Feb 2019

4 markets.ft.com/data/indices/tearsheet/summary?s=FTAL:FSI

5 www.marketwatch.com/investing/currency/gbpusd

No Yes

8

At the time of writing, a no-deal Brexit is a distinct possibility. In such a scenario, where supply chains may be disrupted and tariffs imposed, I would expect this to generate significant distress. It is hard to predict how chaotic a no-deal situation will be; behind the scenes, a great deal of preparation has undoubtedly been undertaken.

Stephen Phillips, Restructuring Partner, London, Orrick

DI respondents appear concerned about what impact a no-deal result will have on capital flows across the region, as financial institutions in the UK and EU could see passporting rights into their respective markets fall away if no exit deal is agreed.

“Financial services will be hit the most as they are the mediators of capital through the continent. The negative economic conditions in Europe will deepen as the UK will try and seal as much capital within their region, leaving the financial sector a bit dry in terms of capital,” says an investment director and portfolio manager at a distressed debt investor.

Regional focus: who will be hit by Brexit?Both DI and PE respondents believe that Ireland and Benelux are the EU regions that would be most negatively affected by a no-deal situation.

Assuming a hard Brexit/no-deal outcome, which sectors would be most negatively impacted in the UK? (Please select two)

0%

10%

20%

30%

40%

50%

60%

70%

GFEDCBA GFEDCBA

50%

44%

58%

45%

45%

16%

4%

8%

14%

56%

8%

4%

21%

28%

Financial services

Manufacturing

Automotive

Consumer/Retail

Construction

Agriculture

Healthcare

A

B

C

D

E

F

G

Key: Private equity

Distressed investors


Germany

Italy

France

Spain

Ireland

Benelux

56% 55%

6%

54% 59%

18% 27%

24% 21%

34% 20%

Nordics

4%

Eastern Europe

14%

8%

Assuming a hard Brexit/no-deal outcome, which EU countries/regions, other than the UK, do you think would be most negatively affected? (Please select two)

Key: Private equity


The withdrawal agreement, if signed – a distant prospect as I consider this – allows the UK financial services sector to operate as if it was still in the EU for the transition period. In a no-deal scenario, the UK’s financial services sector is likely to retain some access to the EU but on an ‘equivalence’ basis with respect to certain aspects of financial services. ‘Equivalence’ is patchy; it is not included in all European financial services legislation (for example, there is no ‘equivalence’ envisaged for banking and payment services). Accordingly, the negative view shown in the survey for the services sector does not surprise me. It is hoped any comprehensive trade agreement agreed during the transition period (if this is what happens) would include a role for access for both sides on an enhanced ‘equivalence’ basis.

Jacqui Hatfield, Corporate and Regulatory Partner, London, Orrick

10

The UK is Ireland’s largest trading partner, buying close to 40% of its exports.6 It is an equally important export market for the Benelux countries. The UK is one of Belgium’s five most important export markets, accounting for close to 9% of its exports,7 while the Netherlands Bureau for Economic Policy Analysis estimates that a hard Brexit could cost the country 1.2% of GDP by 2030.8

Even though France is a much larger economy with a more diversified export base, 34% of PE respondents think it will also be affected, with 20% of the DI respondents in agreement.

“I am surprised how low Germany ranks for this question,” says Christine Kaniak of Orrick’s M&A and Private Equity division in Munich. “The UK is the single largest importer of German cars, for example. I can imagine significant disruption for Germany and other jurisdictions that trade extensively with the UK, such as Ireland, in a no-deal scenario.”

Brexit verdict: distressed debt and PE market playersGiven the wide-ranging risks Brexit poses to capital flows, key sectors and other European economies, a large majority of PE and DI respondents expect it to have a negative impact on at least a small portion of their portfolio companies and credit investments.

Some 44% of PE respondents believe that over a quarter of their portfolio companies will be negatively affected by Brexit. The same percentage of DI respondents believe that over a quarter of their credit investments will suffer negative effects.

Germany

Italy

France

Spain

Ireland

Benelux

56% 55%

6%

54% 59%

18% 27%

24% 21%

34% 20%

Nordics

4%

Eastern Europe

14%

8%

Key: Private equity


What percentage of your portfolio companies (PE)/credit investments (DI) will be negatively affected by Brexit?

0%

5%

10%

15%

20%

25%

30%

35%

40%

Over 50%26-50%11-25%6-10%0-5%0%

12%

20%

8%

12%

36%

24%

26%

28%

18%

16%

Key: Private equity


6 www.independent.ie/business/farming/agri-business/uk-remains-irelands-top-trading-partner-despite-6pc-drop-in-exports-35973657.html

7 www2.deloitte.com/be/en/pages/public-sector/articles/belgiums-brexit-report_press-release.html

8 www.government.nl/topics/brexit/impact/impact-of-brexit-on-the-dutch-economy


With the EU Insolvency Directive (EUID) set to be implemented in 2019, how have PE and DI views on the EU’s insolvency procedures changed, compared with Chapter 11 in the US and the UK’s schemes of arrangement?

POLICY OUTLOOK

The long-awaited EUID was introduced to harmonise insolvency procedures across Europe and support a rescue culture for businesses in financial distress. The European Council and EU Parliament reached an agreement on a proposal for the directive at the end of 2018.9 After a linguistic review, the EUID will be published in the Official Journal of the European Union and enter into force 20 days after publication. Member States will have two years to implement the directive after this date.

The EUID has taken its lead from US Chapter 11 bankruptcy laws, which protect failed companies from creditors, and the UK’s schemes of arrangement, where distressed businesses can renegotiate terms with creditors without having to shut down.

Under the EUID, debtors who negotiate a restructuring will be able to stop individual creditors from pursuing enforcement actions for up to four months,10 a period that can be extended by up to a year with court approval. It also includes provisions for entrepreneurs to fully discharge their debts if acting in good faith but does have requirements for a majority of creditors across all classes to agree to restructuring plans as a safeguard.

EUID: a positive change?It is hoped the introduction of the EUID will make the restructuring process across the continent easier to navigate and help troubled businesses avoid going bust, save jobs and provide better returns to creditors than a full-blown insolvency.

Our survey backs this up: 68% of PE and 70% of DI respondents believe the EUID will have a significant impact on the European market.

“The survey findings reflect a strong endorsement for the EUID initiative,” says Scott Morrison of Orrick’s Restructuring division in London. “We expect the directive to have a broadly positive impact, particularly as a tool that enables management

9 www.lexology.com/library/detail.aspx?g=28b01724-8836-453c-9e7b-d06b95559c84

10 ibid

11 ibid

0%

10%

20%

30%

40%

50%

60%

70%

80%

Not aware of the proposed EUID

NoYes

68

% 70%

32

%

28%

2%

0%

Do you expect the proposed EU Insolvency Directive to have a significant impact on the European market?

Key: Private equity


12

to undertake a restructuring before a company becomes truly distressed, and it incorporates a mechanism to cram down minority dissident creditors – and possibly shareholders – depending on how it is implemented locally.”

Interestingly, even though the directive is now approaching implementation, our survey suggests it is less of a focus than in previous surveys. The findings are down on last year when 88% of PE and 80% of DI respondents expected the EUID to materially change European restructurings.

DI respondents expect France (45%) to make the most of the use of the EUID, against 34% of PE respondents. This could reflect the hope that the EUID will offer a superior alternative to the cumbersome and complex restructuring regime in France.

A third of DI respondents also point to Belgium, where legislators had already been working on reforming the restructuring process.11 This suggests a need in the country for a more pragmatic insolvency regime, which the EUID will now provide.

PE respondents take on a slightly different opinion overall, most commonly citing the Republic of Ireland as the country that may make the most use of the proposed EUID.

Chapter 11 is still an option for European companiesWhile the EUID may improve restructuring regimes across

It is interesting to see how high France ranks among respondents, in terms of which European countries will make most use of the EUID. We wonder if the possibility of incorporating a cram down mechanic for shareholders, who tend to have a significant say in French public company restructuring, might be a factor.

Carine Mou Si Yan, Banking and Finance Partner, Paris, Orrick

Which EU countries do you expect to make use of the tool the most?(Select top two from list)

Sweden

Austria

Portugal

Greece

Italy

Spain

Luxembourg

Netherlands

United Kingdom

Germany

Ireland (Republic)

Belgium

France

45%

34%

36%

22%

24%

36%

23%

20%

20%

22%

15%

16%

18%

9%

11%

8%

9%

6%

10%

10%

0%

1%

1%

4%

0%

0%

Key: Private equity


Europe, 57% of DI respondents still expect more European companies to opt for Chapter 11 for both domestic and cross-border issuers – a 27-percentage point increase compared to DI respondents in 2017.

Chapter 11 is an expensive option, but the protections it offers and the fact that creditors drive the process rather than out-of-the-money shareholders mean it remains an attractive solution for European multinationals with complicated capital structures.

“If Brexit places the recognition of UK processes in question, the power of the automatic stay and the fear of defying US Bankruptcy Courts is likely to encourage debtors to seek the protection of Chapter 11 for complex cross-border cases, even when the locus of the assets is mainly in Europe,” says Raniero D’Aversa of Orrick’s Restructuring division in New York.

Despite the advantages of the Chapter 11 process in cross-border restructurings, just over three-quarters of DI and PE respondents (76%) expect more US companies to take advantage of the schemes of arrangement.

“Some recent high-profile scheme cases, such as Ocean Rig and Noble, have highlighted the efficacy of common law schemes,” says Evan Hollander of Orrick’s Restructuring division in New York. “US creditors are becoming comfortable with schemes, which are often implemented in conjunction with a secondary filing (that recognises the effect of the


scheme) in the US under Chapter 15 of the Bankruptcy Code.”

The survey also reveals that the popularity of the Netherlands as a bankruptcy jurisdiction has notably surged in the overall estimations of DI respondents since 2014. Dutch courts have adopted a pragmatic view on recognising foreign insolvency processes when there are no treaties or conventions in place.12 They will recognise these processes unless they will result in out-of-pocket creditors being unable to claim against the debtor’s assets in the Netherlands. There is also scope for foreign insolvency practitioners to act in the country and Dutch insolvency trustees and judges are open to cooperating with foreign courts in cross-border insolvencies.

0%

10%

20%

30%

40%

50%

60%

70%

NoYes, but only for cross-border issuers

Yes, for both domestic and cross-border issuers

80%

52%57%

18% 18%

30%25%

Do you expect more European companies to use Chapter 11?

Key: Private equity


0%

10%

20%

30%

40%

50%

60%

70%

80%

NoYes

24%24%

76% 76%

Do you expect more US companies to take advantage of schemes of arrangement?

Key: Private equity


12 www.lexology.com/library/detail.aspx?g=3c08f3df-60b8-4a2d-b7b2-f17c359f1eb6

14

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4.5

20182017201620152014

Germany

Netherlands

United Kingdom

Italy

France

Spain

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3.5

4.0

4.5

20182017201620152014

Germany

Netherlands

United Kingdom

Italy

France

Spain

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20182017201620152014

Germany

Netherlands

United Kingdom

Italy

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Spain

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20182017201620152014

Germany

Netherlands

United Kingdom

Italy

France

Spain

Rate the following bankruptcy jurisdictions on a scale from 1 to 5 for Speed (Average rating out of 5)

Rate the following bankruptcy jurisdictions on a scale from 1 to 5 for Outcome (Average rating out of 5)

Rate the following bankruptcy jurisdictions on a scale from 1 to 5 for Efficiency (Average rating out of 5)

Rate the following bankruptcy jurisdictions on a scale from 1 to 5 for Range of Available Options (Average rating out of 5)

The bankruptcy jurisdiction results from the survey fascinate me every year, given how low the UK places on a consistent basis. Is the UK’s system actually less efficient than Italy? It’s notable how high the Netherlands is ranked – there has long been talk of new legislation to implement a scheme-like law in Holland. The UK is proposing significant insolvency reforms in the future too – will these improve the UK’s position in the rankings?

Stephen Phillips, Restructuring Partner, London, Orrick


Despite macro-economic uncertainty and volatility, distressed debt investors in Europe believe 2019 will prove a tough year for sourcing deals. Our survey opens the window on the sectors, regions and instruments that DIs are focusing on when deal flow is scarce.

MARKET OUTLOOK: INVESTMENT OPPORTUNITIES

Even though stock markets have lost value and become more volatile over the past year and global trade relations have come under strain from Brexit and US-led tariff wars, European distressed debt investors have still not seen much deal flow come their way during the past 12 months.

Interest rates remain low, economies are growing and liquidity is abundant. Companies experiencing distress are still able to avoid the pain of a restructuring by refinancing or finding buyers in a highly competitive M&A market.

In November last year, leveraged loan issuance was on track to beat its record high of US$650bn posted in 2017, according to S&P Global Market Intelligence.13 Moody’s, meanwhile, reports that close to 80% of these loans have fewer and weaker covenants. If companies run

into trouble, lenders have poorer protections and powers to demand restructuring. Default rates for leveraged loans are only 2.4%, but even if defaults do increase, weak covenants mean there will be few cracks for DIs to prise open.14

Over half of DI respondents (54%) expect it will be harder to source distressed opportunities in Europe in 2019, which is more than double the results from the previous survey.

“Such pessimism is surprising,” says Stephen Phillips of Orrick’s Restructuring division in London. “Our watch lists are expanding – you only have to look at retailers’ profit warnings post-Christmas to think there will be more to do in 2019. The European economy slowed significantly in the latter part of 2018 and the end of quantitative easing will tighten credit conditions.”

13 ftalphaville.ft.com/2018/11/16/1542344403000/Leveraged-loans-are-way-past--cov-lite-/

14 ibid

54%

21%

25%

Do you expect it to be easier or harder to source distressed opportunities in Europe in 2019? (DI respondents only)

Easier The same Harder

Chris Hughes, Chairman, THM Partners

The difference in some of the views expressed is marked. One person’s concern constitutes another’s opportunity. It is true to say that markets adjust to significant changes in circumstances and that we have faced similar challenges in the past, when the fleet of foot investors has continued to flourish.

16

46%

54%

Did you increase your asset allocation to distressed investing in 2018? (DI respondents only)

Yes No

Asset allocation expectationsThe perceived dearth of opportunities is influencing allocations to distressed debt in the year ahead. A minority of only 46% of DI respondents increased their asset allocation to distressed investment in 2018, far short of the 78% that did so in 2017.

“We suspect that participants would probably be more bullish on this question if they were responding in the first quarter of 2019, rather than in the fourth quarter of 2018 when the survey was done,” says Orrick’s D’Aversa. “In the US and in Europe, we think our clients are going to allocate more to

0%

10%

20%

30%

40%

50%

60%

70%

Stay the sameIncreaseDecrease

15%

19%

66%

What do you expect to happen to your distressed allocation in 2019?(DI respondents only)

distress this year as opportunities are opening up.”

As with the previous survey, 66% of DI respondents expect their distressed allocation to stay the same. However, while none of the respondents last year expected to lower their distressed allocation, 15% now say they do expect it to decrease.

“It will definitely be harder to source distressed assets because most of the assets in the distressed zone belong to non-core sectors, which are not appealing to investors,” says the chief executive and chief investment officer of one Swiss distressed investor.


America first: regional outlookNorth America (62%) is the most attractive region in terms of distressed opportunities according to DI respondents, followed by Asia (excluding China) (49%) and Eastern Europe (45%). This stands in contrast with the previous survey, when North America ranked third, behind Western Europe and Eastern Europe.

One explanation for this shift could be a perception of more potential deals in the region after a number of large, high-profile American brands like Sears, Neiman Marcus and Windstream fell into financial difficulty in 2018.

The increased interest in Asia and Eastern Europe, meanwhile, shows that distressed investors are looking beyond mature Western markets for deal opportunities, and are willing to take on more risk.

“Asia will be a high-risk, high-return strategy for us, but we won’t have to risk too much as the development of Asia outside of China is good. North America will be a medium risk but quick return strategy for investment because of the maturity that market has gained,” says a distressed investor portfolio manager.

Where do you expect to find the best distressed opportunities going forward? (Please select top two) (DI respondents only)

0%

10%

20%

30%

40%

50%

60%

70%

FEDCBA

12%

35

%

58

%

86

%

86

%

FEDCBA

3%

9%

32

%

45

%

62

%

49

%

A

B

C

D

E

F

North America

Asia (excluding China)

Eastern Europe

Western Europe

China

Africa and Middle East

Broad strokes: sector focusOpinions on which sectors will provide the best distressed opportunities are more mixed than they have been in previous years. Property and construction are closely followed by a number of other sectors including the financial services (55%), the automobile industry (53%), renewables (52%) and oilfield services (52%).

“While 2015/16 were the years of oil distress and 2017/18 were about retail, we think 2019 may not have any sector theme,” says Orrick’s Stephen Phillips. “We do, however, expect to see a broader distress wave across numerous sectors particularly in leveraged finance structures where it is generally acknowledged that many sub-investment grade companies are overburdened by debt.”

Property and construction: This industry is most commonly cited as one that may provide significant opportunities in 2019, though only 58% now say this compared to 71% the previous year.

“The late property cycle, abundance of capital and limited supply of traditional assets in the European real estate market is

Ben Paice, Director, THM Partners

Rapid structural change, government policy and oil prices are just some of the key macro uncertainties that make automotive, renewables and oilfield services difficult investment sectors absent a compelling investment thesis for an individual asset.

18

Please rate the following sectors in terms of the opportunities they present for distressed investors in 2019 (DI respondents only)

VUTSRQPONMLKJIHGFEDCBA

1% 1% 1%

41%

39%

6%

13%

8% 9%

16%

10%

10%

10%

10%

13% 11%

14% 11%8%

59%

11%

11%

6%

6%

34% 40

%

39%

48%

44%

35% 41

% 47%

44%

44%

45%

44%

48%

46%

49%

46% 53

%

51%

58%

55%

53%

52%

52%

51%

50%

49%

48%

47%

46%

46%

45%

45%

42%

42%

49%

9%

41%

40%

40%

40%

39%

38%

Property and construction

Financial services

Auto/auto parts

Renewables

Oilfield services

Business services

Telco/cables

Leisure

Transport (incl. shipping)

Infrastructure

Paper and packaging

Technology

Chemicals and materials

Mining and materials

Energy

Basic industries

Aerospace

Recycling

Oil and gas

Media

Consumer/retail

Utilities

A

B

C

D

E

F

G

H

I

J

K

L

M

N

O

P

Q

R

S

T

U

V

Significant opportunities

Some opportunities

Few opportunities


forcing investors into alternative or niche asset classes,” says Fraser Brown, Partner, THM Partners. “The specialist nature of these assets provides the opportunity for higher yields but is not without risk due to pressures on tenants’ business models, a higher asset management requirement and often limited alternative use.”

Property and construction companies in the UK are still carrying a hangover from the collapse of construction services group Carillion, which was put into liquidation last year. The business had close to £1bn in debt when it failed, leaving thousands of other companies and contractors in its supply chain out of pocket. Balfour Beatty, the UK’s largest construction company, for example, anticipated a £45m hit as a result of Carillion’s failure.15

Buying into debt at discounted levels is seen as one of the best opportunities presented by the construction sector, as mentioned by 60% of respondents.

“The construction industry will be affected the most by the restrictive forces in the market. It has already suffered at the hands of delayed completion and lack of sales, and will continue to suffer due to lack of attention from interested investors who will choose other industries to invest in,” says the chief executive of a Dutch distressed investment firm.

15 www.theguardian.com/business/2018/jan/15/jobs-carillion-liquidation-construction-hs2

In terms of distressed investing, what will be the best opportunity presented by the retail and consumer sectors in 2019? (Please select two) (DI respondents only)

In terms of distressed investing, what will be the best opportunity presented by the construction sector in 2019? (Please select two) (DI respondents only)

0%

10%

20%

30%

40%

50%

60%

EDCBA EDCBA

51%45%

41%38%

25%

0%

10%

20%

30%

40%

50%

60%

70%

EDCBA EDCBA

60%

36% 36% 34% 34%

Buying into the debt at discounted levels with a more passive strategy centred around improving market/macroeconomic fundamentals

Shorting debt instruments or equity

Providing new financing directly to distressed retail and consumer firms

Buying into the debt at discounted levels with a more active strategy centred around a financial/operational turnaround

Credit Default Swaps (CDSs)

Buying into the debt at discounted levels with a more passive strategy centred around improving market/macroeconomic fundamentals

Shorting debt instruments or equity

Providing new financing directly to distressed construction firms

Credit Default Swaps (CDSs)

Buying into the debt at discounted levels with a more active strategy centred around a financial/operational turnaround

A

B

C

D

E

A

B

C

D

E

We advised on a number of consolidations in the oil field services sector in 2018 – we expect a further wave of restructurings and consolidation in 2019.

Jonathan Ayre, Energy and Infrastructure Partner, Orrick Houston

20

16 www.theguardian.com/uk-news/2019/jan/29/mike-ashley-scs-group-bidding-battle-struggling-furniture-retailer-sofacom

17 www.pricebailey.co.uk/press-releases/restaurants-going-bust-reaches-record-high/

Automotive: The shift to electric cars is a long-term trend that could weigh on automotive companies, in addition to supply chain risks in the event of a hard Brexit.

“The automotive industry is also facing challenges from reduced sales due to the demand of environmentally-friendly vehicles. Europe has the best infrastructure available for these types of vehicles, which have shifted the focus from traditional combustion engine vehicles,” says a Swiss distressed debt investor.

Retail and consumer: Retailers like House of Fraser, Evans Cycles, HMV and sofa.com have all closed down or been sold in distressed M&A deals,16 while financial distress at restaurant chains Gaucho and Byron are just two examples of businesses running into trouble in the casual dining industry.

According to Price Bailey, the number of restaurant businesses going bust has reached its highest level since 2010, jumping by more than a third in 2018.17

“The retail sector will continue to face the same significant challenges in 2019 of low consumer confidence, online competition, changing consumer habits and a rising cost base,” says Michael Thomas, Partner at THM Partners and former CRO and

Board Director of Jack Wolfskin. “Against this backdrop, there will be winners and losers, with those who are able to differentiate themselves with a strong brand proposition and the right execution of an omnichannel strategy more likely to succeed.”

There is not an overwhelming consensus, however, on which are the best opportunities presented by the retail and consumer sectors. Just over half (51%) of respondents point at buying into debt at discounted levels while 45% look at shorting debt instruments.

Oilfield services: For the DI respondents (52%) who saw increased activity in the oil services sector, a volatile oil price – which recovered through 2018 only to fall back below US$50 a barrel at the end of the year – more than likely informed their view.

“Despite the increase in oil price, oilfield services remains a difficult market given cost pressure in the supply chain and over-capacity,” says James Westcott, Partner at THM Partners. “A strategic, technical and financial edge is more important than ever to increase market share and adapt to the ‘new normal’.”

Half of PE respondents now expect the price of oil to be between US$60 and US$69 in 2019. A similar proportion of DI investors

What do you expect the average price of oil (Brent) will be during 2019?

0%

10%

20%

30%

40%

50%

60%

DCBA

30%

35%

81%

DCBA

4%4%

16%

12%

50

%

49%

US$50-US$59 bbl

US$60-US$69 bbl

US$70-US$79 bbl

US$80-US$89 bbl

A

B

C

D

KeyPrivate equity

Distressed debt investors


expect the same, although around a third of DI (35%) and PE (30%) investors see the price settling below US$60 a barrel.

“The fourth quarter was a disappointing end to the 2018 oil rally. The OPEC production cut from January has helped to marginally increase prices, but shale production and US trade policy could equally work the other way,” says Westcott. “Absent a crystal ball, we’ll place our bets with the near majority of respondents at US$60-69bbl.”

“The weakness of the oil price late last year, when many expected the price to make a more substantial rebound, has meant that the oilfield services sector, an area highly sensitive to down confidence and investment, has not recovered as strongly as was expected,” adds Jonathan Ayre of Orrick’s Energy and Infrastructure division in Houston.

Financial services: The survey participants who see distressed deal flow coming out of the financial services sector will point

If you invest in NPLs, what kind of NPLs do you invest in? (Select all that apply) (DI respondents only)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

A B C D E

31%

21%

36%

36% 38

%

36%

49%

54%

80%

68%

Unsecured consumer credit

Secured consumer credit

Residential mortgages

SME loans

Commercial mortgages

A

B

C

D

E

Key2017

2018

to problems at institutions like Nordea and Danske Bank18 as well as distress across Italy’s banking sector.19

“The banks in Europe are not performing at the same level that they are thought to. The situation at the moment in Europe is largely due to banks lending carelessly and not being able to recover at the same pace, crippling them from capital distribution,” says a distressed debt chief investment officer.

Non-performing loans: opportunities abound in ItalyThe huge opportunity to participate in the non-performing loan (NPL) market across Europe, especially in the Mediterranean, is another spur for DI and PE investment in financial services.

According to the European Central Bank, European NPL stocks are sitting at close to €1trn20 and provide investors with an opportunity to buy assets at reduced rates from troubled banks eager to clean up their balance sheets. NPLs have delivered solid returns, with some

18 www.thelocal.se/20181018/swedish-bank-nordea-targeted-in-money-laundering-allegations-after-danske-bank-scandal

19 www.reuters.com/article/us-eurozone-banks-monte-dei-paschi/monte-dei-paschi-shares-suspended-after-plunging-on-ecb-warning-idUSKCN1P814Z

20 www.bloomberg.com/news/articles/2018-02-14/get-a-grip-on-europe-s-bad-loan-problem-with-these-five-charts

Annalisa Dentoni-Litta, Structured Finance Partner, Rome, Orrick

Italy’s wave of NPL transactions, where banks sold their problematic debt to funds, started relatively slowly compared to the rest of Europe after the 2008 crisis. Activity exploded in recent years as the bid/offer spread narrowed and certain helpful government initiatives bore fruit. Our work extended outside of Italy to other countries such as Greece and Portugal. It’s a multi-year ongoing project across Europe. There is still much to do.

22

In which geographies are you interested in buying NPLs? (Select all that apply) (DI respondents only)

43%Italy

11%Greece

32%Spain

7%Portugal

21%Ireland

4%EasternEurope

7%Benelux

32%UK


investors forecasting double-digit IRRs from NPL deals.21

Among the DIs who invest in NPLs, 68% say they invest in commercial mortgages. Over half (54%) also say they invest in SME loans.

Among investors, the NPL market of greatest interest is Italy (43%), with a third also focusing on Spain and the UK.

“We think that the size of the opportunity is at its greatest extent in Italy at this moment,” says Madeleine Horrocks of Orrick’s Finance and Capital Markets division in Milan. “But we are surprised how high the UK ranks, given that our perception is that the volume of NPLs is low in the UK at the moment, at least compared to Italy and other Southern European destinations.”

The interest in NPL portfolios in Italy and Spain is driven by supply and demand. Banks in those countries that were hardest hit by the sovereign debt crisis have built up the largest NPL stockpiles and are now actively seeking to offload this paper.

Italian banks have more NPLs on their books than any other European country. Spain is ranked third in terms of volume of NPL loans that its banks still need to divest.22

21 www.gbm.hsbc.com/insights/growth/european-npls-the-market-grows

22 www.bloomberg.com/news/articles/2018-02-14/get-a-grip-on-europe-s-bad-loan-problem-with-these-five-charts

0%

10%

20%

30%

40%

50%

60%

44%

53%

16%

51%

34%

32%

56

%

26%

24% 25

% 26%

13%

FEDCBA

Neil Douglas, Managing Director, THM Partners

We have seen an increased return for distressed investors in 2018 over 2017, pointing to challenging underlying trading conditions driving an increase in required yields, with an expectation that the risk premium will continue to increase in 2019.

Direct contacts with corporate

Advisors

Existing lenders

Independent originators

Broker/dealer

Press/public sources

A

B

C

D

E

F

Key2017

2018

What are your key sources of origination for distressed debt opportunities? (Select top two) (DI respondents only)

24

Origination: a search for expert adviceJust over half (53%) of DI respondents consider direct contacts with corporates to be one of their top two key sources of origination for distressed debt opportunities. A similar number (51%) see advisors as a main source, far higher than the 16% who said the same in the previous survey.

“I am glad to see advisors are being tapped as a source for the origination of distressed opportunities,” says Doug Mintz of Orrick’s Restructuring division in Washington D.C. “We see it as part of our business to introduce borrowers to lenders and try to ensure we make connections that are mutually beneficial to our clients and contacts.”

What are the key metrics you are tracking to determine potential investment opportunities? (Please select top three) (DI respondents only)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

51%

48

%

56

%

48

%

48

%

46

%47%

40

%42

%

29%

23%

15%

14%16

%

8%

11%

34

%24

%

H IGFEDCBA

Economic trends and performances by geography/industry

Cash balances and available headroom on facilities

Maturity or amortisation of debt

Price movement in quoted instruments

Financial ratios

Profit warnings

Management change

CDS prices

Acquisition history

A

B

C

D

E

F

G

H

I

Key2017

2018


0%

10%

20%

30%

40%

50%

60%

70%

Over 20%17-19%14-16%11-13%

0%

6%

68%

17%

25%

53%

1%

30%

Interestingly, the previous survey’s most cited key source of origination for distressed debt – independent originators, mentioned by 56% – was only mentioned by 26% of respondents in 2018.

When it comes to identifying where distressed investment opportunities may arise, economic trends and performance by geography (51%) and cash balances (48%) top the list as the key metrics to track when determining potential investment opportunities.

These sources are followed by maturity of amortisation of debt (46%) and price movement in quoted instruments (40%). Notably fewer respondents cite management change as a key metric for this purpose than was cited in the previous year’s survey.

What level of yield do you consider “distress”? (DI respondents only)

Key2017

2018

“Economic trends are a clear indicator that will allow us to determine our investment strategies. If we see volatility continuing, there will be subdued interest, but if the volatility starts reducing post-Brexit, we will consider all our investment reports again and align them to new strategies,” says the director of investment at a firm in the UK.

Forces of attractionDI respondents are divided when it comes to which instruments they think will offer the most attractive investment. Convertible bonds remain popular at 41% (slightly down from 45% in 2017) while second lien debt has jumped to 38% – more than double the previous survey.

“Convertible bonds have always been a preferred choice of investment in Europe. Investors

Which of these instruments do you think will offer the most attractive investment opportunities in the next 12 months? (Please select top two) (DI respondents only)

0%

10%

20%

30%

40%

50%

F GEDCBA

45%

41%

18%

38%

18%

35%

25% 29

%

41%

27% 31

%25

%

22%

5%

Convertible bonds

Second lien debt

CDS

Senior debt

Mezzanine debt/PIK notes

Securitisations/ABS

Equity

A

B

C

D

E

F

G

Key2017

2018

26

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

16-20%10-15%9-10%

14%

81%

51%

5%

44

%

64

%

1%5%

35

%

What percentage return did you achieve in 2018? And what percentage return do you expect when investing in distressed debt in 2019? (DI respondents only)

know that this region pays well for bonds initially, then converts them for sustained returns into stock. This strategy will work again as this region shows signs of stability on bonds initially and then higher returns on stocks,” says one distressed debt investor.

One encouraging sign for the asset class is that a higher proportion of respondents expect higher returns from investments deemed to be distressed than was the case a year ago.

Some 53% of respondents consider a yield level of 17-19% to be distress. In 2017, the majority of respondents considered a yield level of 14-16% to be distress.

With respect to their actual return expectations, 64% of respondents are expecting returns in the 16-20% range in 2019 for their * Showing results for the same question asked in 2017

KeyReturn expected in 2019

Return in 2018

Return in 2017*


What are the main issues preventing your investment in distressed businesses? (Please select top two) (DI respondents only)

0%

10%

20%

30%

40%

50%

60%

IHGFEDCBAA B C D E F G H I

0%

45

%

54

%

27%

37%

26% 28

%

48

%

21%

19%

19%

15%

4%

10%

24%

9%

7% 7%

Market uncertainty

Leverage multiple

Cash needs of the business

Legal jurisdiction

Timeframe for exit

A

B

C

D

E

F

G

H

I

Extent of CDS referencing/guarantees

Access to funds internally

Inter-creditor issues/debt documentation

Pricing

Key2017

2018

28

distressed debt investments – understandable, as 44% say they achieved this return in 2018.

“The credit markets repriced in the later part of 2018, and the survey results are consistent with this repricing,” says Orrick’s Raniero D’Aversa.

What is stopping investment?Although most respondents expect higher returns from distressed debt plays, 54% point to market uncertainty as one of the biggest issues preventing their investment in distressed debt. In the previous survey, 48% pointed to legal jurisdiction as the main issue, while only 21% considered this a main issue in 2018.

“The decline in the weight attributed to debt documentation in decision-making related to distressed investments from 2017 to 2018 is noticeable,” says Dominic O’Brien, head of Orrick’s English law Banking and Finance Practice in London. “With lender protections having been eroded and with the well-publicised resurgence of the cov-lite phenomenon, we would have

expected greater weight being attributed to debt documentation as investors consider their secondary market investments.”

Another factor that appears to be putting off investors is a perceived rise in accounting fraud: 44% of PE respondents believe this increased in 2018, against 34% of DI respondents.

The market has indeed been rocked by a number of higher-profile accounting scandals, such as café chain Patisserie Valerie’s collapse after a black hole was found in its accounts and the investigation of insurance firm Quindell by the UK’s Serious Fraud Office23 as well as money laundering allegations facing Danske Bank.24

“Fraud resulted in a number of high-profile restructuring cases in 2018,” says Anthony Place, Partner at THM Partners. “While not ‘headline grabbing’ in quite the same way, we consistently find poor management to be a far greater contributor to business failure than fraud.”

Do you think that there was an increase in accounting fraud and/or irregularities in 2018 compared with the previous year?

Key: Private equity


0%

10%

20%

30%

40%

50%

CBA

25%24%

44%

41%

32%34%

A

B

C

No

Yes

Not sure

23 www.theguardian.com/business/2019/feb/01/decline-in-quality-auditors-face-scrutiny-over-string-of-scandals

24 www.ft.com/content/6ae5f7f6-f324-11e8-ae55-df4bf40f9d0d


What are the opportunities and challenges facing firms when it comes to debt renegotiation and restructuring?

MARKET OUTLOOK: DEBT RENEGOTIATION

DI respondents expect one of the most prevalent forms of debt renegotiation in 2019 to be a break-up or disposal of assets (59%). Amend and extend (49%) also ranks highly, with respondents taking the view that, in a liquid market with strong appetite from lenders to refinance loans at attractive prices, it is easier to negotiate amended loan terms with existing lenders and push out maturities.

Despite what is still seen as a benign environment, 78% of DI respondents believe that more than 10% of their European sub-investment grade companies are likely to face debt restructurings in 2019. Last year, half this proportion (39%) had the same expectations for 2018.

Almost half (44%) of PE respondents, meanwhile, say over 40% of their portfolios underwent covenant reset, covenant amendment or maturity extension, compared with only 14% of respondents who said the same regarding 2017 in the previous survey.

A similar percentage (46%) of respondents say that over 40% of their portfolio underwent some financial restructuring in 2018 – again, notably higher than the 26% who said the same in 2017.

“On a number of assignments in 2018, we saw the same lenders at the end of a restructuring that were in the debt stack at the start of it; the preference seems to be to stay invested and drive

Which forms of debt renegotiation do you expect to be most prevalent in 2019? (Please select top two) (DI respondents only)

0%

10%

20%

30%

40%

50%

60%

EDCBA

59%

49%

34%32%

26%

Break-up or asset disposals

Amend and extend

Whole or partial debt equitisation/exchange

New money injections

Liability management

A

B

C

D

ESimon Caton, Managing Director, THM Partners

Absent a major correction in the credit markets, we expect the level of restructuring activity in 2019 to increase slightly on 2018. A larger maturity wall from 2021, coupled with tightening credit markets and lower global growth could give rise to greater investment opportunities in 2020.

30

Simon Greenaway, Director at THM Partners.

78%

22%

What proportion of European sub-investment grade companies do you believe are likely to face debt restructurings in 2019? (DI respondents only)

Over 10% 6 - 10%

What percentage of your portfolio underwent a covenant reset, covenant amendment or maturity extension in 2018? (PE respondents only)

0%

5%

10%

15%

20%

25%

30%

Over 70%61-70%51-60%41-50%31-40%21-30%11-20%

28%

6% 6%

2%

16%

22%

20%

Sentiment in the distressed market appears to be split. Structural rather than cyclical issues in certain sectors should keep restructuring advisers busy without necessarily providing opportunities for investors.


What percentage of your portfolio underwent some form of financial restructuring in 2018? (PE respondents only)

0%

5%

10%

15%

20%

HGFEDCBA

14%

12%

0%0% 0%

4%

32%

25%

12%

18% 18%

6%

2%

4%

20% 20%

0-10%

11-20%

21-30%

31-40%

41-50%

51-60%

61-70%

Over 70%

A

B

C

D

E

F

G

H

High yield

Mezzanine

Unitranche

PIK

Leverage loan

A

B

C

D

E

an improved outcome rather than exiting,” adds Ed Wildblood, Partner at THM.

High yield a hit with PEOn average, high yield was the most used refinancing instrument in the PE toolbox last year, and this is expected to continue to be the case in 2019. Europe’s high yield market has offered cheap pricing for borrowers, which has been enough to lure PE firms refinancing their portfolio companies. PE firms still plan to use high yield for refinancing even though the market was more volatile last year.

In 2018, at least 18 potential high yield deals were postponed or cancelled, according to Bloomberg

When refinancing your portfolio companies in 2018, what percentage have you used of the following instruments? And what do you anticipate using in 2019? (PE respondents only)

0%

5%

10%

15%

20%

25%

30%

35%

40%

EDCBA

33

% 36

%

20%

22

%

16%

16%

14%

15%

17%

11%

EDCBA

33

% 36

%

20%

22

%

16%

16%

14%

15% 17

%

11%

* Results show an average of the percentages given as answers by respondents

Key2018

Expectations for 2019

32

In which of the following countries/regions do you expect to see the most debt restructuring? (Please select top two) (DI respondents only)

56%Germany

47%Nordics

24%UK/Ireland

32%Benelux

21%France

4%Italy

3%Turkey

3%Spain

10%EasternEurope

data, as speculative-grade high yield issuance slipped by 36% on the 2017 results.

Regional focus: where will there be the most debt restructuring?Germany and Nordics are expected to be the most active for debt restructuring in 2019 according to DI respondents, with 56% and 47% of respondents choosing these regions respectively.

This differs significantly to the previous survey, when Italy and Spain topped the list, and comes as something of a surprise given that the volume of Spanish and Italian loans in need of restructuring is much higher than the Nordics and Germany.

“Given the strength of the German economy and the decline of insolvency cases in recent years, there has not been much restructuring activity,” says Dr Nikita Tkatchenko of Orrick’s M&A and Private Equity division in Düsseldorf. “A combination of sector problems, such as in retail and motor manufacturing, the impact of the trade tensions, growing evidence for a real estate bubble in certain regions, unprecedented valuations for M&A targets, transactions that are highly leveraged and a slowing

Chinese economy all seem to have convinced the market that Germany will experience a significant uplift in distress.”

The restructuring of Germany’s state-owned banks (PE firms Cerberus and Centerbridge have recently bid for regional German lender Nord to help clean up its loan books)25 and the announcement by German tech giant SAP that it will take a restructuring charge of close to US$1bn26 to reshape its business towards faster-growing markets may explain the focus on Germany.

For DIs, the issues facing Nordic banks Nordea and Danske Bank may have similarly piqued their interest.

25 uk.reuters.com/article/us-nordlb-m-a/nordlb-in-talks-to-sell-ship-loans-to-cerberus-stake-in-bank-sources-idUKKBN1OH1E4

26 www.businessinsider.com/sap-restructuring-jobs-2019-1?r=US&IR=T

Given the potential impact of Brexit on the UK and Ireland, it’s surprising to see Germany as the leading contender for 2019 restructuring activity. That said, Germany has only narrowly avoided recession, retail is struggling and parts of the Mittelstand are susceptible to technological change. If pricing adjusts, Germany could be a key market for distressed investment opportunities.

Neil Robson, Partner, THM Partners


What is the greatest challenge to completing financial restructurings? (PE respondents only)

0%

5%

10%

15%

20%

25%

30%

35%

FEDCBA

20%

FEDCBA

2%

4%

14%

14%

32%

14%

18%

18%

12%

22

%

22%

28%

Challenges to completing financial restructuringAlthough the Nordics and Germany are the clear frontrunners with respect to most attractive geographies, there is no overwhelming consensus when it comes to the greatest challenge to completing financial restructuring. Just over a quarter of PE investors (28%) believe it could be lender perception, followed by lack of proper restructuring tools (22%).

“It is surprising to see such a large fall in unworkable business models being perceived as the greatest challenge to a restructuring given the number of sectors facing structural challenges,” says Chris Elkins, Director at THM Partners. “At the centre of many of our assignments are budgets that have been significantly missed, resulting in unsustainable capital structures, and it feels unlikely that this will significantly change over the next 12 months”

Almost three-quarters (70%) of PE respondents, meanwhile, anticipate that leveraged buyout (LBO) volumes will decrease in 2019, with almost half expecting them to decrease by as much as 10% to 30%.

“This is consistent with credit tightening,” says Sushila Nayak of Orrick’s Finance division in London. “Raising debt is looking like it will be harder in 2019, but credit remains readily available.”

Lender perception of sponsors’ available funds/track record

Lack of proper restructuring tools

Availability of funds

Unworkable business model in current climate

Divergent creditor attitudes

Low valuations

A

B

C

D

E

F

Key2017

2018

34

Decrease over 50%

Decrease 41%-50%

Decrease 31%-40%

Decrease 21%-30%

Decrease 11%-20%

Decrease 1%-10%

Stay the same

Increase 1%-10%

To what extent do you anticipate LBO deal volumes to increase or decrease in 2019? (PE respondents only)

0%

5%

10%

15%

20%

25%

30%

HGFEDCBA

14%

0% 0%

4%

22%

26%

4%

2%

26%

2%

10%

8%

HGFEDCBA

A

B

C

D

E

F

G

H


DI and PE investors have been anticipating an increase in restructuring volumes since 2017, but most respondents now expect restructurings to only peak by 2020.

MARKET OUTLOOK: RESTRUCTURING

Half of PE respondents and 48% of DI respondents believe the peak in restructuring will be in 2020. On the other hand, 46% and 41% of PE and DI respondents, respectively, believe that the peak in restructuring will come this year. PE respondents are marginally more in alignment than DI respondents that a peak will come earlier rather than later.

PE respondents are fairly evenly split over what will trigger restructurings for PE firms: just over half point to either a geopolitical/macroeconomic shock (26%) or liquidity shortfall (26%). Only 6% say a failure to sell on core assets, compared to 18% in 2017’s survey.

“The prevalence of cov-lite structures will inevitably result in liquidity being a key driver of restructurings,” says Chris Davis, partner at THM Partners. “Unless sponsors or corporates are proactive in addressing new money needs ahead of time, distressed debt investors will need to be flexible and able to move quickly to address the funding shortfall.”

41%46%

50%

48%

11%

4%

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

2019 2020 2021

Distressed investors Private equity

2019 2020 2021

Geopolitical issues: tariffs are still a concernGeopolitical factors are already having an impact on some investors. Some 42% of PE investors say the US tariff hikes on China affected over a quarter of their portfolio companies, while 42% also say that between 11% and 25% of their portfolio companies were affected.

According to both sets of respondents, Brexit is one of the main macroeconomic factors likely to drive a European restructuring wave in 2019 (34% for PE and 40% for DI), followed by inflationary pressures in the Eurozone (28% for PE and 30% for DI).

“Geopolitical conflict will be a prime reason for inconsistencies in

36

What do you expect to be the most important factor triggering restructurings for PE portfolio companies? (Please select one) (PE respondents only)

0%

5%

10%

15%

20%

25%

30%

EDCBA

26%

26%

22%

16% 18

%20%

24%

20%

6%

22%

EDCBA

Geopolitical/macroeconomic shock

Liquidity shortfall

Failure to amend covenants

Failure to refinance

Failure to sell non-core assets

A

B

C

D

E

business within Europe,” says one PE investor. “This region is quite dependent and certain economies heavily rely on each other for economic and financial support. With geopolitical conflict, there have been inconsistencies in this support and the dependent nations face further challenges in managing their economy,

leading to an increase in restructuring activities.”

That said, almost a third of PE respondents also mention either or both a systematic bank default and/or monetary policy tightening as being likely to drive a wave of European restructuring in 2019: “As borrowing increases and

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Over 50%26-50%11-25%0-10%None

10%

6%

42%

36%

6%

What proportion of your portfolio companies were impacted by the US tariff hikes on China in 2018? (PE respondents only)

Key2017

2018


Which macroeconomic factors are most likely to drive a European restructuring wave next year? (Please select top two)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

JIHGFEDCBA

40

%3

4%

30

%28

%

25%

22

%

30

%2

2%

30

%

8%

12%

11%12

%

0%

6%

18%

14%

14%

24%

20%

Brexit

Inflationary pressure in Eurozone

Reduced funding availability and/or more onerous terms when accessing the bank and capital markets

Systemic bank default

Monetary policy tightening

Geopolitical conflict

Political instability in Italy

Credit crunch in China

Trade wars (e.g. US/China)

Trump presidency

A

B

C

D

E

F

G

H

I

J

Key: Private equity


revenue generation decreases, there will a lot of restructuring activity within the Union,” says an Austrian PE managing director.

Sector focus: impact and opportunitiesBoth PE and DI respondents (64% and 57% respectively) say that the automotive sector will be most negatively affected by the tightening of monetary policy in Europe, the UK and the US, as well as reduced funding availability and/or more onerous terms when accessing the bank and capital markets.

“It’s unsurprising that financial services, manufacturing and automotive lead the list,” adds Andrea Trozzi, partner at THM Partners. “Diminished access to EU markets, lower inward investment and supply chain disruption are all material threats.”

Both PE and DI respondents (60% and 64% respectively) also agree that the consumer and retail sector offers the best opportunities in 2019, under the same circumstances.

“It’s worth adding that the technology sector is an area that will be heavily impacted by a tightening of conditions,” adds Shawn Atkinson of Orrick’s Private Equity, Mergers & Acquisitions and

Technology Companies Group in London. “Many of the businesses in the sector operate at a loss as they grow, relying on investors continuing to make liquidity available. Changes in confidence and any decline in liquidity will impact the sector significantly.”

A majority of PE respondents agree that operational changes (54%) and asset disposals (50%) are likely to be their method of choice for restructuring those companies in their portfolio that may need restructuring.

38

Which sectors would be most negatively impacted by a tightening of monetary policy in Europe, the UK and the US, and reduced funding availability and/or more onerous terms when accessing the bank and capital markets? (Please select top two)

Which sectors would present the best opportunities for distressed investors in 2019, assuming a tightening of monetary policy in Europe, the UK and the US and reduced funding availability and/or more onerous terms when accessing the bank and capital markets? (Please select top two)

0%

10%

20%

30%

40%

50%

60%

70%

GFEDCBA

57%

64

%

39

%3

8%

33

%18

%

46

%3

0%

26%

4%

11%

11%

4%

19%

GFEDCBA0%

10%

20%

30%

40%

50%

60%

70%

GFEDCBA

64

%6

0%

41%

46

%

30

%14

%

26%

23%

36

%

12%13

%

9%

6%

20%

GFEDCBA

Automotive

Financial services

Construction

Manufacturing

Consumer/Retail

Agriculture

Healthcare

A

B

C

D

E

F

G

Consumer/Retail

Financial services

Healthcare

Automotive

Manufacturing

Construction

Agriculture

A

B

C

D

E

F

G

Key: Private equity


Key: Private equity



For companies in your portfolio that may be restructured, which methods of restructuring are most likely? (Please select top two) (PE respondents only)

0%

10%

20%

30%

40%

50%

60%

GFEDCBA

54

%4

6%

50

%4

6%

24%

22

%

20%

20%

28%

28%

18%

14%

10%

20%

GFEDCBA

Operational changes

Asset disposals

Maturity extension/refinancing

Equitisation/deleveraging

New equity injection

Covenant reset

New management

A

B

C

D

E

F

G

Key: 2017

2018

40

While a majority of DIs are expecting fundraising to be more difficult in 2019, all PE respondents overwhelmingly anticipate conditions to be tougher.

MARKET OUTLOOK: FUNDRAISING

Of those firms that are fundraising, 44% are actively raising funds for distressed debt, a much lower proportion than the 76% in last year’s survey and the lowest proportion recorded since the question was first posed.

“This is a really interesting finding,” says Orrick’s Raniero D’Aversa. “It’s hard to see why as we near the end of the expansion cycle that the expectation for fundraising for distress is at its lowest point since 2014. Perhaps investors think that they have enough dry powder.”

Half of DI respondents expect insurance companies to be the largest source of investment in distressed funds in 2019, followed closely by family offices (49%) and funds of funds (47%). In 2017, high-net worth individuals were expected to be the largest source by 53% of DI respondents but this has now dropped to just 15%.

100%

76%

24%

Do you anticipate tougher fundraising conditions in 2019?

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

20182017201620152014

82%

57%

68%

76%

44%

Are you actively raising funds to invest in distressed debt? (Year-on-year results) (DI respondents only)

Key

Yes No


Private equity

Yes No


Which sources do you expect to represent the largest investment in distressed funds in 2019? (Please select top two) (DI respondents only)

0%

10%

20%

30%

40%

50%

60%

GFEDCBA

37%

50

%

36

%4

9%

39

%47

%

17%

34

%

53

%15

%

14%

4%

4%

1%

GFEDCBA

Insurance companies

Family offices

Funds-of-funds

Pension funds

High-net-worth individuals

Universities

Banks

A

B

C

D

E

F

G

Key: 2017

2018

Strategic thinking: loan-to-ownBetween 2014 and 2017, DI respondents increasingly pursued a par repayment strategy. However, this was not the case for 75% of DI respondents in 2018 who now say they favour a loan-to-own/control strategy.

“This is not surprising – as economic conditions improve, a par strategy makes sense,” says Orrick’s Stephen Phillips. “In a more distressed environment, however, distressed debt investors will need to become more activist and force debt equity swap and other more draconian solutions.”

What overall strategy are you pursuing?(DI respondents only)

0%

20%

40%

60%

80%

100%

EDCBA

15%

26% 26% 25%

48%

75%

85%

74% 74%

52%

Key: Loan-to-own/control

Par repayment

2014

2015

2016

A

B

C

D

E

2017

2018

42

PE dealmakers continue to assess how their portfolio companies are performing and respond accordingly.

PE INSIGHTS: PORTFOLIO PERFORMANCE AND EQUITY INJECTIONS

The survey found a fairly wide spread in PE respondents’ estimates for how their portfolios are performing. Only 8% report that 1-10% of their portfolios are underperforming the acquisition business plan, compared to 12% saying that 50% or more of their portfolios are underperforming.

Alarmingly, over a third (36%) of respondents say that between 21% and 30% of their portfolio is showing sub-par performance, although this is less than the 58% recorded last year.

Responses vary as to what percentage of these companies represent potential stressed or debt restructuring candidates in the next 12 months, but a significant 46% of PE respondents believe that over half of them do.

This is surprising given that most returns figures for PE show that it has outperformed other asset classes. US pensions fund CalPERS, for example, one of

0%

10%

20%

30%

40%

50%

60%

70%

GFEDCBA

12% 22

%

GFEDCBA

8% 10%

0%

0%

0%

24%

58%

36%

30%

16%

2%

4%

8%

4%

What percentage of your portfolio is performing below the level of the acquisition business plan? (PE respondents only)

A 1-10%

B 11-20%

C 21-30%

D 31-40%

E 41-50%

F 51-60%

G 61-70%

Key: 2017

2018


27 www.calpers.ca.gov/page/investments/asset-classes/private-equity/pep-fund-performance

the oldest investors in PE, has received a net IRR of 11% and a net 1.5x multiple from its PE programme since inception.27 In this context, the survey responses underscore the importance of manager selection in PE, but also could indicate that there is more distress in portfolios than has been assumed.

Equity injectionsAgain, the relative levels of equity that PE respondents injected in 2018 varies more than it did in the previous year. And once more, this emphasises how crucial manager selection is for investors.

A much higher percentage of respondents report making equity injections to smaller proportions of their portfolios. The number of PE participants injecting equity into larger proportions of their portfolios is also up. One in five PE respondents injected additional equity into over half of their portfolio companies in 2018 and say they may need to consider doing so again 2019. This stands in stark contrast to the 2017 findings, when no respondents reported a need to inject equity into such a high proportion of their portfolio companies.

When equity injections are made, responses are mixed regarding the concessions that sponsors expect in return for new money injections. Most commonly cite a change of amortisation/maturity profile on existing debt (50%); a write down of existing debt (50%); and a renegotiation of better covenants (44%).

0%

5%

10%

15%

20%

25%

30%

35%

40%

IHGFEDCBA IHGFEDCBA

6%

2% 2%0%

12%14

%

12%

20% 22

%

32%

18%

18%

16%

12%

6%

2%

6%

0%

Of your portfolio businesses performing below the level of the acquisition business plan, what percentage represents potential stressed/debt restructuring candidates in the next 12 months? (PE respondents only)

A 1-10%

B 11-20%

C 21-30%

D 31-40%

E 41-50%

F 51-60%

G 61-70%

H 71-80%

I Over 80%

The increase [from 2017] of the option to write down debt is probably reflective of the view that certain capital structures are seen as being over-leveraged and in need of deeper restructuring.

Scott Morrison, Restructuring Partner, London, Orrick

Key: 2017

2018

44

What percentage of your portfolio companies did you inject additional equity into in 2018? And what percentage of your portfolio companies will you have to consider injecting additional equity into in 2019?(PE respondents only)

What leniencies do you expect from lenders in return for new money injections? (Please select top two) (PE respondents only)

0%

10%

20%

30%

40%

50%

60%

EDCBA

2%

10%

8%

0%

0%

10%

12%

42

%4

2%

24%

56

%18

%3

6%

20%

20%

EDCBA0%

10%

20%

30%

40%

50%

60%

GFEDCBA FEDCBA

30

%

50

%

36

%

50

%

38

%

44

%

48

%

26%

24%

16%

24%

14%

None

0-10%

11-25%

26-50%

Over 50%

A

B

C

D

E

Change of amortisation/ maturity profile on existing debt

Write down of existing debt

Renegotiate better covenants

Priority return for new money

Covenant holiday

Equity cure rights

A

B

C

D

E

F

Key: 2017*

2018

2019 expectations

Key: 2017*

2018

* Showing results for the same question asked in 2017


How are attitudes of DI and PE changing, with regards to private debt and direct lending in Europe?

ASSETS, CAPITAL AND CREDIT SOLUTIONS

In just under a decade, acquisition finance markets in Europe have been transformed. The private debt industry has undergone massive growth, with direct lenders and debt funds seizing market share from banks that had to step away from lending to recover from the credit crunch fall-out.

According to Preqin, private debt funds focused on the region now have around €176bn of assets under management, with the number of investors allocating to European opportunities climbing to 1,755 at the end of November last year.28

Almost half (49%) of Europe-focused assets under management are held by direct lending funds, while distressed debt funds account for 24% of Europe-focused private debt assets under management. Investors have been drawn to these vehicles because of their income-like characteristics and attractive yields in a low interest rate environment.

28 docs.preqin.com/press/European-PD-Nov-18.pdf

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Expected to be invested 12 months from now (average percentage)

Currently invested (average percentage)

84%

97%99%

94%

What percentage of your assets under management are currently invested and expected to be invested 12 months from now? (State percentage)(DI respondents only)

Key: 2017

2018

Direct lending is down from the expected high in 2017, but still remains healthy. Last year there were significant reforms to the banking monopoly laws which we believe will facilitate more direct lending by funds in France – Italy is making similar moves.

Emmanuel Ringeval, Finance Partner, Paris, Orrick

70%

75%

80%

85%

90%

95%

100%

201820172016

78%

84%

97%

What percentage of your assets under management, on average, is invested?(YoY results)(DI respondents only)

46

Where did you deploy your capital in 2018? Where do you expect to allocate capital in 2019? (DI respondents only)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2019expectations

20182017*

9%

14%

11%

5%

7%

7%7%

7%4%

3%

10%

10%

10%

10%

8%

11%

14% 14%

18%20%

2%2%2%1%2%2%

23%

30%

25%

12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

DCBA

Yes

0%10

%

4%

74%

42

%

16%

43

%

11%

How long do you have capital locked up for? (DI respondents only)

6 months to 1 year

1–3 years

4–5 years

More than 5 years

A

B

C

D

Assets under managementIn terms of how they are invested, DI respondents on average have a healthy 97% of their assets under management invested at present and expect this to rise to 99% in the next 12 months. The percentage of assets under management invested by DI respondents has been steadily increasing since 2016.

DI respondents still allocate the largest portion of their capital to distressed debt (25%) and direct lending (18%). In 2019, however, the proportion of capital that investors expect to allocate to distressed debt will reduce slightly. Compared to 2017, DI respondents also reported a year-on-year reduction in capital allocation to distressed debt in 2018.

* Showing results for the same question asked in 2017

Distressed debt

Direct lending

High yield bonds primary

Secondary bond/loan market

CDS

Listed corporate equity

CMBS/Real estate

NPL portfolios

Fallen angels

Private corporate equity

Not invested

Key: 2017

2018


“The only significant change is the reduction allocated to distressed debt – perhaps the market thinks a downturn is still some way away,” says Orrick’s Scott Morrison.

More than half (54%) of respondents have their capital locked up for four of more years, while 42% have it locked up for one to three years.

Raising capitalAlmost two-thirds (60%) of DI respondents are actively raising long-term capital for direct lending, which is 13 percentage points lower than in 2017. Appetite for this strategy, however, is still strong, with DI managers no doubt drawn by direct lending’s strong performance over the current cycle. According to Preqin, direct lending has a five-year horizon IRR of more than 10%.

DI respondents moving into direct lending will have also noticed how many more deals in their market are now financed from alternative capital sources. Two-thirds of respondents say that over a fifth of their deals were financed using private debt/alternative capital.

As more sponsors move into the credit space, however, there are concerns around potential conflicts of interest facing managers running equity and debt strategies. More than a third (36%) of respondents feel uncomfortable with sponsors providing credit solutions, a notably higher proportion than those that said the same in 2017.

0%

10%

20%

30%

40%

50%

60%

70%

80%

D DCBA

72%

53%

73%

60

%66

%

Are you actively raising funds for direct lending? (YoY results)(DI respondents only)

2014

2015

2016

2017

2018

A

B

C

D

E

0%

5%

10%

15%

20%

25%

30%

35%

40%

DCBA

2%

32

%

28%

38

%

What percentage of deals have you financed with private debt/alternative capital? (PE respondents only)

11-15%

16-20%

21-25%

More than 25%

A

B

C

D

An increasing number of sponsors are providing credit solutions. Are you comfortable with this type of arrangement? (PE respondents only)

0%

10%

20%

30%

40%

50%

60%

70%

CBACBA

24%

42

%

64

%

22

%

12%

36

% Yes and I have entered into financing arrangements with other sponsors

Yes but I haven’t yet entered into financing arrangements with other sponsors

No

A

B

C

Key: 2017

2018

48

Even though volatile markets and political uncertainty should create ideal conditions and deal flow for distressed debt investors, most still believe that 2019 will be a challenging year for sourcing investment opportunities.

CONCLUSION

Low interest rates, a frothy M&A market and active leveraged loan and high yield bond markets continue to provide companies that would otherwise be in financial distress to find alternative solutions to restructuring. The survey finds that a higher proportion of investors are reducing their distressed debt allocations than was the case in the previous year.

The fact that the majority of distressed debt investors are not optimistic about deal opportunities over the next 12 months, however, stand in contrast to other responses, which suggest that there is more financial strain in the system than some may think.

One in five PE investors report having made an equity injection into a portfolio in 2018. Just a year earlier that number was zero. Almost a third of PE respondents say more than 30% of their portfolios are performing below the level of the acquisition business plan.

Some 70% of respondents, meanwhile, believe LBO volumes will drop in 2019, and there is a consensus that the construction, property, automotive, retail and consumer sectors face stiff headwinds in the year ahead.

There are also signs that the soft lending markets that companies have been able to tap to tide them over are beginning to creak. Overall high yield bond and leveraged loan issuance is down on figures from a year ago. Lenders are beginning to push back on terms and finance costs are creeping. The Federal Reserve and Bank of England, meanwhile, have both increased interest rates over the past 12 months and the European Central Bank has ended its quantitative easing programme. Capital markets are still benign, but for how much longer?

Companies that are aggressively financed need to put contingency plans in place and ready themselves for a turn in the cycle, which most respondents anticipate will come in the next 12 to 18 months. Distressed debt investors, who have had to bide their time, may be in a position to offer a solution.

“We advise on a significant number of direct lending transactions in Europe and the US; we expect that this is not a transient sector,” says Dominic O’Brien of Orrick’s Finance division in London. “Perhaps the discomfort expressed here relates to the conflicts of interest that may arise for sponsors, who are more renowned for equity investments, providing debt.”

A sizeable group of respondents, however, are happy to lend from sponsors: 42% say they feel comfortable with this type of credit solution and have entered into financing arrangements with other sponsors. This is also a notably higher proportion of respondents compared to 2017 (24%).

It’s positive to see that funds have arranged for capital to be locked up for longer. In 2008, as we went through the distressed cycle, we saw skittish investors in funds withdraw their investments. This forced funds to sell their most liquid assets, resulting in a downward price spiral for many assets. Hopefully this can be avoided next time.

Raniero D’Aversa, Restructuring Group Chair, New York, Orrick


ORRICK CONTACTS

RESTRUCTURING CONTACTS

BANKING AND FINANCE CONTACTS

Stephen Phillips European Practice Head Partner, London +44 20 7862 4704 [email protected]

Daniela Andreatta Special Counsel, Milan +39 02 4541 3861 [email protected]

Lorraine McGowen Partner, New York +1 212 506 5114 [email protected]

Raniero D’Aversa Restructuring Group Chair Partner, New York +1 212 506 3715 [email protected]

Laura Metzger Partner, New York +1 212 506 5149 [email protected]

Thomas Mitchell Partner, San Francisco +1 415 773 5732 [email protected]

Scott Morrison Partner, London +44 20 7862 4747 [email protected]

Evan Hollander Partner, New York +1 212 506 5145 [email protected]

Doug Mintz Partner, Washington DC +1 202 339 8518 [email protected]

William S. Haft Banking and Finance Group Chair, Partner, New York +1 212 506 3740 [email protected]

Dominic O’Brien Partner, London +44 20 7862 4683 [email protected]

Alessandro Accrocca Partner, Rome +39 06 4541 3883 [email protected]

Francesca Isgro Partner, Rome +39 06 4521 3947 [email protected]

Olivier Bernard Partner, Paris +33 1 5353 7568 [email protected]

Emmanuel Ringeval Partner, Paris +33 1 5353 7569 [email protected]

Thomas Laryea Counsel, Washington DC +1 202 339 8416 [email protected]

Hervé Touraine Partner, Geneva | Paris +41 22 787 4060 [email protected]

Sushila Nayak Partner, London +44 20 7862 4616 [email protected]

Annalisa Dentoni-Litta Partner, Rome +39 06 4521 3917 [email protected]

Raul Ricozzi Partner, Rome +39 06 4521 3955 [email protected]

Amaury de Feydeau Partner, Paris +33 1 5353 7583 [email protected]

Timo Holzborn Partner, Munich +49 89 383 980 120 [email protected]

Patrizio Messina Partner, Rome | Milan +39 6 4521 3998 [email protected]

Madeleine Horrocks Partner, Milan +39 02 4541 3841 [email protected]

Gianrico Giannesi Partner, Rome +39 06 4521 3953 [email protected]

Arnauld Achard Partner, Paris +33 1 5353 7236 [email protected]

Carine Mou Si Yan Partner, Paris +33 1 5353 7597 [email protected]

B. J. Rosen Partner, New York +1 212 506 5246 [email protected]

50

M&A AND PRIVATE EQUITY CONTACTS

King Milling Corporate Business Group Chair Partner, New York +1 212 506 5075 [email protected]

James Connor Partner, London +44 20 7862 4687 [email protected]

Anthony Riley Partner, London +44 20 7862 4615 [email protected]

Ylan Steiner Partner, London +44 20 7862 4606 [email protected]

Etienne Boursican Partner, Paris +33 1 5353 8157 [email protected]

Alexis Marraud des Grottes Partner, Paris +33 1 5353 8167 [email protected]

Patrick Tardivy Partner, Paris +33 1 5353 7582 [email protected]

Attilio Mazzilli Partner, Milan +39 02 4541 3800 [email protected]

Andrea Piermartini Rosi Partner, Rome +39 06 4521 3929 [email protected]

Marco Zechini Partner, Rome +39 06 4521 3900 [email protected]

Peter O’Driscoll Partner, London / New York +44 20 7862 4639 [email protected]

Weyinmi Popo Partner, London +44 20 7862 4679 [email protected]

Nell Scott Partner, London +44 20 7862 4748 [email protected]

Daniel Wayte Partner, London +44 20 7862 4755 [email protected]

Guillaume Kessler Partner, Paris +33 1 5353 7267 [email protected]

Jean-Pierre Martel Partner, Paris +33 1 5353 7579 [email protected]

Alessandro De Nicola Partner, Milan +39 2 4541 3888 [email protected]

Gabriel Monzon Cortarelli Partner, Milan | New York +39 02 4541 3877 [email protected]

Betty Louie Partner, Milan | Beijing +39 02 4521 3923 [email protected]

Oliver Duys Partner, Düsseldorf +49 211 3678 7245 [email protected]

Shawn Atkinson Partner, London +44 20 7862 4715 [email protected]

Ali Ramadan Partner, London +44 20 7862 4818 [email protected]

Jinal Shah Partner, London +44 20 7862 4613 [email protected]

Konstantin Kroll Russia and CIS practice group Partner, London +44 20 7862 4697 [email protected]

Jean-Michel Lepretre Partner, Paris +33 1 5353 7230 [email protected]

George Rigo Partner, Paris +33 1 5353 7559 [email protected]

Marco Dell’Antonia Partner, Milan +39 02 4541 3840 [email protected]

Marco Nicolini Partner, Rome +39 06 4521 3930 [email protected]

Guido Testa Partner, Milan +39 02 4541 3831 [email protected]

Sven Greulich Partner, Düsseldorf +49 211 3678 7261 [email protected]


ORRICK CONTACTS CONTINUED...

M&A AND PRIVATE EQUITY CONTACTS

Konstantin Heitmann Partner, Düsseldorf +49 211 3678 7195 [email protected]

Nikita Tkatchenko Partner, Düsseldorf +49 211 3678 7264 [email protected]

Christine Kaniak Partner, Munich +49 89 38398 0126 [email protected]

Fabian von Samson Himmelstjerna Partner, Munich +49 89 38398 0192 [email protected]

Wilhelm Nolting-Hauff Partner, Düsseldorf +49 211 3678 7154 [email protected]

Stefan Weinheimer Partner, Düsseldorf +49 211 3678 7233 [email protected]

Christoph Rödter Partner, Munich +49 89 38398 0160 [email protected]

Jonathan Ayre Partner, Houston +1 713 658 6710 [email protected]

Stefan Renner Partner, Düsseldorf +49 211 3678 7302 [email protected]

Christoph Brenner Partner, Munich +49 89 38398 0127 [email protected]

Thomas Schmid Partner, Munich +49 89 3839800 [email protected]

52

Fraser Brown Partner T +44 20 3012 1132 M +44 7900 654497 E [email protected]

Simon Caton Managing Director T +44 20 3012 1147 M +44 7721 235041 E [email protected]

Chris Davis Partner T +44 20 3012 1104 M +44 7825 376551 E [email protected]

Neil Douglas Managing Director T +44 20 3012 1129 M +44 7780 110162 E [email protected]

Matt Hinds Managing Partner T +44 20 3012 1126 M +44 7917 775613 E [email protected]

Chris Hughes Chairman T +44 20 3012 1128 M +44 7802 948204 E [email protected]

Peter Morgan Partner T +44 20 3012 1139 M +44 7785 957134 E [email protected]

Anthony Place Partner T +44 20 3012 1143 M +44 7795 122360 E [email protected]

Neil Robson Partner T +44 20 3012 1146 M +44 7836 237326 E [email protected]

THM PARTNERS CONTACTS

Michael Thomas Partner T +44 20 3012 1149 M +44 7917 268249 E [email protected]

Andrea Trozzi Partner T +44 20 3012 1163 M +44 7823 537610 E [email protected]

James Westcott Partner T +44 20 3012 1153 M +44 7900 953998 E [email protected]

Edward Wildblood Partner T +44 20 3012 1154 M +44 7770 637088 E [email protected]


NOTES

54

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it should not be acted on or relied upon or

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