outlook, opportunities and pitfalls of distressed …...european leveraged loan and bond issuance,...
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Outlook, Opportunities and Pitfalls
of Distressed Investing in Europe
Neville Kahn, UK National Head of Restructuring, Deloitte LLP
Corinne Ball, Head of Business Restructuring and Reorganisation Practice, Jones Day
James P Shinehouse, Partner, Atlantic Financial Advisory Partners, LLC
Paul McGowan, Chief Executive, Hilco UK
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Ireland returns to the
international bond
market
25 Jan
5 Apr
25 Jun
21 Jun 29 Jun
Jumpstart Our
Business
Startups (JOBS)
Act eases IPO
regulations
29 Feb 26 Jul 9 Jun
15 Sep
6 Sep
8 Oct
LIBOR
scandal
breaks;
Madrid asks
for aid for its
financial
sector
Coalition
government
formed in
Greece
European
Council
Agreement to
infuse capital
directly into
troubled banks
Fed announces Quantitative Easing 3 (QE3)
The European Central
Bank (ECB) offers
another unlimited three-
year LTRO
Mario Draghi announces
the ECB “will do whatever
it takes” to save the euro
Spain accepts bailout for
its banks
ECB launched an
unlimited bond-
buying program
IMF cuts its
global growth
forecasts
31 Dec
US ‘fiscal cliff’
compromise deal
reached
6 Nov
Barack Obama wins the
U.S. Presidential Election
BoE/HMT launch Funding for Lending
Scheme (expires Jan 2014)
Source: Deloitte
Turbulent capital markets context Significant events that impacted European capital markets in 2012
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US, UK, China and Eurozone equity markets (rebased to January 2008)
30
40
50
60
70
80
90
100
110
120
2008 2009 2010 2011 2012 2013
United States
EMU
China
UK
3
Source: Deloitte
Equity markets don’t rate European growth prospects…
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0
10
20
30
40
50
60
70
80
90
100
2006 2007 2008 2009 2010 2011 2012 2013
VStoxx volatility index
4
Source: S&P
As measured by volatility for the EURO STOXX 50, the Eurozone’s index of top corporates
… but stress in European financial markets is finally easing…
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… the perceived risk of euro secession continues to ease …
Probability of any of the existing eurozone members not being in the single currency area in the next 12 months (based on extensive survey of CFOs)
Source: Deloitte
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… and yields on riskier debt are falling Investors’ hunt for yield is pushing their appetite towards riskier assets
Average Yield: European and US High Yield Bond Flow Names 2012 ended with:
• Low yields
• Increased risk
appetite
• Resilience to macro
concerns
• European companies
are grabbing these
opportunities to raise
cheap finance
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The shape of the European leveraged market is changing…
As Euro banks retreat from the market, non-bank and US bond investors are stepping in
• Since 2010, Euro issuance including US bond
investor participation has remained broadly
stable at c.€90m - €100bn p.a.
• However, this masks two significant factors:
– A 33% fall in domestic leveraged loan
issuance in 2012
– A dramatic fall in CLO and bank
participation
• The shortfall has been made up by alternative
bond investors & growth in Yankee bonds
European leveraged loan and bond issuance, 2010-12
Source: S&P, Bloomberg
Leveraged loans: domestic European issuance falls -33% in 2012 (vs 2011)
High yield bonds: domestic European issuance rises -F1% in 2012 (vs 2011)
Yankee bonds: European companies raise €22bn from US HY investors - more than 2010 and 2011 put together
€billions
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… and default rates are rising ELLI default rates are back above 6% – levels last seen in July 2010
European vs. US lagging 12m speculative grade loan default rates based on par
amount outstanding
Source: S&P
• Default rates are rising
above 6% – despite
massive policy support
and widespread bank
forbearance
• As banks’ own capital
positions are slowly
restored, we anticipate
less appetite to forbear
• S&P predict y/e 2013
European default rates
will be 6.8%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
Jun-
07
Sep
-08
Nov
-08
Jan-
09
Mar
-09
May
-09
Jul-0
9
Sep
-09
Nov
-09
Jan-
10
Mar
-10
May
-10
Jul-1
0
Sep
-10
Nov
-10
Jan-
11
Mar
-11
May
-11
Jul-1
1
Sep
-11
Nov
-11
Jan-
12
Mar
-12
May
-12
Jul-1
2
Sep
-12
Nov
-12
US (S&P/LSTA Loan Index) Europe (S&P European Loan Index)
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The picture varies by industry… Retail insolvencies are high profile at present, but there are other active sectors
Trailing 12-month 2012 European corporate default rates by industry
Source: S&P
0
2
4
6
8
10
12
14
%
Key drivers include:
• Rising raw materials prices
• Weak consumer
discretionary spend
• Cyclical sensitivity
• Survivorship bias (e.g. auto
industry restructured years
ago)
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… and country Eurozone vs non-Eurozone; North vs South polarities; “Emerging Europe” in the east
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What’s the best way in? Implications for distressed investors
Previously amended rather than properly restructured
Fundamentally over-leveraged
Structural challenges (market, technological, consumer behaviour)
Businesses who can’t refinance are likely to
reflect the following characteristics:
Solutions for these poorer credits will depend
on stakeholders’ appetites:
Interim solution / amend & extend
Stakeholder capital injections
Lenders and funds drive full restructuring or recapitalisation