EUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 - Debtwire
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EUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019
2
CONTENTS
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 METHODOLOGY
PE: Portfolio
performance and
equity injections In the fourth quarter of 2018,
Debtwire canvassed the opinion of
46 80 distressed debt investors and
Assets, capital and 50 private equity executives in two
separate surveys to gain insight
credit solutions
into their views on the European
49 distressed debt market in 2018 and
Conclusion expectations for the market in 2019
and beyond.
50
Orrick contacts The interviews were conducted
by phone and respondents were
53 assured anonymity. Results are
THM Partners contacts presented in aggregate.
EUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 3
FOREWORD
2018 proved another slow many reckonings this year for over- Against that backdrop, the virtuous
year for the distressed debt indebted credits facing increasingly cycle of recent years, with ever-
community, with dovish insurmountable headwinds. tighter spreads in credit markets
monetary policy keeping credit and hence falling funding costs,
markets saturated with liquidity. There are also plenty of looks to be reversing, pushing
But the mood changed by macroeconomic signs that up interest rate burdens for
year-end as increasing earnings the long running up-cycle is many issuers as they refinance
misses triggered a string of approaching its end. Central maturities, who in a rising number
steep selloffs in the secondary banks are slowly beginning to of cases can no longer access
markets, resulting in investors push up interest rates and either capital markets at all. The European
finally repricing risk, which is halt or wind down quantitative leveraged loan market is still in first
bringing an end to the long run easing programmes, while gear, while the high yield market
of easy refinancing conditions geopolitical uncertainty may finally has still not fully re-opened.
that sustained many problem start to dent business confidence.
credits. Together with increased Brexit is now just weeks away, with Distressed debt investors and
event-driven macroeconomic still no clarity on what the UK’s advisors have had to remain patient
risks, this suggests the tide is future relationship with the EU for many years, but it looks like the
finally turning and the distressed will look like after it breaks from long wait is coming to an end.
market is coming back. the bloc, while the US trade war
with China is having an impact
on Chinese economic growth,
For the last couple of years the which has knock-on effects for
distressed debt industry has been companies selling into the world’s
struggling to deploy cash, picking second largest economy.
over a few retail and consumer
opportunities, legacy deals in the This uncertainty is already
oil and gas and packaging sectors; slowing down companies in the Robert Schach
and stressed banking assets and automotive and construction Managing Editor
non-performing loan portfolios in sectors, where executives are Debtwire Europe
Germany and the Mediterranean. holding off from making investment robert.schach@debtwire.com
Most of the respondents to this decisions and taking on long-term
year’s survey expect another projects until the macroeconomic
tough year trying to originate deal picture is clearer.
flow. But there are clear signs that
their continued pessimism could The retail and consumer space,
be misplaced. meanwhile, which has looked shaky
for some time, is also running out
The number of new stressed of road as a number of high-profile
situations increased markedly names like Marcus Nieman, House
in December, while UK discount of Fraser, Byron and Sears fall into
fashion retailer New Look’s financial difficulty. More distress in
unexpected restructuring in this space looks likely to follow, with
January looks set to be the first of CVAs not a cure-all for the sector.
4
EXECUTIVE term US Treasuries for the first time We have also seen several large
SUMMARY: in a decade. property assignments where the
value in the property is intrinsically
THM PARTNERS Focusing on Europe, we see linked to the tenant business.
increasing uncertainty surrounding The critical success factors for
Brexit and the likelihood of a the deployment of capital in these
protracted and messy divorce. This situations have been the ability to
Thus far, 2019 has opened is coupled with uninspiring growth transact rapidly, be innovative in
no differently to each of the and output signals from Germany, thinking and, more often than not,
last few years: a number of and concerns over Italian budget take a medium-term view.
experts predict that this must deficits. While negative fallout
be the year where the bear from Brexit would first hit the UK, History teaches us that predicting
overpowers the bull and other contagion risk exists. Further afield, future activity levels is hard, but
macroeconomic and political the possibility of unexpected we believe that the volume of
factors create the conditions political interventions from the distressed opportunities coming to
for an increase in default USA and the threat that would market in 2019 will start to increase.
rates and a significant uptake pose to global trade remain ever If you can transact quickly and hold
in distressed investment harder to predict. your nerve in the short term, we
opportunities and restructuring see no reason why 2019 should not
activity. Can the rest of 2019 Which brings us to credit markets offer some interesting investment
buck the trend of gloomy (and associated monetary policy) possibilities. Strengthening
forecasts being followed by as the potential driver of a more corporate governance and
largely benign conditions in fundamental change. A correction ensuring stakeholders’ agendas
debt and equity markets? in capital markets is overdue; are pursued following proper
this would undoubtedly impact processes are key contributors to a
both corporates and households successful restructuring but also to
accustomed to cheap and subsequently successful outcomes.
Looking back at 2018, it was abundant credit.
a year dominated by political
uncertainty on a global basis. Corporates have long benefited
Brexit overshadowed the European from favourable capital market
landscape and the potential for conditions, which have allowed
a damaging trade war between structurally challenged businesses
the USA and China loomed large. to find solutions that have merely
While there were some notably put a plaster on the break. This may Andrea Trozzi
large restructurings, these were change this year when we expect Partner, THM Partners
driven primarily by either company- increasing numbers of “second E atrozzi@thmpartners.com
specific or sectoral challenges time” restructurings, as credit
rather than a structural market markets tighten and more intensive
correction. Equally, competition care is required. The question will
to deploy capital in a market be whether this creates the right
with limited opportunities meant conditions for distressed investing.
expected returns for distressed The abundance of capital in the
investors were not always attractive. distressed market means that
pricing might still be a challenge Anthony Place
What of 2019? Fragile investor for investors without a significant Partner, THM Partners
confidence in the world’s largest increase in deal flow. E aplace@thmpartners.com
stock markets, increasing political
uncertainty and the threat of Sector-wise, and largely
tightening monetary policy all consistent with the survey
appear to support a view that 2019 results, we anticipate that retail,
is likely to be more challenging construction/infrastructure, oil
than recent years for both and gas and automotive, as well
corporates and investors. as their associated supply chains,
will continue to face significant
In December 2018, we also challenges. These are sectors
witnessed what market experts where an in-depth understanding
consider to be a bellwether for of a company’s reason to exist
economic slowdown: an inversion is needed to identify attractive
of yields on short-term and long- opportunities.Our business was created to solve
the unique problems of companies
facing financial challenge
We have restructured over 140 businesses with debt
in excess of £150bn across 17 jurisdictions
CRO and Financial Value Delivery
Restructuring Serving the needs of
Solving the issues investors looking to
faced by boards and protect and unlock
companies in financial value in their portfolio
distress companies
Hands on, Executive management Experience Independent Flexible and
senior teams or adviser and leadership and trusted innovative approach
thmpartners.com | +44 20 3012 1100
Registered in England No OC 340120. Registered Office : 25 Watling Street, London EC4M 9BR
THM Partners LLP is authorised and regulated by the Financial Conduct Authority6
EXECUTIVE This begs the question: are The survey results remain bullish
SUMMARY: investors, the advisory community
and the insolvency systems in
on the increased use of schemes
of arrangement, so perhaps the
ORRICK Europe ready to cope with an market still sees a role for the
increase in distress? UK. It’s particularly striking that
respondents also anticipate an
Europe’s banks are better increase in the use of Chapter 11
For years following the global capitalised and authorities are filings for European competitors.
financial crisis, there was much better prepared to deal with
speculation about an impending distress in the banking sector The survey seems very optimistic
leveraged finance “maturity than they were in 2008. The EU’s regarding the direction of European
wall” – a mirage that always Bank Recovery and Resolution insolvency reform in the shape
seemed two years out, yet never Directive has enabled efficient of the proposals under the EU’s
materialised. The refinancing bank resolutions across Europe. flagship Capital Markets Union
market recovered strongly, The new regime has been a clear (CMU) initiative. A new Europe-
enabling a wave of refinancing success (albeit imposing bruising wide insolvency regime is on its
and dividend recapitalisations solutions from the perspective of way, heralding a new restructuring
in recent years. investors in the affected banks). procedure that provides for a
cross-class cram down and a
If there is to be an uptick in distress moratorium for solvent companies.
companies in 2019, commentators We share the survey participants’
While there have been isolated should look to the leveraged finance sense that these reforms will have
default spikes since 2008, market. Solid activity in the global a positive impact.
particularly in the oil and gas, high yield sector and debtor-friendly
construction and retail sectors, conditions have led to an enormous 2019 is shaping up to be a year of
accommodative monetary policy expansion of the leveraged finance volatility. If nothing else, it’s going
has led to a culture of kicking the market. There is now US$9tn-worth to be interesting.
can down the road. Defaults and of high yield bonds in existence, a
insolvencies (with some spectacular 64% increase in a decade. Covenant
exceptions) have, accordingly, protection for leveraged loans and
stayed flat since 2008. high yield bonds has been severely
eroded in recent years, and our
Reflecting an assumed continuation expectation is that restructuring
of this trend, over half of the discussions will start later.
respondents in this year’s report Stephen Phillips
claim it will be more difficult to find Consequently, corporates are Head of European
distressed opportunities in 2019 likely to be in greater distress at Restructuring, Orrick
than in 2018. On the face of it, this the start of any process. Creditors stephen.phillips@orrick.com
is an unusual result. Geopolitical should brace themselves for lower
risks in the shape of trade tensions, recoveries compared to the last
Brexit, a populist insurgency down cycle.
in certain European countries,
slow-downs in major markets and Many of the individual insolvency
distress in some emerging markets systems of the larger European
point to more difficult times ahead, economies have been substantially
which are likely to translate into improved over the past 15 years.
financial distress. Italy stands to overhaul its system
this year. The UK has been the
It is interesting to speculate centre of cross-border European
whether respondents would restructuring, with English law
have changed their outlook had often providing creative solutions
they been given the benefit of to European problems. Will there
seeing the most recent European be a vacuum in leadership, which
economic growth figures, which may result in a return to the
have been anaemic. days of uncoordinated European
insolvency filings, leading to
From Orrick’s perspective, we are insolvency trustees in each
beginning to see more activity in jurisdiction competing with
the distressed area across the US, one another for recoveries?
Europe and in emerging markets.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.
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http://blogs.orrick.com/distressed-download/8
12 months (LTM)3 and has been expensive. The UK does not
characterised by volatility, with a possess a strong manufacturing
21% swing between its highest and and production base, which will
lowest level during the last year.4 make it difficult for us to support
Sterling has also softened, losing industry in the short term,” says
7.34% against the US dollar over one UK PE partner.
the LTM, and swung more than 15%
between its highest and lowest Although 45% of DI respondents
level during the past year.5 also view manufacturing and
automotive as vulnerable to a no-
And according to our survey, DI deal scenario, a higher proportion
ON THE BRINK (97%) and PE (100%) respondents
overwhelmingly agree on one
(50%) see financial services as the
sector most likely to be affected by
OF BREXIT point: there are no benefits for the a hard Brexit.
UK from Brexit.
“We do not see any immediate
Private equity (PE) and benefits for the UK as they are
distressed investors (DI) going to seclude their market and Private equity: Are there any
overwhelmingly agree that will lose valuable business from benefits for the UK from Brexit?
Brexit offers the UK no upside. Europe,” says the partner of a PE
Respondents think Ireland, firm based in France. “There will
France and Benelux will also be subsequent visa challenges 100%
feel the fall-out and expect an that will see a lot of the labour
impact on their portfolios. force stranded in different parts
of the continent, which won’t
benefit anyone.”
The prolonged uncertainty over “In contrast to 12 months ago,
whether the UK will exit the EU PE and debt investor views are
on 29 March 2019 – and on what aligned: Brexit will only have a No
terms – has weighed on the British detrimental impact on the UK,” Yes
economy over the past 12 months. agrees Matt Hinds, Managing
Partner at THM Partners. Distressed investors: Are there any
According to the IMF, UK GDP benefits for the UK from Brexit?
growth slipped from 2.2% in 2015, Sector focus:
the year before the referendum, the impact of a hard Brexit
to 1.5% in 2018.1 Over the same In the event of a hard or no- 3%
period, EU GDP growth has been deal Brexit, the majority of
steadier, coming in at 2.4% in 2015 PE respondents believe that
and 2.2% last year.2 the manufacturing (58%) and
automotive sectors (56%) will
UK stock markets and sterling have be the most negatively affected.
also been hit by the uncertainty
surrounding the Brexit outcome. “Without customs arrangements,
The FTSE All-Share has shed most of the products imported 97% No
5.75% of its value over the past to this country will become more 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/gbpusdEUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 9
Assuming a hard Brexit/no-deal outcome, which sectors At the time of writing,
would be most negatively impacted in the UK? (Please select two) a no-deal Brexit is a distinct
possibility. In such a scenario,
Key: where supply chains may
Private equity
be disrupted and tariffs
Distressed investors
imposed, I would expect
this to generate significant
distress. It is hard to predict
70%
how chaotic a no-deal
situation will be; behind
the scenes, a great deal of
preparation has undoubtedly
been undertaken.
60%
Stephen Phillips, Restructuring
Partner, London, Orrick
50%
40%
DI respondents appear concerned
about what impact a no-deal
result will have on capital flows
across the region, as financial
58%
30% institutions in the UK and EU could
56%
see passporting rights into their
50%
respective markets fall away
if no exit deal is agreed.
45%
45%
44%
20% “Financial services will be hit the
most as they are the mediators of
capital through the continent. The
28%
negative economic conditions in
Europe will deepen as the UK will
21%
try and seal as much capital within
10%
16%
their region, leaving the financial
14%
sector a bit dry in terms of capital,”
says an investment director and
8%
8%
portfolio manager at a distressed
4%
4%
debt investor.
0%
A
A B
B C
C D
D E
E F
F G
G
Regional focus:
who will be hit by Brexit?
Both DI and PE respondents
A Financial services E Construction believe that Ireland and Benelux
B Manufacturing F Agriculture are the EU regions that would
C Automotive G Healthcare be most negatively affected
D Consumer/Retail by a no-deal situation.10
Key:
Assuming a hard Brexit/no-deal outcome, which EU countries/regions, Private equity
other than the UK, do you think would be most negatively affected? Distressed investors
(Please select two)
4%
Nordics
54% 59%
56% 55%
Ireland
Benelux
14%
8%
6%
Germany Eastern Europe
34% 20%
France
24% 21%
Italy
18% 27%
Spain
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, OrrickEUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 11
What percentage of your portfolio companies (PE)/credit investments
(DI) will be negatively affected by Brexit?
Key:
Private equity
Distressed investors
40%
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
35%
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 30%
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 25%
PE respondents think it will also
be affected, with 20% of the DI
respondents in agreement.
“I am surprised how low Germany 20%
ranks for this question,” says
Christine Kaniak of Orrick’s M&A
36%
and Private Equity division in
Munich. “The UK is the single
largest importer of German
cars, for example. I can imagine 15%
significant disruption for Germany 28%
and other jurisdictions that trade 26%
extensively with the UK, such as 24%
Ireland, in a no-deal scenario.”
10% 20%
Brexit verdict: distressed debt
18%
and PE market players
Given the wide-ranging risks 16%
Brexit poses to capital flows,
key sectors and other European 12% 12%
economies, a large majority of PE 5%
and DI respondents expect it to 8%
have a negative impact on at least
a small portion of their portfolio
companies and credit investments.
Some 44% of PE respondents 0%
0-5% 6-10% 11-25% 26-50% Over 50%
believe that over a quarter of 0%
their portfolio companies will
be negatively affected by Brexit.
The same percentage of DI
6 www.independent.ie/business/farming/agri-business/uk-remains-irelands-top-trading-partner-despite-6pc-drop-in-
respondents believe that over a exports-35973657.html
quarter of their credit investments 7 www2.deloitte.com/be/en/pages/public-sector/articles/belgiums-brexit-report_press-release.html
will suffer negative effects. 8 www.government.nl/topics/brexit/impact/impact-of-brexit-on-the-dutch-economy12
Do you expect the proposed
EU Insolvency Directive to have
a significant impact on the
European market?
Key:
Private equity
Distressed investors
80%
POLICY
OUTLOOK 70%
Under the EUID, debtors who
With the EU Insolvency Directive negotiate a restructuring will be
(EUID) set to be implemented able to stop individual creditors
in 2019, how have PE and DI from pursuing enforcement 60%
views on the EU’s insolvency actions for up to four months,10
procedures changed, compared a period that can be extended by
with Chapter 11 in the US and the up to a year with court approval.
UK’s schemes of arrangement? It also includes provisions for
entrepreneurs to fully discharge
their debts if acting in good faith
50%
but does have requirements for
a majority of creditors across all
The long-awaited EUID was classes to agree to restructuring
introduced to harmonise plans as a safeguard.
insolvency procedures across
40%
Europe and support a rescue EUID: a positive change?
culture for businesses in financial It is hoped the introduction
70%
distress. The European Council of the EUID will make the
68%
and EU Parliament reached an restructuring process across
agreement on a proposal for the the continent easier to navigate
directive at the end of 2018.9 After and help troubled businesses 30%
a linguistic review, the EUID will be avoid going bust, save jobs and
published in the Official Journal of provide better returns to creditors
the European Union and enter into than a full-blown insolvency.
force 20 days after publication.
Member States will have two years Our survey backs this up: 68% of PE
to implement the directive after and 70% of DI respondents believe 20%
this date. the EUID will have a significant
32%
impact on the European market.
The EUID has taken its lead from
28%
US Chapter 11 bankruptcy laws, “The survey findings reflect a strong
which protect failed companies endorsement for the EUID initiative,”
from creditors, and the UK’s says Scott Morrison of Orrick’s 10%
schemes of arrangement, where Restructuring division in London.
distressed businesses can “We expect the directive to have a
renegotiate terms with creditors broadly positive impact, particularly
without having to shut down. as a tool that enables management 2%
0%
0%
Yes No Not aware of the
9 www.lexology.com/library/detail.aspx?g=28b01724-8836-453c-9e7b-d06b95559c84 proposed EUID
10 ibid
11 ibidEUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 13
Which EU countries do you expect
to make use of the tool the most?
to undertake a restructuring Europe, 57% of DI respondents still (Select top two from list)
before a company becomes truly expect more European companies
distressed, and it incorporates a to opt for Chapter 11 for both France
mechanism to cram down minority domestic and cross-border issuers 34%
dissident creditors – and possibly – a 27-percentage point increase
45%
shareholders – depending on how compared to DI respondents in 2017.
it is implemented locally.” Belgium
Chapter 11 is an expensive option,
22%
Interestingly, even though the but the protections it offers and
directive is now approaching the fact that creditors drive the 36%
implementation, our survey process rather than out-of-the-
Ireland (Republic)
suggests it is less of a focus than money shareholders mean it
36%
in previous surveys. The findings remains an attractive solution
are down on last year when 88% for European multinationals with 24%
of PE and 80% of DI respondents complicated capital structures.
expected the EUID to materially Germany
change European restructurings. “If Brexit places the recognition 20%
of UK processes in question, the 23%
DI respondents expect France power of the automatic stay and
(45%) to make the most of the the fear of defying US Bankruptcy United Kingdom
use of the EUID, against 34% Courts is likely to encourage 22%
of PE respondents. This could debtors to seek the protection
20%
reflect the hope that the EUID of Chapter 11 for complex cross-
will offer a superior alternative to border cases, even when the locus Netherlands
the cumbersome and complex of the assets is mainly in Europe,” 16%
restructuring regime in France. says Raniero D’Aversa of Orrick’s
Restructuring division in New York. 15%
A third of DI respondents also
Luxembourg
point to Belgium, where legislators Despite the advantages of the
8%
had already been working on Chapter 11 process in cross-border
reforming the restructuring restructurings, just over three- 11%
process.11 This suggests a need in quarters of DI and PE respondents
Spain
the country for a more pragmatic (76%) expect more US companies
insolvency regime, which the EUID to take advantage of the schemes 18%
will now provide. of arrangement. 9%
PE respondents take on a slightly “Some recent high-profile scheme Italy
different opinion overall, most cases, such as Ocean Rig and 10%
commonly citing the Republic Noble, have highlighted the
9%
of Ireland as the country that efficacy of common law schemes,”
may make the most use of the says Evan Hollander of Orrick’s Greece
proposed EUID. Restructuring division in New 10%
York. “US creditors are becoming
6%
Chapter 11 is still an option comfortable with schemes,
for European companies which are often implemented in Portugal
While the EUID may improve conjunction with a secondary filing
0%
restructuring regimes across (that recognises the effect of the
1%
Austria
It is interesting to see how high France ranks among 0%
respondents, in terms of which European countries will 1%
make most use of the EUID. We wonder if the possibility of
Sweden Key:
incorporating a cram down mechanic for shareholders, who
4% Private equity
tend to have a significant say in French public company
Distressed investors
restructuring, might be a factor. 0%
Carine Mou Si Yan, Banking and Finance Partner, Paris, Orrick14
Do you expect more European
companies to use Chapter 11?
scheme) in the US under Chapter
15 of the Bankruptcy Code.”
Key:
Private equity The survey also reveals that the
Distressed investors popularity of the Netherlands as a
bankruptcy jurisdiction has notably
surged in the overall estimations of
70%
DI respondents since 2014. Dutch
courts have adopted a pragmatic
60% view on recognising foreign
insolvency processes when there
50% are no treaties or conventions
in place.12 They will recognise
these processes unless they will
40%
result in out-of-pocket creditors
being unable to claim against the
30% 57% debtor’s assets in the Netherlands.
52%
There is also scope for foreign
20% insolvency practitioners to act in
80% the country and Dutch insolvency
30%
25% trustees and judges are open to
10% 18% 18%
cooperating with foreign courts in
cross-border insolvencies.
0%
Yes, for both domestic Yes, but only for No
and cross-border issuers cross-border issuers
Do you expect more US companies to take advantage
of schemes of arrangement?
Key:
Private equity
Distressed investors
80%
70%
60%
50%
40%
76% 76%
30%
20%
10% 24% 24%
0%
12 www.lexology.com/library/detail.
Yes No aspx?g=3c08f3df-60b8-4a2d-b7b2-
f17c359f1eb6EUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 15
Rate the following bankruptcy jurisdictions Rate the following bankruptcy jurisdictions
on a scale from 1 to 5 for Speed on a scale from 1 to 5 for Efficiency
(Average rating out of 5) (Average rating out of 5)
4.5 4.5
4.0 4.0
3.5 3.5
3.0 3.0
2.5 2.5
2.0 2.0
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Germany Italy Germany Italy
Netherlands France Netherlands France
United Kingdom Spain United Kingdom Spain
Rate the following bankruptcy jurisdictions Rate the following bankruptcy jurisdictions
on a scale from 1 to 5 for Outcome on a scale from 1 to 5 for Range of Available
(Average rating out of 5) Options (Average rating out of 5)
4.5 4.5
4.0 4.0
3.5 3.5
3.0 3.0
2.5 2.5
2.0 2.0
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Germany Italy Germany Italy
Netherlands France Netherlands France
United Kingdom Spain United Kingdom Spain
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, Orrick16
MARKET
OUTLOOK:
INVESTMENT
OPPORTUNITIES
Despite macro-economic The difference in some of the views
uncertainty and volatility, expressed is marked. One person’s concern
distressed debt investors in constitutes another’s opportunity. It is true to
Europe believe 2019 will prove say that markets adjust to significant changes
a tough year for sourcing deals. in circumstances and that we have faced
Our survey opens the window
similar challenges in the past, when the fleet
on the sectors, regions and
of foot investors has continued to flourish.
instruments that DIs are focusing
on when deal flow is scarce.
Chris Hughes, Chairman, THM Partners
Even though stock markets have into trouble, lenders have poorer Do you expect it to be easier
lost value and become more protections and powers to demand or harder to source distressed
volatile over the past year and restructuring. Default rates for opportunities in Europe in 2019?
global trade relations have come leveraged loans are only 2.4%, but (DI respondents only)
under strain from Brexit and US-led even if defaults do increase, weak
tariff wars, European distressed
covenants mean there will be few Easier The same
debt investors have still not seen Harder
cracks for DIs to prise open.14
much deal flow come their way
during the past 12 months.
Over half of DI respondents (54%)
Interest rates remain low, expect it will be harder to source
economies are growing and distressed opportunities in Europe
21%
liquidity is abundant. Companies in 2019, which is more than double
experiencing distress are still able the results from the previous survey. 25%
to avoid the pain of a restructuring
by refinancing or finding buyers in “Such pessimism is surprising,”
a highly competitive M&A market. says Stephen Phillips of Orrick’s
Restructuring division in London.
In November last year, leveraged “Our watch lists are expanding – you
loan issuance was on track to beat only have to look at retailers’ profit
its record high of US$650bn posted warnings post-Christmas to think
in 2017, according to S&P Global there will be more to do in 2019.
Market Intelligence.13 Moody’s, The European economy slowed
meanwhile, reports that close to significantly in the latter part of 2018
54%
80% of these loans have fewer and and the end of quantitative easing
weaker covenants. If companies run will tighten credit conditions.”
13 ftalphaville.ft.com/2018/11/16/1542344403000/Leveraged-loans-are-way-past--cov-lite-/
14 ibidEUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 17
What do you expect to happen to
your distressed allocation in 2019?
(DI respondents only)
70%
Asset allocation expectations distress this year as opportunities
The perceived dearth of are opening up.”
opportunities is influencing
allocations to distressed debt in As with the previous survey, 60%
the year ahead. A minority of only 66% of DI respondents expect
46% of DI respondents increased their distressed allocation to stay
their asset allocation to distressed the same. However, while none
investment in 2018, far short of the of the respondents last year
78% that did so in 2017. expected to lower their distressed
allocation, 15% now say they do
“We suspect that participants expect it to decrease.
50%
would probably be more bullish
on this question if they were “It will definitely be harder to source
responding in the first quarter distressed assets because most of
of 2019, rather than in the the assets in the distressed zone
fourth quarter of 2018 when belong to non-core sectors, which
the survey was done,” says are not appealing to investors,”
Orrick’s D’Aversa. “In the US says the chief executive and chief
40%
and in Europe, we think our clients investment officer of one Swiss
are going to allocate more to distressed investor.
66%
Did you increase your asset allocation to distressed
investing in 2018?
30%
(DI respondents only)
Yes
No
20%
46%
10% 19%
54%
15%
0%
Decrease Increase Stay the same18
Where do you expect to find the
best distressed opportunities going
forward? (Please select top two)
(DI respondents only)
70%
Rapid structural change, government policy and oil prices
are just some of the key macro uncertainties that make
automotive, renewables and oilfield services difficult 60%
investment sectors absent a compelling investment thesis
for an individual asset.
Ben Paice, Director, THM Partners
50%
America first: regional outlook Broad strokes: sector focus
North America (62%) is the most Opinions on which sectors will 40%
attractive region in terms of provide the best distressed
distressed opportunities according opportunities are more mixed
to DI respondents, followed by than they have been in previous
Asia (excluding China) (49%) and years. Property and construction
62%86%
Eastern Europe (45%). This stands are closely followed by a number
86%
in contrast with the previous of other sectors including the
30%
survey, when North America financial services (55%), the
ranked third, behind Western automobile industry (53%),
Europe and Eastern Europe. renewables (52%) and oilfield
49%
services (52%).
45%
58%
One explanation for this shift could
be a perception of more potential “While 2015/16 were the years of
deals in the region after a number oil distress and 2017/18 were about 20%
of large, high-profile American retail, we think 2019 may not have
brands like Sears, Neiman Marcus any sector theme,” says Orrick’s
35% 32%
and Windstream fell into financial Stephen Phillips. “We do, however,
difficulty in 2018. expect to see a broader distress
wave across numerous sectors
The increased interest in Asia particularly in leveraged finance
10%
and Eastern Europe, meanwhile, structures where it is generally
shows that distressed investors are acknowledged that many sub-
looking beyond mature Western investment grade companies
12%
9%
markets for deal opportunities, and are overburdened by debt.”
are willing to take on more risk.
3%
Property and construction: This
“Asia will be a high-risk, high- industry is most commonly cited 0%
return strategy for us, but we as one that may provide significant A B C D E F
won’t have to risk too much as the opportunities in 2019, though only
development of Asia outside of 58% now say this compared to
China is good. North America will 71% the previous year. A North America
be a medium risk but quick return B Asia (excluding China)
strategy for investment because “The late property cycle, C Eastern Europe
of the maturity that market has abundance of capital and limited D Western Europe
gained,” says a distressed investor supply of traditional assets in the E China
portfolio manager. European real estate market is F Africa and Middle EastEUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 19
Please rate the following sectors in terms of the opportunities they
present for distressed investors in 2019 (DI respondents only)
1%
1%
1%
6%
6%
6%
Significant opportunities
8%
8%
9%
9%
10%
10%
10%
10%
11%
11%
11%
11%
Some opportunities
13%
13%
14%
16%
Few opportunities
A Property and construction
41%
B Financial services
C Auto/auto parts
48%
39%
40%
D Renewables
44%
39%
47%
34%
59%
E Oilfield services
41%
44%
44%
45%
44%
49%
35%
48%
F Business services
53%
49%
46%
51%
46%
G Telco/cables
H Leisure
I Transport (incl. shipping)
J Infrastructure
K Paper and packaging
L Technology
M Chemicals and materials
N Mining and materials
O Energy
P Basic industries
Q Aerospace
R Recycling
58%
55%
53%
S Oil and gas
52%
52%
51%
50%
49%
48%
47%
T Media
46%
46%
45%
45%
42%
42%
41%
40%
40%
40%
U Consumer/retail
39%
38%
V Utilities
A B C D E F G H I J K L M N O P Q R S T U V20
In terms of distressed investing, what will be the best opportunity
presented by the construction sector in 2019? (Please select two)
(DI respondents only)
70%
A Buying into the debt at discounted
60% levels with a more passive strategy
centred around improving market/
macroeconomic fundamentals
B Shorting debt instruments or equity
50%
C Providing new financing directly to
distressed construction firms
40% D
Credit Default Swaps (CDSs)
forcing investors into alternative or E Buying into the debt at discounted
levels with a more active strategy
niche asset classes,” says Fraser 60%
30% centred around a financial/
Brown, Partner, THM Partners. operational turnaround
“The specialist nature of these
assets provides the opportunity 20% 36% 36% 34% 34%
for higher yields but is not without
risk due to pressures on tenants’
10%
business models, a higher asset
management requirement and
often limited alternative use.” 0%
A B C D E
Property and construction
companies in the UK are still
carrying a hangover from the
collapse of construction services
group Carillion, which was put into We advised on a number of consolidations in the oil field services sector in 2018
liquidation last year. The business – we expect a further wave of restructurings and consolidation in 2019.
had close to £1bn in debt when
it failed, leaving thousands of Jonathan Ayre, Energy and Infrastructure Partner, Orrick Houston
other companies and contractors
in its supply chain out of pocket.
Balfour Beatty, the UK’s largest
construction company, for example, In terms of distressed investing, what will be the best opportunity
anticipated a £45m hit as a result presented by the retail and consumer sectors in 2019?
of Carillion’s failure.15 (Please select two) (DI respondents only)
60%
Buying into debt at discounted
levels is seen as one of the best A Buying into the debt at discounted
levels with a more passive strategy
opportunities presented by the 50% centred around improving market/
construction sector, as mentioned macroeconomic fundamentals
by 60% of respondents. B Shorting debt instruments or equity
C Providing new financing directly to
40% distressed retail and consumer firms
“The construction industry will be
affected the most by the restrictive D Buying into the debt at discounted
levels with a more active strategy
forces in the market. It has already
30% centred around a financial/
suffered at the hands of delayed operational turnaround
completion and lack of sales, 51% E Credit Default Swaps (CDSs)
and will continue to suffer due to 45%
41%
lack of attention from interested 20% 38%
investors who will choose other
industries to invest in,” says 25%
the chief executive of a Dutch 10%
distressed investment firm.
0%
A
A B
B C
C D
D E
E
15 www.theguardian.com/business/2018/jan/15/
jobs-carillion-liquidation-construction-hs2EUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 21
What do you expect the average price
of oil (Brent) will be during 2019?
60%
Automotive: The shift to electric 50%
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 Board Director of Jack Wolfskin.
facing challenges from reduced “Against this backdrop, there will
sales due to the demand of be winners and losers, with those 40%
environmentally-friendly vehicles. who are able to differentiate
Europe has the best infrastructure themselves with a strong brand
available for these types of proposition and the right execution
vehicles, which have shifted the of an omnichannel strategy more
focus from traditional combustion likely to succeed.”
engine vehicles,” says a Swiss
distressed debt investor. There is not an overwhelming
consensus, however, on which are 30%
Retail and consumer: Retailers like the best opportunities presented
House of Fraser, Evans Cycles, by the retail and consumer sectors.
HMV and sofa.com have all closed Just over half (51%) of respondents
50%
down or been sold in distressed point at buying into debt at
49%
M&A deals,16 while financial distress discounted levels while 45% look 81%
at restaurant chains Gaucho and at shorting debt instruments.
Byron are just two examples of
businesses running into trouble Oilfield services: For the DI 20%
in the casual dining industry. respondents (52%) who saw
35%
increased activity in the oil services
According to Price Bailey, the sector, a volatile oil price – which
30%
number of restaurant businesses recovered through 2018 only to fall
going bust has reached its highest back below US$50 a barrel at the
level since 2010, jumping by more end of the year – more than likely
than a third in 2018.17 informed their view.
10%
“The retail sector will continue “Despite the increase in oil price,
16%
to face the same significant oilfield services remains a difficult
12%
challenges in 2019 of low market given cost pressure in the
consumer confidence, online supply chain and over-capacity,”
competition, changing consumer says James Westcott, Partner
habits and a rising cost base,” says at THM Partners. “A strategic,
4%
4%
Michael Thomas, Partner at THM technical and financial edge
Partners and former CRO and is more important than ever to 0%
A
A B
B C
C D
D
increase market share and adapt
to the ‘new normal’.”
Half of PE respondents now expect A US$50-US$59 bbl Key
16 www.theguardian.com/uk-news/2019/jan/29/
mike-ashley-scs-group-bidding-battle- the price of oil to be between B US$60-US$69 bbl Private equity
struggling-furniture-retailer-sofacom
US$60 and US$69 in 2019. A C US$70-US$79 bbl Distressed debt investors
17 www.pricebailey.co.uk/press-releases/
restaurants-going-bust-reaches-record-high/ similar proportion of DI investors D US$80-US$89 bbl22
If you invest in NPLs, what kind
of NPLs do you invest in? (Select
all that apply) (DI respondents only)
Italy’s wave of NPL transactions, where banks sold their 90%
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 80%
Portugal. It’s a multi-year ongoing project across Europe.
There is still much to do.
Annalisa Dentoni-Litta, Structured Finance Partner, Rome, Orrick 70%
expect the same, although around to problems at institutions like 60%
a third of DI (35%) and PE (30%) Nordea and Danske Bank18 as
investors see the price settling well as distress across Italy’s
below US$60 a barrel. banking sector.19
“The fourth quarter was a “The banks in Europe are not 50%
disappointing end to the 2018 performing at the same level that
oil rally. The OPEC production they are thought to. The situation at
cut from January has helped the moment in Europe is largely due
to marginally increase prices, to banks lending carelessly and not
80%
40%
but shale production and US being able to recover at the same
trade policy could equally work pace, crippling them from capital
the other way,” says Westcott. distribution,” says a distressed
68%
“Absent a crystal ball, we’ll place debt chief investment officer.
our bets with the near majority of
30%
respondents at US$60-69bbl.” Non-performing loans:
54%
opportunities abound in Italy
49%
“The weakness of the oil price late The huge opportunity to
last year, when many expected the participate in the non-performing
price to make a more substantial loan (NPL) market across Europe, 20%
38%
36%
36%
36%
rebound, has meant that the oilfield especially in the Mediterranean,
services sector, an area highly is another spur for DI and PE
31%
sensitive to down confidence and investment in financial services.
investment, has not recovered as
21%
strongly as was expected,” adds According to the European Central 10%
Jonathan Ayre of Orrick’s Energy and Bank, European NPL stocks are
Infrastructure division in Houston. sitting at close to €1trn20 and provide
investors with an opportunity to
Financial services: The survey buy assets at reduced rates from
participants who see distressed troubled banks eager to clean up 0%
deal flow coming out of the their balance sheets. NPLs have A B C D E
financial services sector will point delivered solid returns, with some
A Unsecured consumer credit
B Secured consumer credit Key
C Residential mortgages 2017
18 www.thelocal.se/20181018/swedish-bank-nordea-targeted-in-money-laundering-allegations-after-
danske-bank-scandal D SME loans 2018
19 www.reuters.com/article/us-eurozone-banks-monte-dei-paschi/monte-dei-paschi-shares-suspended- E Commercial mortgages
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-chartsEUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 23
In which geographies are you interested in buying
NPLs? (Select all that apply) (DI respondents only)
32%
UK
4%
21% Eastern
Ireland Europe
7%
Benelux
43%
Italy
32%
Spain
7%
Portugal 11%
Greece24
What are your key sources of origination for distressed debt
opportunities? (Select top two) (DI respondents only)
60% A Direct contacts with corporate
B Advisors
C Existing lenders
D Independent originators
E Broker/dealer
F Press/public sources
investors forecasting double-digit Key
IRRs from NPL deals.21 50% 2017
2018
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%),
40%
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
30%
are surprised how high the UK
56%
ranks, given that our perception
53%
is that the volume of NPLs is
51%
low in the UK at the moment, at We have seen an increased
least compared to Italy and other return for distressed investors
Southern European destinations.” in 2018 over 2017, pointing
44%
to challenging underlying
The interest in NPL portfolios trading conditions driving an
in Italy and Spain is driven by 20% increase in required yields,
supply and demand. Banks in
with an expectation that the
34%
those countries that were hardest
risk premium will continue to
32%
hit by the sovereign debt crisis
have built up the largest NPL increase in 2019.
stockpiles and are now actively
26%
26%
25%
seeking to offload this paper. Neil Douglas, Managing Director,
24%
THM Partners
Italian banks have more NPLs
on their books than any other 10%
16%
European country. Spain is
ranked third in terms of volume
13%
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/ 0%
articles/2018-02-14/get-a-grip-on-europe-s- A B C D E F
bad-loan-problem-with-these-five-chartsEUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 25
What are the key metrics you are tracking to determine potential
investment opportunities? (Please select top three) (DI respondents only)
60% A Economic trends and
performances by
geography/industry
B Cash balances and
available headroom
55% on facilities
C Maturity or
amortisation of debt
D Price movement in
50% quoted instruments
E Financial ratios
F Profit warnings
G Management change
45% H CDS prices
I Acquisition history
Key
2017
40%
2018
35%
30%
56%
51%
25%
Origination: a search
48%
48%
48%
47%
46%
for expert advice
Just over half (53%) of
42%
DI respondents consider
40%
direct contacts with corporates 20%
to be one of their top two
key sources of origination for
34%
distressed debt opportunities.
A similar number (51%) see
29%
15%
advisors as a main source, far
higher than the 16% who said the
24%
23%
same in the previous survey.
“I am glad to see advisors are 10%
being tapped as a source for
16%
15%
14%
the origination of distressed
opportunities,” says Doug Mintz
11%
of Orrick’s Restructuring division 5%
8%
in Washington D.C. “We see it as
part of our business to introduce
borrowers to lenders and try
to ensure we make connections
0%
that are mutually beneficial to
A B C D E F G H I
our clients and contacts.”26
Which of these instruments do you think will offer the What level of yield do you consider
most attractive investment opportunities in the next 12 “distress”? (DI respondents only)
months? (Please select top two) (DI respondents only)
Key
50% A Convertible bonds 2017
B Second lien debt 2018
C CDS
D Senior debt 70%
E Mezzanine debt/
PIK notes
40%
F Securitisations/
ABS
G Equity
Key 60%
30%
2017
2018
45%
41%
41%
20%
38%
35%
31%
50%
29%
27%
25%
25%
22%
10%
18%
18%
5%
40%
0%
A B C D E F G
68%
Interestingly, the previous survey’s “Economic trends are a clear
most cited key source of origination indicator that will allow us to
for distressed debt – independent determine our investment 30%
originators, mentioned by 56% strategies. If we see volatility
– was only mentioned by 26% of continuing, there will be subdued
53%
respondents in 2018. interest, but if the volatility starts
reducing post-Brexit, we will
When it comes to identifying consider all our investment reports
where distressed investment again and align them to new
opportunities may arise, economic strategies,” says the director
20%
trends and performance by of investment at a firm in the UK.
geography (51%) and cash
balances (48%) top the list as Forces of attraction
the key metrics to track when DI respondents are divided 30%
determining potential investment when it comes to which
opportunities. instruments they think will offer 25%
the most attractive investment.
10%
These sources are followed by Convertible bonds remain popular
at 41% (slightly down from 45% 17%
maturity of amortisation of debt
(46%) and price movement in in 2017) while second lien debt
quoted instruments (40%). has jumped to 38% – more than
Notably fewer respondents double the previous survey.
6%
cite management change as
a key metric for this purpose “Convertible bonds have always
0% 1%
than was cited in the previous been a preferred choice of 0%
year’s survey. investment in Europe. Investors 11-13% 14-16% 17-19% Over 20%EUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 27
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)
Key
Return expected in 2019
Return in 2018
Return in 2017*
90%
80%
70%
60%
50%
know that this region pays well for
bonds initially, then converts them
81%
64%
40%
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
30% distressed debt investor.
One encouraging sign for the asset
51%
class is that a higher proportion of
44%
35%
respondents expect higher returns
20% 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
10%
be distress. In 2017, the majority
14%
of respondents considered a yield
level of 14-16% to be distress.
5%
5%
1%
With respect to their actual return
0% expectations, 64% of respondents
9-10% 10-15% 16-20% are expecting returns in the
* Showing results for the same question asked in 2017 16-20% range in 2019 for their28
What are the main issues preventing your investment in distressed
businesses? (Please select top two) (DI respondents only)
Key
2017
2018
60%
50%
40%
30%
54%
48%
45%
20%
37%
28%
27%
26%
24%
21%
19%
19%
10%
15%
10%
9%
7%
7%
4%
0%
0%
A
A B
B C
C D
D E
E F
F G
G H
H II
A Market uncertainty F Extent of CDS referencing/guarantees
B Leverage multiple G Access to funds internally
C Cash needs of the business H Inter-creditor issues/debt
documentation
D Legal jurisdiction
E Timeframe for exit I PricingEUROPEAN DISTRESSED DEBT MARKET OUTLOOK 2019 29
Do you think that there was an
increase in accounting fraud
and/or irregularities in 2018
compared with the previous year?
Key:
Private equity
Distressed investors
50%
40%
distressed debt investments – expected greater weight
understandable, as 44% say they being attributed to debt
achieved this return in 2018. documentation as investors
consider their secondary
“The credit markets repriced market investments.”
in the later part of 2018, and
the survey results are consistent Another factor that appears 30%
with this repricing,” says Orrick’s to be putting off investors is a
Raniero D’Aversa. perceived rise in accounting fraud:
44% of PE respondents believe
What is stopping investment? this increased in 2018, against
Although most respondents expect 34% of DI respondents.
higher returns from distressed
debt plays, 54% point to market The market has indeed been 44%
uncertainty as one of the biggest rocked by a number of higher-
41%
issues preventing their investment profile accounting scandals, such 20%
in distressed debt. In the previous as café chain Patisserie Valerie’s
survey, 48% pointed to legal collapse after a black hole was
jurisdiction as the main issue, while found in its accounts and the 34%
32%
only 21% considered this a main investigation of insurance firm
issue in 2018. Quindell by the UK’s Serious
Fraud Office23 as well as money
“The decline in the weight laundering allegations facing 25%
24%
attributed to debt documentation Danske Bank.24
in decision-making related to 10%
distressed investments from “Fraud resulted in a number of
2017 to 2018 is noticeable,” says high-profile restructuring cases
Dominic O’Brien, head of Orrick’s in 2018,” says Anthony Place,
English law Banking and Finance Partner at THM Partners. “While
Practice in London. “With lender not ‘headline grabbing’ in quite
protections having been eroded the same way, we consistently
and with the well-publicised find poor management to be a far
resurgence of the cov-lite greater contributor to business
phenomenon, we would have failure than fraud.” 0%
A B C
23 www.theguardian.com/business/2019/feb/01/
decline-in-quality-auditors-face-scrutiny- A No
over-string-of-scandals
B Yes
24 www.ft.com/content/6ae5f7f6-f324-11e8-
ae55-df4bf40f9d0d C Not sureYou can also read
