Distressed debt, restructuring and debt advisory with Lazard
Sep 22, 2023
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Sam Whittaker and Tom Howard from Lazard discuss topics on debt restructuring and distressed debt in Europe, including the evolving role of financial advisors, the impact of documentation on restructuring negotiations, and the influence of private credit on the fixed income landscape. They also explore trends in distressed debt and restructuring, the dominance of private credit in the middle market, challenges in the retail space, and the need for broad toolkit and capital solutions.
The restructuring activity in Europe has been slower than expected, with more focus on small to mid-cap companies and specific sectors experiencing distress.
Borrowers have successfully extended their debt maturities, supported by the willingness of lenders to give the benefit of the doubt to quality companies.
The dynamics in restructuring deals have changed, with fewer triggers for creditors to intervene and a greater emphasis on strategic initiatives and M&A.
Deep dives
Restructuring Activity in Europe
The restructuring activity in Europe has been slower and more gradual than initially anticipated. While there is still distress in the market and fragility within corporates, the wave of traditional loan-to-own restructuring transactions has not materialized. Instead, there has been more restructuring in the small to mid-cap space, where companies are more fragile, and the documentation is more vulnerable to increases in rates. Certain sectors like real estate and cyclical industries such as chemicals and building materials have experienced more distress and restructuring opportunities. However, larger cap sponsors and corporations have seen less activity, with many looking to protect their investments through additional financing.
Borrowers Extending Debt Maturities
Borrowers have been successful in extending the maturity of their debt through amended extend exercises, with €24 billion of first-line institutional term loan facilities pushed out to mature in 2028. This has been possible due to high-quality businesses, backed by strong sponsors and businesses that have continued to perform well. Despite the fragility in the market, lenders are willing to give the benefit of the doubt to these quality companies and support their refinancing and extension efforts.
Trends in Private and Public Credit Markets
In the private credit market, there is a selective focus on middle-market segments, with deal flow being dominated by private credit direct lending funds. Demand remains healthy in sectors such as business services, TMT, and healthcare, while supply has been harder to find in less favored sectors. The bank market has also filled some of the gap in certain jurisdictions, participating in deals alongside private credit. In the public credit market, there has been a differentiation in access to credit, with private credit providing competition. Overall, liquidity is available, and the public market is open, with banks showing willingness to underwrite deals. However, the private credit market may see a resurgence in the TLB market due to pricing differentials.
Changing Dynamics in Restructuring Deals
The current environment in restructuring deals is marked by fewer triggers to bring creditors to the table and more opportunities for sponsors and owners to manage liquidity needs without engaging in discussions with creditors. Creditors may be anxious to solve issues but lack the ability to intervene. Despite the challenges, there is still plenty of capital available for funding, particularly in sectors that have been more structurally challenged. This has led to innovative solutions that go beyond traditional debt-for-equity swaps, incorporating liability management techniques and capital solutions. The focus has shifted to more strategic initiatives and M&A, recognizing that a hockey stick recovery may not be forthcoming.
Considerations for Restructuring
Understanding the creditor base, particularly CLOs, and the implications of ratings on their behavior is crucial in restructuring. Additionally, analyzing the flexibility within documentation and the ability to trade and whitelist investments are important aspects to consider. The landscape requires a holistic approach that combines analytical rigor in documentation, capital solutions, and M&A to find effective solutions for companies and creditors.
Conclusion
The restructuring activity in Europe has been slower than expected, with more focus on small to mid-cap companies and specific sectors experiencing distress. Borrowers have successfully extended their debt maturities, supported by the willingness of lenders to give the benefit of the doubt to quality companies. Private and public credit markets have seen different trends, with private credit dominating the middle-market segment, while the public market remains open with potential for a resurgence in the TLB market. The dynamics in restructuring deals have changed, with fewer triggers for creditors to intervene and a greater emphasis on strategic initiatives and M&A. Understanding the creditor base, document flexibility, and incorporating a holistic approach are key considerations in finding successful restructuring solutions.
Debtwire's Jou Yu speaks with Sam Whittaker, Co-Head of Lazard’s Europe Restructuring & Liability Management Group, and his colleague Tom Howard, Co-Head of European Debt Advisory. They talk about a number of wide-ranging topics on debt restructuring and distressed debt in Europe, from the evolving role of the financial advisor, to how documentation is affecting restructuring negotiations, and the way private credit is impacting the fixed income landscape.
