Vol 6 (2009) - Issue 6

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An Update on Current Restructuring Issues and Trends in Europe

There can be no doubt that we are witnessing an unprecedented restructuring cycle. Neither the industry- specific 2001 tech bubble burst, nor the Asian or Russian crises of the late 1990s, nor the ‘traditional’ recessions of the early 1990s and of the early 1980s – not even the oil-price driven shocks post 1973 and post 1979 can compare to what we are seeing now. Many pundits (and more than a few statistics) point at the fact that nothing of the sort we are experiencing has been seen since the end of WWII, and that it should only be benchmarked against the crisis in the 1930s. Of course, in the summer of 2009 we are not (yet?) seeing collateral damages of the magnitude and importance of the Great Depression. But there is no doubt that it is in reference to this period and to its dramatic mid-term consequences that governments all around the globe, regulatory authorities and privatesector decision-makers have embarked on corrective measures of an unprecedented scale (such as the USD 700 billion TARP and all other recovery plans over the globe), nature (letting large banks go bust or effectively nationalising them in countries such as the USA or the United Kingdom) and long-term consequences (overlooking the creditors’ priority rankings in the Chapter 11 at GM and Chrysler, doubling the size of the Federal Reserve balance sheet and hitting a 13% budget deficit in the US, to name but one country). Hopefully the unprecedented speed and coordination of the response efforts around the globe will help keep the credit markets meltdown and accompanying economic crisis somewhat in check before secondary and tertiary effects spin out of control. It remains to be seen whether this hope will be fulfilled, or whether the effects of these hastily conceived responses soon come back to haunt the economies and the social spheres. Either way, there is no arguing that this cycle is in many ways the cycle of a century.

This uniqueness does not only apply to the macro events around us, but also to the restructuring market, its environment, its characteristics, the tools and methodologies which are widely used or at the disposal of its leading players. In many ways, it is fair to say that this cycle is like no other previous cycle and that while experience is key, the winning solutions and techniques this time round will not be the old and tested ones that got us out in the previous cycles. In this article we will quickly review some of the most striking characteristics of the current restructuring issues, which we believe are: the lack of liquidity, the increasing complexity and costs of restructuring processes, and the increasing international dimension of restructuring processes.

1. The lack of liquidity

If 2008 can be arguably considered 'the Year of the Covenant Breach (Cured)', then there is no doubt that 2009 is 'the Year Liquidity is King'. At the same time last year, many breaches were being dealt with by covenant waivers, usually accompanied by chunky margin increases and consent margins, equity cures whenever possible, excess cash sweep clauses, etc. No write-offs were necessary in the books when no one (whether debt-side or equity-side) was keen to take any in the horrible 2008 financial year, and the problems were, well … if not solved, at least swept under the carpet for some time. If you can't cure the disease, why not at least break the thermometer and look the other way? Monty Python’s Brian wouldn’t have disapproved ...

How time flies … It wasn't long in 2009 before the same or other debtors were coming (back) to the table crying out for cash. Whether overindebted LBOs, struggling Corporates, CDOs or other structured vehicles: the liquidity crunch is now what carries the day in today’s restructuring arena. How long ago do the times in 2007 and beyond now look – when just about any restructuring situation could be met with a simple refinancing (often only storing up more trouble for later, but that’s another matter and it was not recognised at the time).