Distressed Investing in...Investing in distressed debt 13 in Europe: an overview Tom Cox Damian...
Transcript of Distressed Investing in...Investing in distressed debt 13 in Europe: an overview Tom Cox Damian...
Consulting Editor Ignacio Buil Aldana
The TMA Handbook for Practitioners
Investing in
Distressed
D
ebt in E
urop
e
Consulting editorIgnacio Buil AldanaPublished in association with TMA Europe
Managing directorSian O’Neill
Investing in Distressed Debt in Europe: The TMA Handbook for Practitionersis published byGlobe Law and Business Limited3 Mylor CloseHorsellWokingSurrey GU21 4DDTel: +44 20 3745 4770www.globelawandbusiness.com
Printed and bound by Gomer Press
Investing in Distressed Debt in Europe: The TMA Handbook for Practitioners
ISBN 9781911078104
© 2016 Globe Law and Business Ltd
All rights reserved. No part of this publication may be reproduced in any material form (includingphotocopying, storing in any medium by electronic means or transmitting) without the writtenpermission of the copyright owner, except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under terms of a licence issued by the Copyright Licensing Agency Ltd, 6-10 Kirby Street, London EC1N 8TS, United Kingdom (www.cla.co.uk, email: [email protected]).Applications for the copyright owner’s written permission to reproduce any part of this publicationshould be addressed to the publisher.
DISCLAIMERThis publication is intended as a general guide only. The information and opinions which it containsare not intended to be a comprehensive study, nor to provide legal advice, and should not be treated as a substitute for legal advice concerning particular situations. Legal advice should always be soughtbefore taking any action based on the information provided. The publishers bear no responsibility forany errors or omissions contained herein.
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Table of contents
Foreword 7
Lukas Fecker
TMA Europe President
Preface 9
Ignacio Buil Aldana
Cuatrecasas, Gonçalves Pereira
Part I: Introduction
Investing in distressed debt 13
in Europe: an overviewTom Cox
Damian Malone
Mark Sinjakli
AlixPartners
Part II: Acquisition of distressed debt
Credit agreement and 33
indenture analysis from a European perspective
Jacqueline Ingram
Cadwalader, Wickersham & Taft LLP
Anatomy of an LMA distressed 43
trade transaction and transfermechanisms under English law
Elizabeth Bilbao
Mandel, Katz & Brosnan LLP
Overview of distressed 59
trading in selected jurisdictions
FranceJérémie Bismuth
Olivia Locatelli
Dimitrios Logizidis
Gide Loyrette Nouel
GermanySacha Lürken
Wolfgang Nardi
Oded Schein
Kirkland & Ellis International LLP
ItalyGregorio Consoli
Federica Scialpi
Chiomenti Studio Legale
SpainBeatriz Causapé
Cuatrecasas, Gonçalves Pereira
Part III: The European non-performing loans (NLP) market
‘Bad banks’ and their 81
role in the financial sectordeleveraging process in Europe
Fernando Mínguez
Cuatrecasas, Gonçalves Pereira
Anatomy of a non- 93
performing loan portfolio salePaul Dunbar
Vinson & Elkins LLP
Part IV: Direct lending
The direct lending landscape 109
in EuropeNerea Pérez de Guzmán
FTI Consulting
Trends in direct lending 119
Andrew Perkins
Sarah Ward
Macfarlanes LLP
Legal structuring of directlending deals in selectedEuropean jurisdictions
France 133
Jérémie Bismuth
Marie Dubarry de Lassalle
Olivia Locatelli
Caroline Texier
Gide Loyrette Nouel
Germany 141
Sacha Lürken
Wolfgang Nardi
Oded Schein
Kirkland & Ellis International LLP
Italy 149
Giorgio Cappelli
Andrea Martino
Giovanna Randazzo
Chiomenti Studio Legale
Spain 157
Íñigo de Luisa
Íñigo Rubio
Cuatrecasas, Gonçalves Pereira
Part V: Restructuring and workouts
Recent trends in European 167
cross-border restructuringsArturo Gayoso
Deloitte Financial Advisory
Schemes of arrangements: 175
theory and practiceGraham Lane
Iben Madsen
Willkie Farr & Gallagher LLP
Developments in the Europeanlegal framework for restructuring
France 199
Jérémie Bismuth
Marie Dubarry de Lassalle
Olivia Locatelli
Caroline Texier
Gide Loyrette Nouel
Germany 215
Sacha Lürken
Kirkland & Ellis International LLP
Italy 237
Giulia Battaglia
Antonio Tavella
Chiomenti Studio Legale
Spain 249
Cristóbal Cotta
Andrea Perelló
Fedra Valencia
Cuatrecasas, Gonçalves Pereira
4
Restructuring high-yield 261
bonds in EuropePaul Durban
Grégoire Hansen
Brown Rudnick LLP
The recast EU Insolvency 279
Regulation and its impacton distressed investing
James Bell
Douglas Hawthorn
Jeremy Walsh
Travers Smith LLP
Part VI: Taxation
Structuring the acquisition 295
and disposal of distressed debtRebeca Rodríguez
Cuatrecasas, Gonçalves Pereira
Luke Vassay
Milbank, Tweed, Hadley & McCloy LLP
About the authors 317
5
As president of Turnaround Management Association (TMA) Europe, it is a pleasure
to introduce Investing in Distressed Debt in Europe: The TMA Handbook for Practitioners
co-published by TMA Europe.
This book comes at a time where the European distressed debt market has
developed exponentially during the last few years and has experienced very
significant changes, including very relevant amendments to national insolvency and
restructuring laws throughout Europe, with the common goal of introducing
restructuring tools to enhance out-of-court and in-court restructurings. Furthermore,
attention to the non-performing loans market (which has experienced a dramatic
increase from 2010 to 2016) and direct lending is also provided, acknowledging the
importance and relevance that these fields of distressed investing have achieved in
Europe during recent years.
I am grateful to the consulting editor, Ignacio Buil Aldana, and the team of
contributors who have participated in this book and authored the different chapters
which capture the complexities and intricacies of the European distressed market.
These contributors, who represent some of the key European jurisdictions, are all
leaders in their field and have taken the time to share with us both their technical
knowledge of the matters discussed and the practical aspects they come across in
their day-to-day practice. I am sure that, as a result of this, this book will become a
practical reference guide for those seeking a better understanding of the commercial
and legal complexities involved in the European distressed market.
I want to finish this preface highlighting that this publication is part of TMA’s
dedication to corporate renewal and turnaround management, shared with more
than 9,000 TMA members who comprise a worldwide professional community of
turnaround practitioners. In particular, TMA Europe (which represents 12 European
chapters) has become the forum for the interchange of ideas across Europe in
connection with turnaround and restructuring matters. This book is yet another
example of our organisation’s commitment to innovation and progress in the law
and practice of restructuring and turnaround in Europe and in the cross-border
context.
Dr Lukas Fecker, TMA Europe President, owns a turnaround and distressed investment
boutique, he is a frequent speaker at sector conferences in Europe and the United States.
ForewordLukas Fecker
TMA Europe President
7
The European distressed debt market has experienced dramatic developments since
the financial crisis that began in 2007/2008. This book is a response to these
developments and aims to give an overview of the legal background and the
challenges and opportunities of investing in distressed debt in Europe, with specific
attention to certain European jurisdictions (France, Germany, Italy, Spain and the
United Kingdom). In this regard, our book focuses on what are the four key areas of
interest for distressed investors: distressed debt trading, direct lending, the non-
performing loan portfolio market in the context of bank deleveraging and the
European restructuring and workout framework.
1. Distressed debt tradingThe development of the European secondary loan market of par and distressed debt
(also known as impaired debt or sub-performing debt) during the last few years is
remarkable. ‘Distressed debt’ refers to those loans or credits with uncertain recovery
prospects due to the borrower either being in insolvency or in financial distress; this
debt being traded as a result at significant discount to face value. The market where
this type of debt is traded, once controlled by a small number of participants, is now
used by a diverse array of participants, ranging from investment banks to hedge
funds, pension funds or private equity houses.
Despite the uniformity provided by the Loan Market Association (LMA) terms
and conditions (which is currently the standard used by the market and is analysed
in depth in the “Anatomy of an LMA distressed trade transaction” chapter), the
European market is far from being uniform (both from a regulatory and legal point
of view) which becomes clear in the chapter “Overview of distressed debt trading in
selected jurisdictions”.
2. Direct lendingThe changes in bank regulation have led to a reduction of bank lending
opportunities for corporations and especially for small and medium-sized enterprises
(SMEs). This retrenchment of traditional banks in the business of lending has
resulted in a lack of sources of financing, providing the backdrop for the
development of an alternative lending market which has become a permanent
feature of the European market and is rapidly evolving to become an asset class with
over 300 direct lending professionals active in the European market.
This alternative lending market, commonly known as direct lending, refers to
PrefaceIgnacio Buil Aldana
Cuatrecasas, Gonçalves Pereira
9
lending provided by non-traditional sources of financing (ie, credit funds) with
different lending strategies, such as mezzanine financing, distressed-debt investment
or capital relief to name a few. This book provides an overview of the current state of
the direct lending market as well as a chapter undertaking an analysis of the trends
in the European market relating, for example, to unitranche financing or ‘cov
loose’/’cov lite’ financings, as well as a review of the regulatory and legal regimes
applicable in different European jurisdictions.
3. Non-performing loans marketReducing non-performing loans in the banks’ balance sheet has become a hot topic
for a broad range of politicians, policymakers and investors. The regulatory focus on
the level of non-performing loans in the European banking system is the result of the
concerns that these loans hold down credit growth and reduce economic activity.
These concerns and increased regulation – the European Central Bank driven
single supervisory mechanism, capital requirements for banks and insurance
companies as a result of Basel III, Solvency II and, in the future, IFR39 – continue to
stimulate deleveraging, and a strong European non-performing loans market has
developed, with the United Kingdom and Ireland heading the tables of non-
performing loan transactions and Spain, Benelux the Nordic countries and central
and eastern Europe following their lead. This activity is expected to remain high in
the next couple of years, and new countries are expected to open up the non-
performing loan market in the coming months with their banks becoming active
participants (eg, Italy).
Moreover, some European countries have set up so-called bad banks (such as
Nama in Ireland or SAREB in Spain) which, as explained in the chapter “Bad banks
and their role in the deleveraging process in Europe”, is a well-established banking
crisis management tool aimed at facilitating the management of legacy assets and
their orderly divestment, turnaround or liquidation. These bad banks also play a key
role as active participants in the distressed-debt markets.
4. Restructuring and workoutsThe scheme of arrangement has been one of the restructuring tools most favoured by
market participants during the last few years. Debtors from continental Europe have
used this tool to restructure their debt and implement their restructurings, taking
advantage of a flexibility that their national restructuring and insolvency regimes did
not provide to them. This book acknowledges this and provides a detailed focus on
the scheme of arrangement and its latest developments. We also look into the
dynamics of high-yield bond restructuring and the influence that the scheme of
arrangement and the US Chapter 11 have in the restructuring process.
In this regard, different European countries have enacted amendments to their
legislation, introducing new frameworks to facilitate in-court or out-of-court
restructuring, in what can be seen as a race to catch up with the English restructuring
framework and prevent the ‘escape’ to English law of many debtors, creditors and
their restructurings.
These amendments, which range from the Spanish homologación judicial to the
Preface
10
Italian concordato preventivo, have also introduced changes in the new money regime,
debt-for-equity swaps and other tools with the purpose of enhancing corporate
restructuring and facilitating the viability of distressed debtors. All these
developments are addressed in this book, and we provide an overview of the many
legal changes introduced in recent years in the European market.
Now we have explained what this book is about, two things need to be raised at
this point, without which the preface of this book would not be complete. First,
Brexit. Brexit is changing, and is going to change further (once the formal exit
process is formally started and eventually concluded), the relationship between the
United Kingdom and the rest of Europe, both politically and economically. While we
have included references to Brexit throughout this book, it will be only in the
medium term when we will be in a position to assess the real impact that Brexit will
have in the European distressed investing market. At this point, however, to try and
picture the impact of Brexit is highly speculative and while all political signs seem to
point to a ‘hard’ Brexit, it is difficult to have much clarity on what this will really
mean if this is finally the case.
Secondly, it has not been possible to cover all the countries that comprise Europe
and have a say in its distressed market. We acknowledge that chapters on the Nordic
or central and eastern European countries may be missing in this first edition of the
book; however, while we anticipate that this book may move into future editions
that will allow us to analyse these countries as well, we also hope that as it stands
this book serves as a valuable introduction to the European distressed market and its
key features.
Finally, I would like to extend my gratitude to all the contributors for their
support and cooperation in the preparation of this book, to the Turnaround
Management Association Europe for their kind sponsorship, and to our publishers
for all their help in the completion of this book. Finally, thanks as ever to my wife.
Ignacio Buil Aldana
Cuatrecasas, Gonçalves Pereira
El Tormillo / London
Ignacio Buil Aldana
11
1. IntroductionThe concept of distressed investing in Europe is not new. We have operated in an
environment of extreme financial volatility (both boom and bust) from a debt
market perspective since the early 1980s, accelerated by the emergence of the
European high yield bond market in 19971 which heralded a new wave of value
investing in Europe. This volatility is not a surprise, one might argue, given the rapid
growth of the leveraged buyout market, the subsequent failure of many companies
in the mid-1990s and later the boom-bust cycle in the technology, media and
telecommunications market at the turn of the 20th century.
Since the financial crisis in 2008 the European distressed debt market has become
more dynamic as European and US banks, many of which made significant profits
driving leveraged buyout volumes in the mid-2000s, were forced to unwind balance
sheets of long positions in leveraged buyout loans, and some of the most complex
structured products including mortgage-backed securities and collateralised debt
obligations. Arguably US banks (operating in Europe) suffered more heavily than
their European counterparts who held onto assets for longer, rather than completing
a mark-to-market of their loan books and suffering catastrophic losses at the height
of the crisis.
We have witnessed a substantial increase in non-performing loan portfolio
trading since the start of the Eurozone crisis, as investors flocked to Europe seeking
yield and targeting banks now subject to increasingly stringent capital adequacy
requirements and more onerous regulation. The European Central Bank’s asset
quality review in 2014 identified €879 billion of troubled loans held by 123 banks
in the Eurozone’s 18 countries, prompting a raft of loan disposals and a flood of
capital into Europe. This is hardly a surprise given the growth of the derivatives and
securitisation markets in the mid-2000s, as assets on bank balance sheets grew from
€18 trillion in 1999 to €45 trillion in 2008.
What is perhaps more surprising is the fact that the speed of bank deleveraging
since 2008 (and therefore the opportunity for distressed returns) has not been as
rapid as many commentators originally predicted. There has been a great deal of
‘amend and extend’, in contrast to previous cyclical downturns. However this is
Investing in distressed debt in Europe: an overview
Tom Cox
Damian Malone
Mark Sinjakli
AlixPartners
13
1 Edward Altman, “The Anatomy of the High Yield Bond Market”, September 21 1998: pages.stern.nyu.edu/~ealtman/anatomy.pdf.
more likely to have been the result of under-provisioning by banks and an inability
to absorb losses on disposal of assets rather than through a lack of appetite itself,
particularly since such lending ties up capital and prevents it from being recycled
into other opportunities. The year 2015 witnessed a substantial uptick in activity
with €140 billion of European loan portfolio transactions recorded, up 50% (in
absolute value terms) on 2014, but this was largely driven by non-strategic
performing residential mortgage portfolios in the United Kingdom rather than non-
performing loans.2
On the other hand, deleveraging of Italian bank balance sheets accelerated, with
€11 billion of unsecured/non-performing loans trading at large discounts to par.3 In
the context of an estimated €1,180 billion of non-performing loan stock held by
European banks, less than 30% had traded by the end of 2015, but the speed of
disposal is likely to accelerate in the coming years as lenders have continued to
rebuild balance sheets and are now generating earnings capable of absorbing losses
on non-core portfolios. In the last quarter of 2016 pressure is increasing on Spain’s
‘bad bank’, SAREB, as well as its commercial banks, to recognise significant
impairments in respect of their loan books, which in turn may lead to price
alignment between buyer and seller, and allow for an uptick in transactions.4
The level of genuine distress experienced since 2013 has been relatively muted,
driven by ultra-low interest rates and capital availability across a variety of markets,
both debt and equity, which provided solutions (albeit including amend and extend
in some cases) for the most stressed borrowers. At the same time, looser credit
protection in loan documentation (driven by a shift towards covenant-light bond
financings in Europe) suppressed distressed trading volumes as return-hungry
investors enabled borrowers to avoid or defer complex workouts.
However, the current European distressed industry is one which still presents a raft
of opportunities, given the volatility that threatens the European economic system
and a general feeling of anxiety across global markets. The United Kingdom’s vote to
leave the European Union in the June 2016 referendum has triggered turmoil in the
UK, European and global markets. Only time will tell what the medium-term impacts
will be, with most market commentators predicting a period of uncertainty and in
many cases recession. In the hours after the result was announced, the governor of the
Bank of England sought to reassure the UK population, asserting the ability of the UK
economy to cope with such shocks and to return to stability, yet before the vote he
had predicted that recession was a possible outcome of a Brexit vote.
Indeed, such volatility is playing out during a period in which Europe has also
witnessed the most extensive monetary policy stimulus in living history, through
quantitative easing, which rather than establishing a robust economic platform has
delivered only anaemic growth across the continent. As the Chinese market
continues to slow down and restructuring activity picks up in the United States
(largely driven by low oil prices) it is likely that the European market will again
Investing in distressed debt in Europe: an overview
14
2 PwC, Portfolio Advisory Group Market update – Q4 2015.3 PwC, Portfolio Advisory Group Market update – Q4 2015.4 www.auraree.com/real-estate-news/bank-of-spain-puts-pressure-on-banks-to-speed-up-property-sales/.