European Dd 2013 Final Lr

8/13/2019 European Dd 2013 Final Lr

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EUROPEAN DISTRESSED DEBTMARKET OUTLOOK 2013

JANUARY 2013


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CONTENTSForeword 3

Executive summaries 4

Distressed investors survey 8

Private equity survey 36

Interview with James Roome, Barry Russell and James Terryof Bingham McCutchen LLP 57

Bingham McCutchen LLP Contacts 60

Rothschild Contacts 61


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EXECUTIVE SUMMARIESRothschild

We enter 2013 with a strong sense of dj vu regarding the economic

outlook. European market participants, both inside and outside the distressed

debt markets, experienced a 2012 characterised by market uncertainties,

critical elections and anemic growth, and it seems that 2013 will bring

more of the same. Europes periphery is as precarious as this time last year,

questions remain around full resolution of the scal cliff and the seemingly

annual debt ceiling debate in the US. Although elections in Germany and Italywill fail to garner as much attention as last years polls in the US and France,

both have the potential to be game changers. Global economic growth

will likely disappoint again with, in particular, Europes economic engines

sputtering to barely positive growth rates.

Against this bleak macroeconomic background, certain areas of the market

have a more optimistic outlook. As respondents to this survey testify, we

can expect better liquidity in the credit markets in 2013 than we did last

year. The relaxation of certain Basel III requirements can only help turn

this view into reality. If liquidity does increase, pushing valuations and

renancing levels higher, we are likely to see stressed credits better able

to achieve fulsome solutions and not simply have another go at kicking the

can down the road. With the private equity funds dry powder and the high

levels of cash on many healthy corporate balance sheets, investors appear

more ready now than at any time post the nancial crisis to put new money

to work.

2013 will be an exciting year in the restructuring and distressed debtmarkets. New legislation in Germany, France and particularly in Italy will be

put to the test. As the survey makes clear, distressed investors expect to see

more debt for equity swaps coming this year, with more acquisitions coming

through the junior debt than before. Companies with zombie balance sheets

will survive as long as amend-and-extends and covenant resets persist. But

appetite for these sticking-plaster solutions looks to be diminishing as bank

balance sheets begin to strengthen and lenders begin to see scope to get

repaid if they write down a little. As such, the opportunity for new money is

expected to increase. Now is the perfect time to start ridding Europe of the

zombies.

Andrew Merrett

European Head of Restructuring

Co-Head Financing Advisory UK

Rothschild


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Leading EMEA restructuring adviser

Image: Detail from a bond issued by Rothschild in London for the1900 4.5% Coquimbo railway loan, Chile (The Rothschild Archive)

www.rothschild.com

For further details please contact Andrew Merrett:

New Court, St Swithins Lane, London EC4N 8AL

Telephone +44 (0)20 7280 5728

Kloeckner Pentaplast (2012)

Adviser to SVP on the 1.2bn financial

restructuring and debt-for-equity swap

Belvedere (2012)

Adviser to the company and its receiver

on the restructuring of c.600m of bonds

Findus (2012)

Adviser to the company on its

750m restructuring

Seat Pagine (2012)

Adviser to the company on its 2.7bn

restructuring

Novasep (2012)

Adviser to the ad-hoc committee of

bondholders on a 415m restructuring

Punch Taverns (on-going)

Adviser to the ABI Special Committee of

Noteholders on the 2.7bn restructuring

of Punch A and Punch B WBS

Endemol (on-going)

Adviser to a senior lender consortium on the

2.1bn debt restructuring

Arcapita (on-going)

Adviser to the company on the reorganisation

of c.$2.5bn liabilities under Chapter 11

Deutsche Annington (2012)

Adviser to the ad-hoc group of noteholders

on the 4.3bn renegotiation of GRAND CMBS

Marken (2012)

Adviser to the co-ordinating committee of senior

lenders on 408m restructuring


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Bingham McCutchen LLP

2012 was not a vintage year for debt restructuring in Europe. Although the

Eurozone crisis and the consequences of the nancial crisis resulted in serial

recessions around Europe, the banks were not under pressure to revalue

assets or take losses. Consequently, amend and extend transactions were

far more common in 2012 than comprehensive debt restructurings. Those

restructurings that did happen, such as the successful recapitalisation of

Findus Foods through a mezzanine debt to equity swap, highlighted thedifculties of implementation in Europe as compared to Chapter 11 in the US.

In some respects, 2013 starts out with similar features. Although the

Eurozone crisis is in remission, it has the ability to cause further damage

to the European economy if symptoms re-emerge. European banks remain

under-capitalised and, but for the high yield bond issuance by leveraged

companies, their nancial health would not be improving. Consequently,

the banks are likely to continue to prefer amend and extend transactions

over debt reductions in 2013. With primary debt and equity markets so

subdued, distressed investors in Europe will continue to scan the horizon

for exit routes before being willing to invest heavily in restructuring

opportunities in the secondary market. Sustained strength in equity

markets could lead to more deals.

Nonetheless, some new features will come into play during 2013, whichmight change the landscape. Some of the temporary solutions negotiated

with banks over the past few years will need to be revisited and, in some

cases, more comprehensive restructurings will be needed. The maturity

wall starts to build this year and the level of maturities will be very

signicant by 2014. We cannot conceive that it will be practical simply

to extend all of these maturities. Some borrowers will inevitably need to

restructure, if only because their liquidity cannot sustain the levels of debt

they have incurred. In addition, the boom-time bond issuance in the high

yield market over the past two years will surely change the dynamics.

The past several years have seen a series of attempts by the EU and its

member states to modernise their insolvency and restructuring legislation,

much of it based, at least nominally, on Chapter 11 of the US Bankruptcy

Code. However, few European countries have adopted effective legislation

to facilitate restructurings outside the framework of formal insolvency

proceedings, and investors still lack condence in the courts willingness to

give speedy approval to agreed deals. Consequently, these laws have not yet

stemmed the volume of deals implemented by scheme of arrangement or

administration sales in the UK. Curiously, the laws introduced in Luxembourg

and elsewhere to implement the Financial Collateral Directive are probably

the most widely used implementation tools outside these UK procedures. The

prevalence of secured bonds governed by New York law in the next wave of

restructurings will likely boost the use of Chapter 11 as a restructuring tool.

The volume of non-bank lending into Europe was extraordinary in 2012, asinsurance companies and others stepped into the void left by the commercial

banks. There is every reason to think that that trend will continue into 2013.

Barry Russell

Co-Head, Transactional Finance Group

Bingham McCutchen (London) LLP

James Roome

Co-Head, Financial Restructuring Group

Bingham McCutchen (London) LLP


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Binghams European Financial Restructuring Practice

Widely recognised as one of the worlds top-tier financial restructuring firms, Bingham hasplayed a leading role representing creditors in numerous high-profile, precedent-settingworkouts and restructurings throughout Europe, including:

Nationalisation and financialrestructuring of three majorIcelandic banksKaupthing,Landsbanki and Glitnirandparticipation on the informalcreditors committee of each ofthe three banks

Bingham is advising the

worldwide bondholder group

Debt restructuring of a Europeanfrozen foods business

Bingham advised the ad

hoc committee of mezzaninebondholders

Insolvency filings in multipleEuropean jurisdictions totaloutstanding bond debt of

US$1.75 billionBingham is advising the ad hoc

committee of bondholders

1.2 billion financialrestructuring of one of Irelandslargest companies

Bingham is advising the

noteholders

Financial restructuring of theowner and operator of threeFPSOs listed on the Oslo Brs

Bingham advised thebondholders

1.8 billion financialrestructuring of a Greektelecommunications operator

Bingham advised the ad hoccommittee of senior secured

noteholders

Binghams European Financial Restructuring Practice is top ranked in the following:

Icelandic Banks Findus Petroplus

Quinn Group Sevan Marine Wind Hellas

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inghamM

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DISTRESSED INVESTORS SURVEY

The majority of investors believe the sovereign debt crisis in the Eurozone

will continue to have a major impact on private credit markets in 2013.

Sixteen percent of respondents think the crisis will not have an impact

on the markets. In last years survey 99% of respondent expected the

sovereign debt crisis to have some kind of impact on private debt markets

in the year ahead with a mere 1% saying it would have had no impact.

Bank lending standards have tightened and debt funding costs have risen

sharply. Traditional nancial institutions have remained cautious. This

is the right opportunity for private credit providers who can still provide

some leverage, suggested a Norwegian hedge fund manager.

To judge by the headlines, the intensity of the European

crisis has abated since the summer of 2012. Although it

remains to be seen whether the world is as disconnected

as this trend tends to indicate, European leaders certainly

seem to have quelled the fears of Eurozone break-up for

the moment.

James Roome, Partner, Bingham McCutchen LLP

Do you expect the Eurozone and sovereign

debt crises to continue to have a major

impact on private credit markets in 2013?

Yes

No

84%

16%

In the nal quarter of 2012, Debtwire

canvassed the opinions of 100 hedge

fund managers, long-only investors and

prop desk traders in Europe.

Interviewees were questioned about their

expectations for the European distressed

debt market in 2013 and beyond. The

interviews were conducted over the phone

and the respondents were guaranteed

anonymity. The results are presented in

aggregate.


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DISTRESSEDINVESTORSSURVEY

Compared to last year, a smaller portion of respondents believe Greece

will be cast out of the Eurozone. Twenty-one percent of investors think

Greece is likely to exit the single currency area. Spain is viewed as next

most likely, with 6% of respondents predicting its exit. Forty-three percent

of respondents to last years survey expressed doubt over Greeces ability to

remain a member.

There is every possibility that the Greek government will succumb to the

pressure of its people and opposition and end austerity measures leading

to a disorderly default, commented a UK based hedge fund manager.

If yes, do you expect any European country/

countries to leave the Eurozone?

0% 5% 10% 15% 20% 25%

Portugal

Spain

Greece21%

6%

1%

Percentage of respondents

Over three quarters of the distressed investors surveyed do not think that

any country will leave the Eurozone.

Concerns of Greece or any other European country exiting the Eurozone are

diminishing, suggested a hedge fund manager in Sweden.

The Eurozone looks safe now and I don't think any country will leave it,"

added a prop trader in the UK. Now there is greater co-operation among the

Eurozone members; this is improving the environment and developing the

market.

Fears of a break-up seem to be receding and the public

sector has replaced a lot of private foreign investment in the

weaker Eurozone countries. Nonetheless, if any country were

to leave the Eurozone, the legal consequences for investors

would still be very serious - not least due to the inevitable

introduction of capital controls and currency redenomination.

Stephen Peppiatt, Partner, Bingham McCutchen LLP

Do you expect any European countries

to leave the Eurozone?

No

Yes

77%

23%


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A slim majority of respondents think that the Eurozone crisis has not

yet reached its peak while 44% think that the worst has now passed.

The debt crisis in Europe is still intense because of huge upcoming

debt maturities, said a prop trader in Switzerland.

The level of uncertainty is too high to sustain, suggested a hedge fund

manager in the UK. Lack of growth and recovery is threatening the fragile

political consensus that has kept Europe's currency bloc intact through more

than two years of crisis.

Forget Groundhog Day, we are entering the third

reincarnation of Groundhog Year with Europe facing another

year of anaemic growth, currency risk and general geopolitical

uncertainty. Read into this another active year for distress.

Glen Cronin, Rothschild

Has the worst passed in the European

sovereign debt crisis?

No

Yes

56%

44%

Over two thirds of respondents do not believe the EU scal compact is

a feasible long-term solution.

Investors interviewed agreed that the scal compact is too focused on

austerity measures and argued that this cannot represent a long-term

solution to the sovereign debt crisis. In addition governments should

consider development and growth measures to balance out the negative

effects caused by austerity and to avoid recession.

The only solution to the crisis is to end the negativity and bring back

condence, suggested a hedge fund manager in the UK. For that it is

essential for governments to restore development measures. Austerity

is not the right solution to end the crises.

Do you think the EU scal compact is a

feasible long-term solution?

No

Yes

68%

32%


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In a similar fashion to last year, respondents remain divided over when the

volume of European restructuring activity will peak. However, just over half

of them think it will peak in 2013, with 20% opting for the rst half of the

year and 31% the second.

A smaller 22% portion forecasts that the next top will occur in the rst

half of 2014, while 12% think it will occur in the second half of that year.

I was expecting 2012 to be the peak but many companies managed to

push their maturity by six to twelve months, said a prop trader from the

Netherlands.

I think banks have been pushed to their limits to renance debt to

prevent defaults and are now above their capacity to continue to

renance, said a prop trader in Switzerland. They do not have capital

in hand and because of new regulations they are not able to raise new

capital. Thus I think by the second half of 2013 restructurings will peak.

With interest rates so low and with government policy

so accommodating, we do not expect the restructuring

pressure to grow until the maturity wall is upon us. At

that point, a proportion of borrowers will inevitably need

to restructure. Based on historical default statistics, we

would also anticipate increased defaults amongst high

yield issuers within the next 12 to 18 months, given the

enormous issuance over the last two years.

James Terry, Partner, Bingham McCutchen LLP

When do you expect the volume of European

restructurings to hit its next peak?

0% 10% 20% 30% 40%

2016

2015

H2 2014

H1 2014

H2 2013

H1 2013

H2 2012 2%

20%

31%

22%

12%

10%

3%

Some 28% of those surveyed think that amend and extend and/or forward

start facilities will be the most frequent form of debt renegotiation during

2013. The same number of respondents point to break-up or asset

disposals as the most likely type of renegotiation, a big change on last year's

survey when only 6% of respondents picked this as the most likely option.

A larger portion of investors than last year thinks whole or partial debt

equitisations will feature in debt renegotiations in 2013. Last year only

11% of those surveyed foresaw this as the most frequent process against

20% this year.

Notably this year only 11% of respondents believe new money injections

will most likely feature in debt renegotiations in 2013 against 22% of

those surveyed last year.

The unwillingness of banks to take losses through sales or

write-downs means that amend and extend will still be the

favoured solution during 2013. However, we are starting to

see more second round restructurings where the sticking-

plaster solution of the last few years has not worked and

where a fresh approach may be needed. There will inevitably

be more companies facing fundamental problems which will

increase opportunities for distressed investors.Neil Devaney, Partner, Bingham McCutchen LLP

Which form of debt renegotiation do you

expect to be prevalent in 2013?

0% 5% 10% 15% 20% 25% 30%

Amendments

Debt buybacks

New money injections

Whole or partial debtequitisation / exchange

Break-up or asset disposals

Amend and extend/forward start facility

28%

28%

14%

14%

25%

20%

11%

11%

8%

21%

15%

5%

Most Least



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Distressed debt investors are expecting a larger proportion of sub-investment

grade companies to face debt restructurings in 2013.

This year 31% of respondents think that more than 25% of sub-investment

grade companies will face restructurings while 18% think that 20-25% will

go down this road and 48% think that 10-20% will restructure

Last year 58% of those surveyed thought that only 5-10% of companies

would go through a workout process and 36% believed the correct gure

was 10-15%. The 15%-20% and the 20%-25% brackets included just 12%

of respondents while the over 25% camp represented a mere 10%.

What proportion of sub-investment grade

companies do you believe are likely to face

debt restructurings in 2013?

Over 25%

20-25%

15-20%

10-15%

5-10%

31%

26%

22%

18%

3%

Some 50% of respondents expect the number of sub-investment grade

companies facing restructurings in 2013 will increase while 30% think the

number will remain the same. Last year close to 60% of those surveyed

expected an increase in 2012 restructurings and only 5% foresaw a reduction.

A large and growing number of companies are running into difculties over

interest payments and we will see a marked increase in debt restructurings

in the next 12 months, explained a hedge fund manager in Germany.

Does this represent an increase or a

decrease on 2012?

Increase

No change

Decrease

50%

30%

20%


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Nearly a quarter of respondents think that the UK will be the European

country to see the highest number of debt restructurings in 2013. Spain

and Italy follow the UK with 18% each while 17% opt for Ireland.

Germany will account for the largest percentage of corporate workouts

according to 14% of respondents while only 8% expect France to have

the highest number of restructurings.

The results represent a reversal on last year when only 6% of those

surveyed thought the UK would lead in terms of restructurings, and a

return to the position of the 2011 survey when the UK got the top spot

with 39%. Some 32% of respondents last year expected Italy to account

for the largest number of workout while 31% opted for Spain.

Distressed investors will continue to explore opportunities

in the peripheries of the Eurozone, but will continue to

deploy most of their capital in the UK/Ireland, France,

Germany, Benelux and Scandinavia.

Dacre Barrett-Lennard, Rothschild

Where do you expect most European debt

restructuring to take place?

UK

Spain

Italy

Ireland

Germany

France

Greece

14%

17%

18%

18%

24%

1%8%

Mirroring last years results, a majority of respondents (58%) expect Southern

Europe to witness the highest number of corporate restructurings in 2013

while 42% opt for Western Europe. In this years survey, no respondents

expected Eastern Europe or the Nordic region to account for the highest

number of corporate workouts compared to 10% and 7% in last years survey.

Where do you expect most European debt

restructuring to take place?

Western Europe

Southern Europe

42%

58%


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Respondents were fairly equally split regarding the region likely to offer

the best distressed opportunities with around a third opting for Asia,

Europe and North America.

Distressed opportunities in Asia have an attractiveness component with

them, suggested a fund manager in Norway. Asian markets are not in as

deep trouble as the European and North American markets. Investors are

condent of making returns while they lack the same condence in Europe

and North America.

A hedge fund manager in Germany had a different view: North America

is unique because of its sheer scale, breadth of opportunities and the

inexpensive price of the debt. European markets cannot handle the size of

the renancing needs and the distressed assets are more of junk category.

APAC is still fresh and the valuations are very high.

Our restructuring team in Asia has had a very busy 2012,

particularly in Japan and India, and we are starting to see

increased debt restructuring opportunities throughout the

broader region. As always, participants should understand

the different systems of each jurisdiction and appreciate

that no country offers the clarity or procedural certainty

of US Chapter 11.Mark Fucci, Partner, Bingham McCutchen LLP

Where do you expect to nd the best

distressed opportunities going forward?

Asia

Europe

North America

35%

33%

32%

A large majority of respondents expect the high yield bond market to

remain open, allowing companies that become stressed to renance their

bank debt af fordably.

Stressed companies will not only use high yield bonds to renance their

debt but also to raise money for working capital, a hedge fund manager

in Switzerland suggested. The high yield bond market has become much

more liquid, diverse and reliable and will be signicantly used to take

advantage of its low rates.

As the high-yield and leveraged loan markets continue

to open and close sporadically, the success of stressed

renancings remains a question of timing. The mantra

is: Be ready early to exploit these potentially short

windows stands.


Despite unstinting efforts by institutional investors to

revise investor-unfriendly terms in senior secured notes, the

volume of issuance and of demand for high yield paper has

limited their success. When the default rate in the high yield

market does resurge, as it inevitably will, these documentaryproblems will present legal and technical obstacles to

successful debt restructuring.

Elisabeth Baltay, Partner, Bingham McCutchen LLP

Do you expect the high yield market to

remain open allowing stressed companies

to renance their bank debt cheaply?

Yes

No

70%

30%


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For the second year in a row nancial services remain the area expected

to offer the most opportunities for distressed investors. The property and

construction sector has climbed up the list to stand in second place, from

tenth in 2012. The automotive sector has risen from eighth place to third,

bearing out the negative signs emanating from some of Europes largest

vehicle producers. Investors also see substantial opportunities within the

consumer and retail space, which maintains its position in fourth, as well

as transport, energy and technology.

Construction and property companies are nding it very difcult to raise

capital and lack of demand has increased the chance of their default

providing opportunities for the distressed investors, suggested a prop

trader in the UK.

Lower discretionary spending will continue to hurt consumer-

facing industries the most, such as retail and hotels & leisure.

Real Estate is and will remain a signicant source of distress

over the coming year.

Andrew Merrett, Rothschild

For some time now, distressed investors have been eyeing

the shipping market. There have been few rewards to date,but there are now signs that this may be starting to change

as portfolios begin to be marketed and as shipping becomes

a non-core sector for some banks.


Please rate the following in terms of the

opportunities they present for distressed

investors in 2013.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Property & Construction

Financial Services

Auto/Auto Parts

Consumer/Retail

Transport (Incl. Shipping)

Energy

Technology

Infrastructure

Telco/Cables

Leisure

Chemicals and Materials

Media

Utilities

Paper and Packaging

Aerospace

Basic Industries 46%

54% 36% 10%

42% 48% 10%

42% 48% 10%

33% 53% 14%

22% 51% 27%

30% 42% 28%

24% 48% 28%

12% 56% 32%

18% 43% 39%

16% 44% 40%

7% 46% 47%

6% 46% 48%

12% 31% 57%

4% 37% 59%

2% 32% 66%

47% 7%

0% 10% 20% 30% 40% 50% 60%

PIK notes

CDS

Second lien debt

Senior debt

Securitisations/ABS

Private placements

Convertible bonds

Mezzanine debt

High yield bonds

8% 15% 9%

4% 4%5%

11%2%

1%

7%5%3%

13% 11% 12%

14% 11% 20%

17% 19% 16%

19% 9% 9%

21% 23% 12%

Few opportunities Some opportunities Signicant opportunities


High yield bonds, chosen by 21% of respondents, remain in rst place as

the most attractive investment instrument for the year ahead. Mezzanine

debt has moved up to second place from fth while convertible bonds and

private placements swapped places in third and fourth position. ABS debt

has increased its appeal moving up to fth place from ninth while CDS

and PIK notes remain among the least attractive debt instruments for the

distressed investor community.

Everyone is now in a classic framework of allocating capital to diverse

assets, explained a hedge fund manager in Switzerland. High yield

bonds are risky but every investor still wants to invest in them because

they have always generated higher returns than investment grade bonds

or any other investment area.

Out of the following, please rank the three

instruments that you think will offer the most

attractive investment opportunities in 2013.

Most attractive Signicantly A`ttractive Attractive



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Mezzanine debt, convertible bonds, private placements and high yield

bonds were chosen by respondents as the most attractive instruments

to secure control of credit in 2013.

This represents a shift compared to last year when senior debt was seen

as the most likely instrument with 47% of respondents selecting it. This

may suggest investors are becoming more optimistic about valuations in

2013 and believe rst lien debt will be less likely equitised or that junior

lenders will be more able to renance the senior debt.

We have seen a small number of very successful junior

debt restructurings in Europe over the past ve years. In

Gala Coral, Klckner Pentaplast and Findus Foods, junior

lenders were able to secure control. But the lack of an

absolute priority rule in any European insolvency law -

compared to the US where this is a key feature of Chapter

11 - means that in Europe senior lenders always remain in

control of the process even when their debt is fully covered.


Which instrument is most likely to be

attractive as a means to secure control

of a credit in 2013?

Mezzanine debt

Convertible bonds

Private placements

High yield bonds

Securitisations/ABS

Senior debt

Second lien debt

PIK notes

CDS

20%

19%

16%

14%

12%

9%

5%

4% 1%

Looking at an 18 month time horizon, some 42% of distressed investor

respondents think that the peak for high yield-related restructurings will

occur in the second half of 2013 and 38% expect it in the rst half of

2014. Only 20% think the peak will occur in the rst half of 2013.

The outlook for 2013 is similar to last year: restructuring

events driven more by maturities and liquidity issues than

mere covenant issues, but with more high yield maturities

looming on the horizon.

Hamish Mackenzie, Rothschild

When do you expect high yield-related

restructuring opportunities to peak in the

next 18 months?

0% 10% 20% 30% 40% 50%

H1 2013

H1 2014

H2 2013 42%

38%

20%



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Nearly two thirds of respondents think that there will be more in-court

restructurings in 2013 versus 2012. This represents a slight decline from

last years survey when 82% of respondents expected more in-court

restructurings in the following 12 months.

In most of Europe, it remains the rule that in-court

debt proceedings result in liquidations. As a result, all

parties are motivated to follow an out-of-court route soas to preserve the going concern value of the distressed

business. Moreover, outside England, where the scheme of

arrangement and administration pre-pack are widely used

to implement deals, it is rare to nd a formal process that

works to facilitate debt restructurings.

Liz Osborne, Partner, Bingham McCutchen LLP

Do you expect to witness more in-court debt

restructuring in 2013 than during 2012?

Yes

No

65%

35%

A majority (58%) of respondents think that there will be an increase in forum

shopping to either the UK or US. This is in line with a trend for both creditors

and debtors opting to have their case heard in countries with a well developed

restructuring culture and a tested insolvency regime.

Continuing attempts by European states and the

European Commission to improve debt restructuring

procedures have not stemmed the volume of deals

implemented by scheme of arrangement in the UK.

Emma Simmonds, Partner, Bingham McCutchen LLP

As complex multinational global businesses encounter the

need to restructure, such companies and their creditors are

likely to take actions intended to provide jurisdiction to US

and/or UK courts to implement their 'plans' and 'schemes'.

Jeff Sabin, Partner, Bingham McCutchen LLP

Do you expect to see an increase in forum

shopping to the UK or US to transact

restructurings via a court-driven process?

Yes

No

58%

42%


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Around two-thirds of distressed investor respondents expect changes to

insolvency laws in Germany, France and Italy to lead to an increase in

the number of in-court restructurings taking place in these countries.

Wherever possible, we prefer to use local laws to implement

restructurings, adapting existing processes for sophisticated

capital structures. However, each country has introduced

laws to suit its own culture and legal framework, and there

remains a lot of uncertainty about the ways these new lawswill be applied in practice in individual cases. The changes

in Germany look most promising, but the restructuring

culture in France and Italy is very entrenched.

Christian Halsz, Partner, Bingham McCutchen LLP

Do you expect the changes implemented in

the German, French and Italian insolvency

laws to boost in-court debt restructurings

in these countries?

Yes

No

66%

34%

A large majority (73%) of respondents think that the legal changes made

in Germany, France and Italy are strong enough to encourage distressed

investors to invest more into these markets.

The German and French legislators have made changes to their respective

insolvency laws and this is helping investors have signicant control which

is convincing them to venture into these geographies, suggested a hedge

fund manager in Belgium.

The end of 2012 saw an increase in distress activityin France due to the weak economic environment in an

election year. We can expect more lender-led situations

being implemented despite the perceived borrower-friendly

jurisdiction and more fulsome restructurings in 2013 it

remains to be seen what impact the new policy environment

has on appetite to provide new capital in stressed situations.

Arnaud Joubert, Rothschild

Do you think the legal changes are signicant

enough to convince distressed investors to

venture further in these geographies?

Yes

No

73%

27%


19/6419


A large majority (70%) of respondents think that there will be more interest

in assets and debt in Southern Europe.

Distressed investors are eyeing Southern Europe as a limp market, explained

a hedge fund manager in Switzerland. The economic woes in the region are

attracting the attention of distressed debt funds that want to take advantage

of cheap opportunities.

We are seeing tremendous interest in distressed assets

in Southern Europe, particularly in Spain. This interest

has, however, for the most part been limited to real assets

rather than debt, since the inuence of local banks and

the uncertainty in local restructuring regimes continue to

undermine the condence of foreign investors.

Tom Bannister, Partner, Bingham McCutchen LLP

Do you think there will be an increased

interest in Southern European debt/assets?

Yes

No

70%

30%

Of those respondents that anticipate increased interest in Southern

Europe some 41% think that investors will be mostly targeting

government assets up for sale or privatisation, 35% opt for the debt

of companies with some sovereign involvement while 24% see sovereign

debt as the main area of interest.

All the Southern European countries are doing massive restructurings to

increase private investment and raise capital. Privatisation of many core

areas will attract investors and improve the condition of the government

as they can use the capital raised to pay down their debt, a prop trader

in Greece commented.

Notwithstanding investors growing interest in Southern

Europe, appetite for European sovereign debt has been

greatly undermined by restrictions on short-selling, which

have reduced investor liquidity.

Christopher Leonard, Partner, Bingham McCutchen LLP

If yes to the previous question, what are

investors mostly looking at?

Assets up for sale/to be privatized

Debt of Sovereign-owned or

part-owned companies

Sovereign debt41%

35%

24%


20/64


Portugal, chosen by 32% of respondents, is seen as the most attractive

country within Southern Europe, closely followed by Italy picked by 31%

of respondents. Spain with 26% placed third while Greece was last with

only 11% of those surveyed viewing it as the most interesting market to

invest in debt or assets.

The market conditions in Portugal have started to improve and soon

they will be returning to the bond markets so I see Portugal as more

interesting," a prop trader in Italy noted.

The recent privatisation programs in Portugal have been positive for the

macro-economic environment. This privatisation program has increased

investor condence and makes Portugal an interesting market, added a

managing director in Belgium.

A trader in Spain took a different view: Spains legal jurisdiction is

moderately attractive and their double taxation treaties have a wide

network which makes the country more interesting.

Which country do you think is most

interesting to invest in debt/assets?

Portugal

Italy

Spain

Greece

32%

31%

26%

11%

In 2012 Spain avoided an Irish/Greek-style bail-out

partly due to the 40bn banking recapitalisation scheme

provided by the European Union. A full sovereign bail

out seemed unavoidable, but the risk now seems to be

considerably diminished, with the 10 year bond yield

below 5% and Spanish issuers accessing the capital

markets again in January 2013.

The real economy will, however, continue to strugglein 2013, due to high unemployment and very subdued

consumer condence. This and the banking consolidation

are likely to result in continuing restructuring opportunities

that will reach beyond the pure amend and extend

renancings typically implemented during the last three

years. The UK Scheme used for amend and extend

transactions will become more frequent and typically start

to be utilised for disenfranchising subordinated lenders.

Beltran Paredes, Rothschild


21/6421


The economic environment, chosen by 64% of respondents, is seen as the

biggest barrier to investment within Southern Europe. The legal backdrop

was picked by 25% of respondents while the size and availability of the

opportunity was seen as the least important deterrent chosen by just 11%.

Most of the Southern European countries have returned to recession

which has led to tax rises meaning that investments are held back,

a prop trader in Italy commented.

Economies in Southern Europe are contracting because of the pressure to

reduce debt and implement austerity measures; investors prefer markets

which are less volatile, added a hedge fund manager in Germany.

What if anything has held investment back

in Southern Europe?

Economic environment

Legal jurisdiction

Size of/availability of opportunity

64%

25%

11%

A majority (71%) of respondents expect liquidity in the primary market to

improve in 2013, a signicant change from last year when only 53% of

those surveyed expected the market to improve over the course of 2012.

I am expecting the liquidity to improve in the primary market because

corporates are boasting healthy balance sheets while primary market

dealers such as private equity are holding huge stores of dry powder,

commented a prop trader in Austria.

Do you expect liquidity in the primary market

to improve in 2013?

Yes

No

71%

29%


22/64


Renancing continues to be seen as the main driver of primary market

activity but the number of respondents choosing it as the most important

factor has fallen to 43% from 65% in the 2012 survey.

Funding M&A is seen as the second most important reason to tap debt

capital markets, chosen by 33% of respondents versus only 9% in 2012.

LBOs are in third place, chosen by 20% of respondents while dividend

payouts are considered the least likely driver, picked by just 3%.

The private equity buyers and corporates are sitting on a lot of cash

and their priority is to go for strategic deals so M&A will be the key

driver behind primary market activity in 2013, suggested a prop trader

in Switzerland.

Private equity funds still have dry powder and will be keen

to deploy this in 2013 ahead of fund maturitiesmaturities.

We can also expect trade buyers to be more present in

distressed M&A than in the past, particularly as healthy

corporates are sitting on record cash piles.

Andrew Merrett, Rothschild

What will be the key driver behind primary

market activity in 2013?

Dividend payouts

LBOs

M&A

Renancings

43%

20%

4%

33%

Reecting the results of the previous question half of those surveyed expect

liquidity in the primary market to improve by a sizeable 20-29. Some 13%

expect the improvement to be even greater at 30-39 while 15% anticipate an

improvement of 10-19 and 22% expect an improvement in the 0-9 range.

Optimism has increased since the 2012 survey when only 32% of those

polled expected an increase of more than 20%, compared to 63% in this

years survey.

The market is recovering as the Eurozone is stabilising, suggested a prop

trader in Austria. Investors who were holding cash will now bring it to the

market and that will boost liquidity.

In percentage terms, how much will liquidity

improve in the primary market in 2013?

30-39%

20-29%

10-19%

0-9%

50%

15%

13%

22%


23/6423


Expectations about who will be the primary providers of liquidity remain

broadly similar to last year.

Just over half of respondents think that funds will be key (compared to

49% in 2012). Banks are expected to be the main providers of liquidity

by 35% of respondents versus 46% in 2012, while CLOs are tipped by

13% of respondents, up from 5% last year.

Alternative lending institutions have been stepping into

the primary lending void left by the banks. Our London

ofce originated over 6 billion of privately-placed notes

in 2012, none of it from banks. We have seen no sign of

this unprecedented activity abating.

Barry Russell, Partner, Bingham McCutchen LLP

Who will be the players behind primary

market liquidity in 2013?

Mutual funds, insurance

companies and pension funds

Banks

CLOs

52%

13%

35%

Basel III rules will inhibit banks' lending capabilities by 0-25% according

to just over half of those surveyed. Some 40% think that that the capacity

to lend will be cut by 25-50%, while only 7% of respondents think that

banks' ability to lend will be unchanged.

The changes to Basel III, specically the LCR, would

appear to further limit the need for banks to sell assets

into the market.

Dacre Barrett-Lennard, Rothschild

In percentage terms, to what degree do you

think banks ability to lend new money or

extend existing debt facilities has diminished

as a result of Basel III rules?

More than 50%

25-50%

0-25%

Unchanged

51%

7% 2%

40%


24/64


There is a reasonable amount of liquidity in the high yield secondary

market, according to the survey respondents.

Views are more positive than this time last year. Some 64% of respondents

say there is a reasonable amount of liquidity compared to just 30% in last

years survey. Conversely only 33% of those surveyed suggest that there is

not very much liquidity while in 2012 some 60% of respondents held this

opinion.

The mark to market nature of high yield structures andthe likely trading which may follow in distressed names

will be fertile ground for funds, particularly as ratings

downgrades trigger liquidity.


How much liquidity is there in the high yield

bond secondary market in Europe?

A lot of liquidity

A reasonable amount of liquidity

Not very much liquidity

64%

33%

3%

Distressed debt respondents are split on whether hedge funds will be able

to ll the funding gap left by banks.

Commercial banks are reluctant to extend credit as they have become

more cautious about exposure to risk and this is creating an opportunity

for the hedge funds to ll in the lending gap, said a prop trader in Italy.

Do you expect hedge funds to ll the

lending gap?

No

Yes

51%49%


25/6425


A majority (55%) of respondents expect the amount of liquidity in the

high yield secondary market to increase in 2013, while 41% expect

liquidity to remain the same and only 4% expect deterioration.

Do you think that this level of high yield

liquidity will increase, decrease, or stay the

same in 2013?

Increase

Stay the same

Decrease

55%

41%

4%

A majority (53%) of respondents say that there is a reasonable amount

of liquidity in the secondary debt market compared to some 43% who

say that there is not very much.

How much liquidity is there in the secondary

debt market in Europe?

A reasonable amount of liquidity

Not very much liquidity

A lot of liquidity

53%

43%

4%


26/64


27/6427


Afrming the trend seen in the previous question 46% of those surveyed

expect to increase their distressed asset allocation in 2013, while 43%

expect to keep the share the same and only 11% anticipate a decrease.

What do you expect to happen to your

distressed allocation in 2013?

Increase

Stay the same

Decrease

46%

11%

43%

Just under half (45%) of those surveyed say that they are actively raising

funds to invest in distressed debt, which represents a sizeable shift from

last years survey when only 20% of respondents were sourcing funding

to invest in distressed situations.

Are you actively raising funds to invest in

distressed debt?

No

Yes

55%

45%


28/64


Pension funds, chosen by 30% of respondents, are now expected to

be the top source for investment into distressed funds in 2013, up from

second place in last years survey. The top pick in 2012, funds-of-funds,

has slipped to second place at 28%, while high net worth individuals

came in third at 16% and insurance companies fourth at 15%.

Pension funds have raised a lot of capital in the past years and will be

investing more in distressed funds, says a hedge fund manager.

Pension funds are attracted by the high rates of return that distressed

debt offers which they can cannot expect from their common investments

such as stocks, a UK based prop trader noted.

Which source do you expect to represent

the largest investment in distressed funds

in 2013?

Pension funds

Funds-of-funds

High net worth individuals

Insurance companies

Family ofces

Banks

Universities

30%

28%

16%

15%

5%

5% 1%

Raising new money is becoming easier according to the distressed investors

surveyed. A minority (43%) of respondents expect fundraising conditions

to worsen in 2013, a more positive picture than last year when over half

(54%) were expecting conditions to deteriorate.

The economic environment has stabilised so I feel the fundraising conditions

will not be tougher in 2013 compared to last year, suggested a hedge fund

manager in Switzerland.

Do you anticipate tougher fundraising

conditions in 2013?

No

Yes

57%

43%


29/6429


Distressed oppor tunities are expected to be easier to source in 2013

according to 63% of survey respondents, a slight increase on the 60%

who said that deals would be easier to come by in last year's survey.

A sizeable minority think that deals will be harder to source as reected in

a comment from a hedge fund manager: Distressed opportunities are not

easy to nd. Capital is cheaper which is helping companies to renance

their debt. Over the last two years the level of nonperforming assets has

decreased signicantly.

The banks are not under pressure to revalue assets or

take losses. In the absence of capital increases, most

European banks will not be able to sell distressed debt

at knock-down prices. We see no reason why this trend

will not continue in 2013. Sourcing of good opportunities

remains key.


Do you expect it to be more or less difcult

to source distressed opportunities in Europe

in 2013?

Less

More

63%

37%

Private equity deals are seen as the most important source of liquidity for

long-term exits from European distressed debt, with 26% of respondents

choosing this as their top choice and 60% putting it in their top three

Sale to other distressed players, chosen by 20% as their rst choice and

60% as one of their top three, came second. Renancing was in third place

with 11% of respondents choosing it as their top choice and 51% of those

surveyed putting it in their top three selections. A sale to a strategic buyer was

placed fourth, with 18% of those surveyed selecting it as their primary source

for exits and 40% in their top three

Distressed players, particularly hedge funds, will be the primary source for

exits from distressed assets, suggested a hedge fund manager in Germany.

Hedge funds have a huge appetite for distressed assets as they are prone

to take risks which other investors are not ready to assume.

What do you expect to be the primary source

of liquidity for long-term exits from European

distressed debt?

0% 10% 20% 30% 40% 50% 60% 70%

Distressed OTC trading/saleto other distressed players

Public markets

Existing shareholders

Strategic buyer

Refinancing

Distressed OTC trading/saleto other distressed players

Private equity 26% 14% 20%

20% 24% 16%

11% 21% 19%

18% 10% 12%

4% 10% 11%

8% 8% 8%

13% 3% 4%

Primary Source (choice one) Secondary Source (choice two)

Tertiary Source (choice three)



30/64


Distressed debt was the most popular asset class during 2012 with

95% of those surveyed allocating more than 10% of their investment to

this area and 62% allocating over 20%. Equities were the second most

popular option with 47% of respondents allocating 21-30% to this area

and 22% allocating over 30% of their investments to this asset class.

German corporates have breathed a sigh of relief as the

economy has avoided going into recession but may begin

to wonder whether marginal growth is the new norm. This,in turn, could shift attention to the more stable asset

classes (such a residential real estate) whose risk/return

proles appear to be increasingly appealing and apply

some stress to companies in more cyclical sectors who

are expected to see more difcult trading but so far have

avoided restructuring.

Heinrich Kerstien, Rothschild

What proportion of your investments in the

past 12 months have you allocated to

the following:

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

CDS

Discounted par credits

Fallen Angels

New Issuance

Equities

Distressed 5% 32% 41%

23%

1%

47%

7% 29%

27% 32%

32% 12% 5%

24% 19% 7%

4%

2%

30% 11% 2%

19% 3%

16% 5%

40%


Some 31% of respondents think that long-term exits from unlisted equity

will be limited in 2013, giving this option the highest proportion of rst

choice answers and highlighting the challenging nature of the market.

When considering respondents top three choices private equity was the

preferred pick, with about 60% of those surveyed putting this exit route

among their top three options. A strategic buyer was the second pick, with

a total of 57% and a sale to existing shareholders was third with 54%.

Many debt-to-equity swaps have involved private equityowned businesses, with no existing listed platform to

facilitate an easy exit. At some point, when liquidity returns

to the debt and equity primary markets, there should be good

opportunities to realise distressed investments.


What do you expect to be the primary source

of liquidity for long-term exits from your

European distressed investments in unlisted

equity?

0% 10% 20% 30% 40% 50% 60% 70%

Public markets

Exits will be limited innumber in 2013

Existing shareholders

Strategic buyer

Private equity 19% 25% 16%

27% 20% 10%

15% 20% 19%

31% 6% 8%

8% 7% 22%

Primary Source (choice one) Secondary Source (choice two)

Tertiary Source (choice three)



31/6431


Some 42% of those surveyed are actively seeking direct new money

investments in stressed scenarios representing an increase on last years

gure when only 22% of respondents were looking for opportunities to

invest into stressed situations.

Are you actively seeking direct new money

investments in stressed scenarios?

No

Yes

58%

42%

Senior debt, chosen by 69% of those surveyed, is the most popular option

for respondents seeking new investments into stressed companies. This

is similar to last years result, when senior debt was also the top pick chosen

by 67% of respondents. Equity is again the second most popular choice but

has increased its standing with 62% of investors seeking equity investments

in 2013 compared to 46% in 2012. Super senior debt has moved from fourth

position to third with 26% of respondents seeking investment through super

senior debt instruments this year.

Given the risks in the market, any new investor willwant senior ranking, appropriate leverage and extensive

control. The challenge is to marry those benets up with

appropriate returns.

Barry Russell, Partner, Bingham McCutchen LLP

If yes to the preceding question,

in what form?

0% 10% 20% 30% 40% 50% 60% 70% 80%

Subordinated debt

Super senior debt

Equity

Senior debt 69%

62%

26%

17%



32/64


21-30%

16-20%

10-15%

5-9%

59%

31%

8% 2%

More than half (59%) of respondents say that they targeted returns of

10-15% in 2012, while 31% were targeting returns of 16-20%, 8% were

hoping for returns of 5-9% and 2% were aiming for returns of 21-30%.

What percentage return did you target

in 2012?

There is increased appetite for buying out fellow creditors with 41%

of respondents saying that their willingness to commit additional cash

has increased compared to only 22% who said the same in last years

survey. Just under half (48%) of respondents said that their appetite to

buy out other creditors has remained the same while only 11% said that

willingness to add exposure has declined.

Has your appetite for committing fresh cash

to a situation to buy out other creditors

increased, decreased or remained the same?

Remained the same

Increased

Decreased

48%

41%

11%


33/6433


A majority (53%) of respondents say that their targets are the same as the

previous year while 26% target a higher return and 21% report a decrease

in their expectations.

Has this target increased, decreased or

stayed the same?

Remained the same

Increased

Decreased

53%

26%

21%

Over two-thirds (68%) of distressed investors surveyed seek control over

companies via a loan-to-own strategy. This represents a substantial increase

on last year when only 41% of respondents were pursuing this approach.

Do you seek equity control of companies

via a loan-to-own strategy?

Yes

No

68%

32%


34/64


Yes

No

82%

18%

The vast majority (82%) of those surveyed expect to see an increase in

the number of investors looking to convert debt to equity as a means of

gaining control. This represents a sizeable change from last years survey

when only 55% of respondents expected an increase in the number of

investors seeking control through equitisation.

Despite the general resurgence of credit markets it

remains challenging to source new debt nancing for

companies in balance sheet distress or with volatileearnings history. That said, certain businesses will

support levels of new debt nancing sufcient to facilitate

a substantial renancing of the existing debt structure,

with the remainder funded by new equity on satisfactory

return expectations.

Consequently, there is no substitute for a comprehensive

M&A sales process to establish value in a restructuring

situation, in particular given that debt nancing markets

are open, equity investors trade and nancial have

cash to spend, and desktop valuations frequently sit closer

to or above the top of the debt stack in question.

Hamish Mackenzie, Rothschild

Do you expect an increase in the number of

investors intent on acquiring control through

equitations in 2013?

Over half (55%) of those surveyed believe that the acquisition of a blocking

stake is key to the pursuit of a loan-to-own strategy representing a slight

increase on the 47% who saw it as crucial in 2012.

Do you think acquiring a blocking stake will

be the key to loan-to-own strategies in 2013?

Yes

No

55%

45%


35/6435


With 28% of respondents citing it as the most important metric and 57%

putting it among the top three considerations the underlying economic

environment and associated geography/industry performance is the standout

factor to select potential investment opportunities. Financial ratios, last years

top pick, is now in second place with 15% of those surveyed saying it was

the most important factor, and 42% stating that it was among the top three

considerations. The respondents also rate management change, positioned

third, and cash balances/headroom on facilities, positioned fourth, as key

metrics when choosing investments.

Both geography and industry are key for distressed debt investment,

suggested a prop trader in Portugal. Not all sectors are attractive or even

feasible for distressed investments.

In Italy, all eyes will be on the elections. Uncertainty

may affect the appetite of foreign investors and the

overall liquidity of the market, potentially jeopardizing the

chances for the country to get back on a growth path

Alessio De Comite, Rothschild

What are the key metrics you are tracking to

determine potential investment opportunities?

0% 10% 20% 30% 40% 50% 60%

CDS prices

Acquisition history

Profit warnings

Maturity of amortization of debt

Price movement in quotedinstruments (i.e. debt, shares)

Cash balances and availableheadroom on facilities

Management change

Financial ratios

Economic trends andperformances by geography/

industry (including competitors)28% 19% 10%

15% 15% 12%

7% 15% 17%

16% 14% 8%

9% 14% 7%

9% 4% 16%

6% 9% 11%

6% 10%4%

4% 9%5%

11%

Most Important Important Moderately Important

Market uncertainty is currently the most important deterrent to investing

in distressed businesses for those surveyed, with 31% picking it as the top

issue and 61% putting it in their top three choices. Regulatory risk is the

second most important issue picked by 15% of respondents as their top

choice and put in a top three position by 42%. Regulatory risk was also

the biggest mover, climbing up from fth position in last years survey.

Market uncertainty is the biggest concern as it affects all other

dimensions, said a prop trader in Austria. Valuations are very volatile

because of market uncertainty which is also the prime reason for the

change in regulations.

What are the main issues preventing your

investment in distressed businesses?

0% 10% 20% 30% 40% 50% 60% 70%

Pension deficit

Unionisation

Extent of CDS referencing/guarantees

Intercreditor issues/debt documentation

Cash need of the business

Access to funds internally

Timeframe for exit at requirerate of return

Leverage multiple

Legal jurisdiction

Regulatory risk

Market uncertainty 31% 12% 18%

15% 15% 12%

7% 20% 10%

13% 9% 13%

7% 13% 14%

8% 9% 9%

7% 7% 9%

6% 5% 9%

2%5% 4%

5%1%

2%

3% 2%

Percentage of respondents Percentage of respondents

Most Important Important Moderately Important


36/64


37/6437

PR

IVATEEQUITYSURVEY

Greece is the country seen as most likely to leave the Eurozone, with 23%

of those surveyed expecting the country to exit.

Greece is going to miss its targets and is falling behind in the implementation

of structural reforms that are part of the bailout packages that are keeping

its economy aoat. If Greece fails to implement the reforms then its bailout

packages will be stopped leading to a default on its sovereign debt and

ultimately Greece will have to exit the Eurozone, a principal in Spain

commented.

Do you expect any European country to

leave the Eurozone? If Yes, which one(s)?

0% 5% 10% 15% 20% 25%

Germany

Spain

Greece 23%

3%

3%

Close to three quarters (73%) of respondents believe that no country

will leave Eurozone.

Its hard to imagine any European country leaving the Eurozone. Greece

is the most vulnerable because of its mounting debt crises and default

worries. However, the concerns of a Eurozone breakup have eased as

the European central bank has committed to reduce the borrowing cost

of struggling countries like Greece by buying their bonds, suggested a

Partner in France.

Do you expect any European country to

leave the Eurozone?

Yes

No

73%

27%



38/64

PRIVATE EQUITY SURVEY

Only 33% of respondents think that the EU scal compact is a feasible long-

term solution to the Eurozones problems, with concerns over the lack of a

counter-balancing strategy for promoting growth.

The scal compact is surrounded by austerity and spending cuts and I

think austerity is not the right solution to bring the economy back on track,

suggested a partner in France.

The European governments should come together to implement development

measures and remove uncertainty, added a Director in the UK.

Do you think the EU scal compact is a

feasible long-term solution?

No

Yes33%

67%

A slight majority (53%) of respondents believe that the Eurozone sovereign

debt crisis has peaked, although 47% of the private equity investors

surveyed think that there is worse to come.

Unless the debt crisis is over we cannot say that the worst is over,

suggested a Chief Financial Ofcer in Italy.

Has the worst passed in the European

sovereign debt crisis?

No

Yes

53%

47%


39/6439

PR

IVATEEQUITYSURVEY

Some 83% of respondents expect domestic bank funding gaps to be a

trigger for restructuring in the year ahead, up from 37% of respondents in

2012. Sixty-seven percent of respondents pointed to suppressed demand

as a result of austerity measures, up from 23% last year.

Only 33% of respondents cited reduced lending from foreign banks, a big

reversal from 2012 when this was seen as the most likely trigger cited by

67% of respondents.

What will be the cause of the restructuring

resulting from sovereign risk issues?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Foreign banks having to takeheavy write-downs on stressed

sovereign bond holdingsand having to reduce lending

Austerity measures curbingdemand and impacting trading

Domestic banks struggling tofund themselves as a result oftheir governments difficulties,

curbing lending

83%

67%

33%

Only 7% of respondents stated that none of their portfolio companies

underwent a covenant reset, amendment or maturity extension in 2012,

compared to a gure of 36% in last years survey. Some 20% of respondents

had to take these actions in over 25% of their portfolio, compared to a gure

of 10% in 2011. A third of respondents resorted to these measures for 6-15%

of their portfolio while 37% were required to take one of these actions for

16-25% of their portfolio.

What percentage of your portfolio underwent

a covenant reset, covenant amendment or

maturity extension in 2012?

0

1-5%

6-15%

16- 25%

Above 25%

20%

7%

3%

33%

37%



40/64


Fifty percent of respondents say that European restructuring activity will

peak in 2013, with 20% opting for the rst half of the year and 30% opting

for the second half. Around a third of respondents suggest that the top will

not occur until H1 2014, while 10% say that the peak will not occur until

2015.

Restructuring in 2012 has already jumped signicantly, but the challenges

for the coming year are also signicant, a partner in Sweden commented.

The debt crisis is not yet over and companies will still nd it difcult to

access capital either through debt or through private nance.

When do you expect the volume of European

restructurings to hit its next peak or has this

already happened?

H2 2012

H1 2013

H2 2013

H1 2014

H2 2014

2015

20%

11%

3% 3%

33%

30%

Some 32% of private equity respondents say that over 25% of their

portfolio underwent some form of nancial restructuring in 2012,

compared to a gure of just 11% in 2011. Only 11% of respondents said

that 0-5% of their portfolio underwent nancial restructuring in 2012,

while in the 2011 edition of this report 39% said that none of their

portfolio had undergone restructuring.

What percentage of your portfolio underwent

some form of nancial restructuring in 2012?

0-5%

6-5%

16-25%

Above 25%

32%

11%

36%

21%


41/6441

PR

IVATEEQUITYSURVEY

Respondents point to overleveraged structures (30%), failure to renance

(30%) and liquidity shortfalls (27%) as the largest contributing factors to

restructurings. Difculties amending covenants are seen as a less important

factor, cited by 13% of investors.

Not [being] able to renance debt, will be the core reason for

restructuring, suggested a Managing Partner in the Netherlands. Financing

parameters have become tough and many companies will nd it impossible

to meet the conditions of renancing.

Private equity rms have entered into hostile territory by over-leveraging

their investments and thus they will be forced to restructure their portfolios,

suggested a Partner in Sweden.

What do you expect to be the single largest

contributing factor to trigger restructurings

for private equity portfolio companies?

0% 5% 10% 15% 20% 25% 30% 35%

Failure to amend covenants

Liquidity shortfall

Failure to refinance

Over-leveraged 30%

30%

27%

13%

0% 10% 20% 30% 40% 50% 60% 70%

Unworkable business modelin current climate

Low valuations

Lender perception of sponsorsavailable funds/track record

Divergent creditor attitudes

Availability of funds 67%

50%

43%

33%

27%

In 2012 the availability of funds was seen as the main stumbling block to

completing nancial restructurings. This has been repeated in 2013, with

67% of respondents citing it as one of the greatest challenges.

Divergent creditor attitudes (50%) and lender perceptions of sponsors'

available funds/track record (43%) are regarded as the other key obstacles

to completing restructurings.

What are the greatest challenges to

completing nancial restructuring?

Percentage of respondents Percentage of respondents


42/64


0% 10% 20% 30% 40% 50% 60%

Approach lending syndicatesearly in the event of stress

Build a relationshipwith your syndicate

Be flexible

Work on contingency plans

Focus on management/operational issues

Avoid over-aggressive valuationsin a competitive bid process

Avoid maintaining high leverage 33% 17%

17% 13%

20% 10%

13% 13%

7% 13%

20%

7% 10%

The survey results suggest that the number of portfolio companies needing

additional equity in 2013 will be higher than in 2012. Only 20% of

respondents believe that none of their portfolio companies will need additional

equity in 2013 compared to 37% a year ago. Twenty percent of respondents

indicated that between 0% and 10% of their portfolio would need additional

equity compared to 47% in the 2012 survey. Some 37% said that they will

need to stump up extra investment for 11-25% of their portfolio, while 23%

think that 26%-50% of their portfolio will need extra funding.

For what percentage of your portfolio

companies will you have to consider

additional equity injections in 2013?

0%

1-10%

11-25%

26-50%

23%

20%

20%

37%

The key lesson private equity investors took from restructurings completed

in 2012 was to avoid sustained high leverage, according to the survey

respondents. Some 30% of respondents pointed to the need to avoid

aggressive valuations during competitive bidding processes and 30%

also cited the need to focus on management and operational issues.

What lessons has the private equity industry

learned from restructurings completed in

2012?

1st Choice 2nd Choice



43/6443

PR

IVATEEQUITYSURVEY

A clear majority (67%) of survey respondents indicated that they would

be more likely to inject additional equity into their portfolio companies

this year compared to last year. This answer differs from the 2012 survey

when only 47% of investors said they were more likely to stump up new

money than the year before.

Are you more or less likely to consider

injecting additional equity into portfolio

companies this year compared to last year?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Availability of co-investors

Returns already achievedby the fund

Amount of equityinvested to date

Ability to obtain securityand/or priority ranking on

new monies

Management

Dry powder remainingin the fund

Expected return on new monies 38% 24% 21% 11% 3%3%

17% 14% 17% 17% 12% 7% 17%

17% 7% 17% 17% 7% 14% 21%

10% 18% 14% 14% 24% 10% 10%

10% 21% 7% 34% 14% 7% 7%

10% 10% 7% 21% 24% 21%7%

14%7% 24% 34% 21%

More likely to inject additional equity

Less likely to inject additional equity

33%

67%

The expected return on additional investment was the most important

consideration when providing extra funding for 38% of respondents, followed

by dry powder remaining in the fund (17%). The quality of the management

was considered the third most important consideration in last years survey

and maintained this position in 2013, with 17% of respondents making this

the key priority. The ability to obtain security/priority ranking was the second

most important consideration in the 2012 survey but fell to fourth place this

year, chosen by 10% of respondents as the most important factor.

In a restructuring scenario, what are the

main considerations when you review new

investment in portfolio companies?

Most important Second most important Third most important

Fourth most important Fifth most important Sixth most important

Seventh most important



44/64


0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Equity cure rights

Write-down of existing debt

Change of amortisation/maturity profile on existing debt

Renegotiate better covenants

Priority return for new money

Covenant holiday38% 21% 17% 14% 10%

28% 21% 7% 10% 10% 24%

24% 10% 28% 10% 10% 18%

7% 21% 17% 17% 24% 11% 3%

3% 7% 14% 17% 17% 28% 14%

14% 14% 24% 27% 7%14%

A majority (60%) of private equity investors surveyed expect lenders to

be more willing to accept debt write-downs or equitisations in 2013 than

in 2012. This represents an increase on the 55% of respondents who

expected lenders to be more willing to take a haircut in 2012 than in 2011

and the 37% who anticipated greater leniency in 2011 compared to 2010.

Do you expect lenders to be more open to

write-down/equitisation in 2013 versus 2012?

No

Yes

60%

40%

In return for additional investment private equity respondents view a

covenant holiday as the highest priority leniency from lenders (38%)

followed by priority return for new money (28%). The ability to renegotiate

better covenants was cited as the third most important leniency (24%)

while a change in the amortisation/maturity prole on existing debt

dropped from second place in last years survey to fourth place in this

years cited by just 7% of respondents.

What leniencies do you expect from lenders in

return for new money injections?

Highest Priority Second Highest Priority Third Highest Priority

Fourth Highest Priority Fifth Highest Priority Sixth Highest Priority

Seventh Highest Priority



45/6445

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IVATEEQUITYSURVEY

Private equity investors expect the highest returns from common equity,

with 94% of investors targeting returns of 11-25%. Preferred equity

is expected to yield the second highest return, with 84% of investors

targeting returns of 11-25%. Super senior debt is expected to offer the

lowest return, with 41% of respondents targeting a return of 10% or less

from these instruments.

In last years survey investors were more bullish. Private equity professionals

expected to make the highest returns investing in common equity, with 73%

of the respondents targeting returns greater than 20%, and 23% aiming for

returns above 30%.

When allocating new money in a restructuring

scenario, what annual returns (%) do you

expect from investment in the following

instruments?

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Super senior debt (%)

Subordinated PIK loans (%)

Preferred equity (%)

Common equity (%) 3% 94% 3%

13% 84% 3%

38% 62%

41% 59%

Increased

Stayed the same

Decreased

33%

3%

64%

The targeted return on additional cash injections has increased for a majority

(64%) of respondents. This represents an upwards shift in expectations from

last year when only 17% of respondents said that their required return had

increased and the majority (66%) had kept their requirements the same.

Has the return you require on new money

injections increased, decreased or stayed

the same from last year?

0-10% 11-25% 26-50%



46/64


Over half of respondents (57%) think that they will need to restructure at least

one of their portfolio companies in 2013, up from 47% in last years survey.

Do you expect that you may need to restructure

one or more of your own portfolio companies in

the next 12 months?

No

Yes

Increase

Stay the same

Decrease

57%

43%

20%

13%

67%

Around two-thirds of private equity respondents expect the number of amend

& extend transactions to increase in 2013. Only 13% of respondents expect

there to be a reduction while 20% of respondents expect the number to

remain the same.

The volume of debt maturing in 2013 is signicant and in order to avoid

defaults amend and extend is the only solution as companies certainly do

not have the money to pay off debt, commented a Partner in France.

Do you think the amount of Amend

& Extends next year will increase,

decrease or stay the same?


47/6447

PR

IVATEEQUITYSURVEY

Some 43% of respondents said that more than 15% of their portfolio was

underperforming their original business plans, including 13% who revealed

that a least a quarter of their investments were lagging behind their

targets. Thirty-seven percent of private equity investors said that 6-15%

of their port folio was underperforming its original targets; while 20% said

that 0-5% of their portfolio was off-track.

This years results represent an improvement on last year's when 63% of

respondents said that more than 20% of their port folio was underperforming

their acquisition business plans, while a third admitted that more than half of

their investments were lagging behind their targets.

What percentage of your portfolio is

performing below the level of the

acquisition business plan?

0-9%

10-19%

20-29%

More than 30%

0-%

6-15%

16-25%

More than 25%

27%

27%

26%

20%

30%

13%

20%

37%

Twenty six percent of respondents think that less than 10% of their

underperforming portfolio companies will become stressed debt or

restructuring candidates over the next 12 months. Forty-seven percent

of respondents think that 10-29% of their underperforming companies

will progress in this way while 27% believe that more than 30% will

undergo some kind of restructuring or become stressed.

Last years result was less mixed with two-thirds of the respondents

expecting less than 10% of their underperforming portfolio companies to

become stressed or restructuring candidates over the next 12 months. Ten

percent of the respondents expected over half of their investments' lagging

budgets to turn into stressed debt or undergo balance sheet work-outs.

How many of these underperforming

portfolio companies represent potential

stressed debt/restructuring candidates

in the next 12 months?


48/64


Outlook remains bearish among private equity investors. This years

survey tells us that 67% of the professionals surveyed anticipate a tougher

fundraising environment due to the rise in equitisations. In 2012 70% of

respondents expected a tougher fundraising environment indicating that

pessimism remains at a similar level from a year ago.

Do you anticipate a tougher fundraising

environment following the increased number

of debt equitisations in recent years?

No

Yes

67%

33%

Over the past year attitudes toward restructuring portfolio companies have

changed. While last year changing the management was seen by 39% of

respondents as the most important step, this year operational changes are

in the in top spot with 25% of respondents choosing this as the most likely

step and 21% as the second most likely. New equity injections were chosen

by a quarter of respondents as the most likely action.

Although only 8% of respondents now view changing the management

team as the most important step, 46% of respondents in total placed

this method of restructuring among their top two options, indicating that

it remains a key tool for private equity managers looking to get a portfolio

company back on track.

For those companies in your portfolio which

may be restructured, please rank the following

method of restructuring in order of likelihood.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Asset disposals

New management

Equitisation / deleveraging

Covenant reset

New equity injection

Operational changes 25% 21% 12% 18% 12% 12%

25% 8% 33% 17% 4% 13%

21% 25% 13% 21% 12% 8%

17% 17% 25% 12% 29%

8% 38% 21% 4% 17% 12%

4% 4% 17%8% 42% 25%

Most Likely Second Most Likely Third Most Likely

Fourth Most Likely Fifth Most Likely Sixth Most Likely



49/6449

PR

IVATEEQUITYSURVEY

Just over half (53%) of private equity respondents expect an increase

in the number of port folio exits in 2013, down sharply from the 83%

of respondents who anticipated more exits in 2012 compared to 2011.

Do you expect an increase in the number of

private equity portfolio exits in 2013 ahead

of new fundraising plans?

Private equity buyer

Trade buyer

Renancing

IPO

No

Yes

40%

3% 3%

54%

53%47%

Private equity professionals will rely mostly on buyouts from other private

equity houses as a route to exit investments. Some 54% of respondents expect

this route to be most prevalent in 2013, compared to just 18% in 2012.

Forty percent of respondents expect trade buye

European Dd 2013 Final Lr

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