Restructuring Market Outlook September 2013 The Road Ahead Martin Gudgeon Head of European...

Restructuring Market Outlook

September 2013

The Road Ahead

Martin GudgeonHead of European Restructuring

Confidential

C:\Users\riversod\AppData\Local\Temp\17\Presentation2.pptx 3/19/2013 4:52:55 PMC:\Users\riversod\AppData\Local\Temp\17\Presentation2.pptx 3/19/2013 4:52:55 PM

I. Is Stabilisation Complete?

II. Where in the Restructuring Cycle Are We?

III. What Lessons Have We Not Yet Learned?

Appendix

C:\Users\riversod\AppData\Local\Temp\17\Presentation2.pptx 3/19/2013 4:52:55 PM

Blackstone. 3



Where Are We?I. Is Stabilisation Complete?

LiquidityInjection

BankDeleveraging

InputCosts

ConsumerDemand

Financial Markets Real Economy

Stimulus Asset value Sovereign vs. Bank

balance sheets Cost of funding

Non-performing Loans

Lack of credit-worthy borrowers

HY and non-bank refinancings

Commodities reversal Low cost of Funding Recovering

production Inflationary

pressures?

High debt levels and low debt service

Low wage growth Margin and capex

pressure


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-

10%

20%

30%

40%

50%

60%

70%

1987 1990 1993 1996 1999 2002 2005 2008 2011

Overseas BoE APFInsurance and Pension Funds Other

$0.0

$1.0

$2.0

$3.0

$4.0

2006 2007 2008 2009 2010 2011 2012 1H2013

FED ECB BOE

Financial Markets: Liquidity Injection

Unprecedented global stimulus has expanded government balance sheets…


Monetary Authority Total Assets(USD in Trillions)

UK: Holdings of UK Gilts(% of Gilt Holdings)

BoE Acquires 28.6% of All Gilts

Source: Federal Reserve, ECB, and BoE. Source: UK ONS.

Total Assets1H2013 vs. 2006

FED 4.1xECB 2.1xBoE 3.7x

2013


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2%

6%

10%

14%

B BB

Financial Markets: Liquidity Bubble

…And driven down the cost of borrowing to near-record lows.


Trends in Official Policy Rates(%, GDP-weighted average (both scales))

Average Primary Yield by Rating(Euro Issuance Yield in %)

High Yield Risk Spread Falling(BAML HY BB O.A. Spread less 10 US Treasury Yields, in % - %)

Source: S&P LCD. Source: St. Louis Fed, BofA Merrill Lynch.

Source: IIF.

NA

NA

0%

2%

4%

6%

8%

10%

12%

14%

16%

4%

5%

6%

7%

8%

9%

-

1%

2%

3%

4%

5%

2006 2007 2008 2009 2010 2011 2012 2013Mature Economies Emerging Economies (rhs)


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-2%

2%

6%

10%

14%

18%

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

G3 Emerging Economies

Real Economy: Input Costs

Inflation has been muted to date, although high oil prices remain a risk.


Headline Inflation: Mature and EM(in %, year on year)

Real Commodity Prices(Index, 1 Jan 2007 = 100)

Source: IIF. Source: IIF.

60

100

140

180

220

260

2007 2008 2009 2010 2011 2012 2013

Oil Prices Agricultural Prices Metal Prices


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Real Economy: Consumer DemandConsumers have deleveraged since 2007. Falling rates have mitigated the impact to debt service ratios, despite recent low wage growth.


Household Debt - UK(Total Financial Liabilities to Total Household Income and DSR (1))

Wage Growth - UK(% 3m year on year)

Sources: UK ONS and BIS. Source: UK ONS.

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

1.0x

1.1x

1.2x

1.3x

1.4x

1.5x

1.6x

1.7x

1.8x

1988 1992 1996 2000 2004 2008 2012

Financial Liabilities to Income (x) Debt Service Ratio (%)

(4%)

(2%)

-

2%

4%

6%

8%

Whole Economy Public Sector Private Sector

(1) Debt Service Ratio defined by the BIS as total interest and debt repayments, divided by income.


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Bank Deleveraging in Europe: Larger Than The US (Relatively)

As a multiple of GDP, the Euro Area has a 4.1x larger banking system than the United States.


Source: ECB, IMF, RBA, BoJ, US Fed, BOE, RBS Credit Strategy.

Total Bank Assets(As a Multiple of GDP)

7.2x 7.2x

5.0x

4.0x

3.4x 3.4x 3.2x 3.1x 2.7x

2.2x 2.0x 1.9x 1.4x

0.8x

4.7x 4.7x

3.4x

2.7x 2.6x

1.9x 1.9x

3.0x

1.6x 1.5x 1.3x 1.5x 1.0x

0.7x -

1.0x

2.0x

3.0x

4.0x

5.0x

6.0x

7.0x

8.0x

Ireland Cyprus UK France Euro Area Spain GIIPS Germany Italy Canada Australia Japan Slovenia US

2012 2002


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Bank Deleveraging in Europe: Still A Long Way To GoEuropean banks remain significantly overleveraged and have enormous amounts of commercial real estate debt on balance sheet.

Liabilities and Equity: Europe vs. US(2)Overleveraged Banks(1)

European banks have 2-3x the leverage of U.S. banks Europe 200% of GDP vs. US at 100% of GDP.

Source: Barclays Capital research 2012.


Aggregate Loan to Deposit Ratio: 117%

Aggregate Loan to Deposit Ratio: 77%

U.S. U.K. France Germany

14.0x

24.0x

40.0x

45.0x

Source: Goldman Sachs. (1) Barclays Capital research 2012; U.S. includes GSE and banking system assets.(2) Goldman Sachs. Excludes Derivatives. Figures in Trillions.

Top 25 EuropeanBanks Top 25 U.S. Banks

6%12%

18%

12%

41%

67%

9%11%

2%

14%

6%

€21.1

€8.1

Equity Debt Securities Customer Deposits Trading Liabilities Interbank Other


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-

1%

2%

3%

4%

5%

6%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Actual 2009 Forecast Curve2010 Forecast Curve 2011 Forecast Curve2012 Forecast Curve 2013 Forecast Curve

Recent Interest Rate Expectations

Over the last 2 years, investors continued to look for a near-term increase in US and European interest rates, although no significant tightening has occurred yet.


US Rate expectations(FED Overnight Rate and USD OIS Swap Curves in %)

European Rate expectations(Eonia Overnight Rate and Eonia Curves in %)

Source: Bloomberg as of 10 September 2013.

-

1%

2%

3%

4%

5%

6%

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Actual 2009 Forecast Curve2010 Forecast Curve 2011 Forecast Curve2012 Forecast Curve 2013 Forecast Curve





Appendix


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70

80

90

100

110

2Q 2007 2Q 2008 2Q 2009 2Q 2010 2Q 2011 2Q 2012 2Q 2013Euro Area Germany France Italy Spain

8.0%

5.3%

3.3% 3.4%

1.9%

0.7% 0.6%

(0.3%)

8.2%

5.7%

4.0% 3.9%

3.0%

1.5%1.5% 1.1%

(1%)

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

(% Y

oY)

IMF 2013 IMF 2014

While the growth cycle appears to be picking up across the world, Europe remains polarised. China and the U.S. remain key engines of global growth.

Growth CycleII. Where in the Restructuring Cycle Are We?

(1) “DM” = Developed Markets, EM = “Emerging Markets”, “EA” = Euro Area; (2) Estimated impact on real GDP growth, based on 2000–1Q 2013 data.

Source: IMF and Haver Analytics .

GDP Growth Projections(1) 3m Rolling Industrial Production

Indexed to 100 in 2Q2007

DE

EA

FR

IT

ES

CHN EM World LatAm U.S. UK Germany EA

Source: Eurostat.


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Defaults are forecast to be at 3.0% in 2013, above the average 1920-2013 (2.7%) but below recent peaks. To date, the fix has been “Amend & Extend”.

Default CycleII. Where in the Restructuring Cycle Are We?

Cumulative Amendments by TypeDefaults Off Recent PeaksDefaults peaked in 2009 (13.1%) and 2001 (10.0%) Since ’09, Shift Away From Restructurings

Source: Moody’s Default Rate Analysis.

-

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

Default/Restructuring Covenant Amendment Requests

Source: S&P LCD.

-

2%

4%

6%

8%

10%

12%

14%

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013


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0

20

40

60

80

100

120

140

160

180

Having to negotiate payment terms with creditorsUnable to repay debts if small increases in interest ratesStruggling to pay debts when they fall dueJust paying interest on debts

Record low rates and insolvency reform have mitigated the severity of the downturn, at the expense of creating ‘zombie companies’.

The Rise of The ZombiesII. Where in the Restructuring Cycle Are We?

‘Zombie’ companies in the UKLower insolvencies despite higher losses (UK)

(1) Data as of May 2013 and October 2013 from R3 and the Office of National Statistics respectively. We include all companies in the four categories in the corresponding graph, versus the total companies with turnover over £50k.

Source: R3.

Approximately 1 in 8 (1) UK companies with turnover of £50k or more are either negotiating with their creditors or struggling to pay debts when they fall due

in ‘000s

Source: Bank of England, Bureau van Dijk, The Insolvency Service.

-

5%

10%

15%

20%

25%

30%

35%

40%

0

5,000

10,000

15,000

20,000

25,000

30,000

Liquidations (LHS) Loss-making companies (RHS)


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Bond Seasoning

Work-outs typically peak 3 years after issuance, although in today’s world awash with liquidity this is being deferred until c.5.1 years post issuance.

Avg. Age of Distressed CreditYears to get into distress(1)

Defaults peak 3 years after issuance Average age increasing

Source: S&P LCD.


European Bond IssuanceAt All-Time Highs (€ in billions)

-

5

10

15

20

25

30

35

40

45

Secured Unsecured Subordinated

–

10

20

30

40

50

60

70

–

1

2

3

4

5

6

(1) 2004-present.





Appendix


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Pan-European Restructuring Regime Remains Work in ProgressIII. What Lessons Have We Not Yet Learned?

Select Large European Restructurings(2)Select Large US Restructurings(1)

Typically In-Court via Chapter 11 Typically Out of Court – and Unpredictable

Source: S&P LCD, Debtwire, Capital IQ, and Bankruptcydata.com.

Lack of uniform restructuring regime in Europe and primarily out-of-court settlements result in less predictable process outcomes.

Date Total Assets (1) Issuer Process

2009 $860.4bn AIG - Bailout Out of Court2008 $691.1bn Lehman Brothers Holdings In Court2008 $327.9bn Washington Mutual In Court2009 $218.3bn Ford Out of Court2002 $91.9bn Worldcom Group In Court2009 $91.0bn General Motors In Court2009 $80.4bn CIT Group Inc In Court2001 $65.5bn Enron In Court2009 $59.3bn Energy Future Holdings On-Going2010 $46.1bn International Lease Fin. Corp Out of Court2011 $46.0bn PG& E In Court2011 $40.5bn MF Global In Court2009 $39.3bn Chrysler LLC In Court2009 $36.3bn Thornburg Mortgage In Court2012 $32.9bn Conseco Inc. In Court2009 $32.7bn Indymac Bancorp In Court2009 $28.7bn LyondellBasell In Court2010 $28.1bn General Growth Properties Inc In Court2011 $22.4bn American Airlines In Court2001 $22.0bn Pacific Gas & Electric In Court

Date Total Debt Issuer Country Process

2012 €206.0bn Greece Greece Out-of-court2003 €14.0bn Parmalat Italy In-Court2007 £6.2bn Eurotunnel France Out-of-court2008 €5.2bn Martinsa Fadesa Spain In-Court2010 €5.0bn Actavis Iceland Out-of-court

On-going €4.8bn IVG Immobilien Germany In-Court2012 €4.3bn Deutsche Annington Germany Out-of-court2012 €4.3bn Eircom Ireland Out-of-court2013 €3.7bn Mediannuaire France Out-of-court2010 £2.8bn Gala Coral UK Out-of-court2012 £2.6bn SEAT Pagine Gialle Italy Out-of-court2012 £2.5bn Viridian Ireland Out-of-court

On-going £2.5bn Punch UK On-going2011 £2.4bn EMI Group UK Out-of-court

On-going £2.3bn Yell Group (Hibu) UK On-going2013 €2.7bn Ceva Group Netherlands Out-of-court2011 $3.7bn Preem Sweden Out-of-court2012 €2.4bn Endemol Netherlands Out-of-court2010 €1.8bn Hellas Telecom Greece Out-of-court2013 €1.8bn AfriSam South Africa Out-of-court

(1) Total Assets sourced from the latest available information prior to restructuring.

Source: S&P LCD, Debtwire and other publically available news sources.


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UK Scheme of Arrangement Has Become Implementation Route of Choice

UK Scheme of Arrangement is becoming the restructuring tool of choice for companies across Europe.


Selected European RestructuringsUK Scheme of Arrangement Scope Increases

Year Issuer Issuer Country Law of Obligation

2013 Icopal Denmark English Law2013 Orizonia Spain English Law2013 Estro Group Netherlands English Law2013 Biffa United Kingdom English Law2012 Fitness First United Kingdom English Law2009 Vivacom Bulgaria English Law2012 PrimaCom Germany English Law2012 Deutsche Annington Germany English Law2012 Cortefiel Spain English Law

2012 PrimaCom Germany English Law

2012 Seat Pagine Gialle Italy English Law

2012 Eircom Ireland English Law

2011 Metrovacesa Spain English Law

2011 TeleColumbus Germany English Law

2011 Rodenstock Germany English Law2010 La Seda de Barcelona Spain English Law

Source: Debtwire and S&P LCD.


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Issuer Industry # of Filings

Dex Media Publishing 2 (5/09, 3/13)

Hayes Lemmerz Auto Parts 2 (12/01, 5/09)

SuperMedia Publishing 2 (11/05, 3/13)

Pliant Packaging 2 (5/06, 2/09)

Vertis Advertising 3 (7/08, 11/10, 10/12)

Global Aviation Airlines 2 (10/04, 2/12)

Ballys Leisure 2 (7/07, 12/08)

Journal Register Co. Publishing 2 (2/09, 9/12)

Graphics Properties Electronics 2 (5/06, 4/09)

Goody's Family Clothing Apparel Retail 2 (6/08, 1/09)

Imperial Home Decor Furnishings 2 (1/00, 5/07)

Constar International Packaging 2 (12/08, 1/11)

NBTY Personal Care 2 (2/02, 3/08)

Key Plastics Manufacturing 2 (3/00, 12/08)

Insight Health Services Healthcare 2 (1/10, 12/10)

Citation Corporation Manufacturing 2 (9/04, 3/07)

Arrow Air Transportation 3 (9/00, 1/04, 6/10)

Amend & Extend Does Not Improve Value

Amend & Extend, & Extend, & Extend…Selected US “Chapter 22’s”US Businesses Emerge Undercapitalised, And Re-

Restructure A&E Defers But Does Not Improve Value


Source: Thomson Reuters, S&P LCD, Debtwire, and Capital IQ.

Issuer Industry # of Amendments

Biomet Inc Healthcare 2 (8/12, 10/12)

Capio Healthcare 2 (6/12, 5/13)

Codere Gaming 2 (6/10, 6/13)

EliorFood & Beverage 2 (3/12, 3/13)

Elster Electronics 2 (5/9, 12/9)

Formula One Leisure 2 (3/12, 10/12)

ISS Global Services 2 (6/11, 3/13)

Iglo Birds EyeFood & Beverage 2 (8/10, 4/11)

Kabel Deutschland Telecoms 3 (1/10,11/10,1/12)

Monier Construction 2 (4/12,7/13)

Numericable Telecoms 2 (7/11,7/13)

Mediannuaire Directories 2 (4/11,7/12)

ProSieben Media 4 (7/11, 6/12, 5/13, 7/13)

Smurfit Kappa Paper 2 (6/9, 2/12)

Telenet Telecoms 3 (8/9, 7/10, 6/11)

UPC Holdings Telecoms 3 (3/9, 4/10, 2/12)

Van Gensewinkel Waste 2 (3/11, 4/13)

Some companies have a tendency to defer meaningful restructurings, to the detriment of overall value as they enter a cycle of distress.





Appendix


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Blackstone is the pre-eminent adviser to companies, governments and creditors; and has advised in more than 375 restructurings involving over $1.6 trillion of liabilities.

Blackstone: The Leading Global Restructuring AdviserAppendix

Award Winning

Attributed the most prestigious industry awards: IFR Restructuring

Adviser of the Year 2012

2013 Innovation in Investment Banking Award – The Banker and 2012 Deal of the Year – The Banker (Deutsche Annington)

IFR restructuring house or deal winner in 2004, 2005, 2008, 2009 and 2011

Acquisitions Monthly Sovereign Adviser of the Year 2010

Selected Global Restructuring Experience

Adviser to the Company

Airlines2005

$21.8bn

Adviser to the CompanyInsurance

2010$182.3bn

Adviser to the Creditors

Real EstateOn-going€4.8bn

iVG

Adviser to the PCIC SteerCo

Sovereign2012

€206bn


FIG2008

£100bn

Adviser to a Creditor

Infrastructure2006

£6.2bn


Real Estate2012

€4.3bn

Adviser to the CreditorsOil & Gas

2010€2bn


Energy2012

£2.5bn


RetailOn-going, 2010

£2.5bn

Adviser to the CompanyIndustrials

2010CHF2.5bn


Energy2002

$63.4bn


Automotive2009

$35bn


Media2012

$8.6bn

Adviser to the Minsters of Ukraine

Sovereign2009N/A

Adviser to the CompanyOil & Gas

2013$1bn


Infrastructure2013

£385bn


Pharmaceuticals2010N/A


TransportationOn-going£770m


FIG2013

$1.7bn

Adviser to a Creditor

AutomotiveOn-going€600m


Transportation2013

$1.5bn


FIG2012

$7.6bn

Adviser to the CompanyUtilities

On-going$37.8bn

http://www.acquisitions-monthly-awards.com/default.asp


Blackstone. 22



Blackstone has recently advised on some of the most innovative restructurings in every geography, stakeholder constituency, and asset class

Blackstone: A Strong Track Record of InnovationAppendix

Transaction Key InnovationsAdviser to Deutsche Annington on the €4.3bn Amend & Extend of the GRAND CMBS Transaction recognised as the 2012 Deal of the Year by The Banker Magazine Precedent: The largest rescheduling of a European CMBS to date Process: First time that negotiations to refinance a European CMBS have been successfully conducted directly between principals, rather than with a

servicer or special servicer Implementation: First time that an English Scheme of Arrangement procedure has been used to implement a CMBS rescheduling

Adviser to Dana Gas on Middle East’s first and largest (US$1bn) all-private sector Sukuk instrument restructuring Process: First time in the Middle East that direct Company – Bondholder negotiations in a private sector context have been successful on this scale Structuring: Designed a bespoke “cash-settled” convertible instrument to overcome local law prohibition on issue of shares below par; 5 year refinancing

achieved with no equity contribution from shareholders, with only 0.5% increase in blended financing costs; dilution to shareholders substantially similar to that in the previous financing

Adviser to Enterprise plc on its sale to Ferrovial and concurrent debt restructuring Precedent: Active Strategic buyer interest in restructuring process rather than typical tendency to wait until completion of restructuring Process: Competitive tension was created in an otherwise bilateral sale process by pursuing a parallel debt-for-equity transaction Structuring: Value distribution between the sponsor and lenders was pre-agreed in an innovative Umbrella Agreement which aligned sponsor and lender

interests though the complex and extensive negotiations with the buyer Implementation: Innovative solution avoided traditional restructuring implementation routes to ensure the preservation of critical customer contracts

Precedent: In a highly complex financial restructuring, successfully advised Russian strategic buyer who received 100% of the post restructured equity via a US Chapter 11 process. One of the quickest pre-packaged CH. 11 processes ever

Process: Secured lender support of different creditor classes through parallel negotiations involving a private offering outside and a US Chapter 11 plan of reorganization

Implementation: Prepackaged bankruptcy (of 36 days) which received the support of ~99.9% and ~97% of the unsecured and secured debt, respectively

Precedent: Amended, exchanged, or equitized every security at operating and holding companies, requiring certain minimum participation thresholds as high as 95 and 100%

Process: Each step of complicated multi-security exchange offer was conditioned on each other, utilizing the benefits created from addressing other obligations to motivate all shareholders to exchange

Structuring: Used attractive, high-yielding second lien term loan as currency, and equitized overhanging holding company loans, in order to encourage bondholders to extend maturities and settle litigation

Implementation: Achieved >95% participation on all exchanging securities, as subordinated debt traded up from ~30% to near par

Restructuring Market Outlook September 2013 The Road Ahead Martin Gudgeon Head of European...

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