Confidential
Restructuring Market Outlook
The Road Ahead
September 2013
Martin Gudgeon
Head of European Restructuring
I.
Is Stabilisation Complete?
II.
Where in the Restructuring Cycle Are We?
III. What Lessons Have We Not Yet Learned?
Appendix
Restructuring Market Outlook
I. Is Stabilisation Complete?
Where Are We?
Financial Markets
Liquidity
Injection
Bank
Deleveraging
Real Economy
Input
Costs
Consumer
Demand
 Stimulus
 Non-performing
 Commodities reversal
 High debt levels and
 Asset value
Loans
 Lack of creditworthy borrowers
 HY and non-bank
refinancings
 Low cost of Funding
low debt service
 Low wage growth
 Margin and capex
pressure
 Sovereign vs. Bank
balance sheets
 Cost of funding
 Recovering
production
 Inflationary
pressures?
Blackstone.
2
Restructuring Market Outlook
I. Is Stabilisation Complete?
Financial Markets: Liquidity Injection
Unprecedented global stimulus has expanded government balance sheets…
Monetary Authority Total Assets
UK: Holdings of UK Gilts
(USD in Trillions)
(% of Gilt Holdings)
$4.0
70%
60%
$3.0
50%
40%
$2.0
Total Assets
1H2013 vs. 2006
FED
4.1x
ECB
2.1x
BoE
3.7x
$1.0
30%
20%
BoE Acquires 28.6%
of All Gilts
10%
-
$0.0
2006
2007
2008
FED
Source: Federal Reserve, ECB, and BoE.
2009
2010
ECB
2011
2012 1H2013
1987
BOE
1990
1993
1996
1999
Overseas
Insurance and Pension Funds
2002
2005
2008
2011 2013
BoE APF
Other
Source: UK ONS.
Blackstone.
3
Restructuring Market Outlook
I. Is Stabilisation Complete?
Financial Markets: Liquidity Bubble
…And driven down the cost of borrowing to near-record lows.
Trends in Official Policy Rates
High Yield Risk Spread Falling
(%, GDP-weighted average (both scales))
(BAML HY BB O.A. Spread less 10 US Treasury Yields, in % - %)
5%
9%
4%
8%
3%
7%
2%
6%
1%
5%
-
4%
2006
2007
Source: IIF.
2008
2009
2010
Mature Economies
2011
2012
2013
16%
14%
12%
10%
Emerging Economies (rhs)
8%
Average Primary Yield by Rating
(Euro Issuance Yield in %)
6%
14%
10%
NA
6%
2%
0%
2%
Source: S&P LCD.
4%
NA
B
BB
Source: St. Louis Fed, BofA Merrill Lynch.
Blackstone.
4
Restructuring Market Outlook
I. Is Stabilisation Complete?
Real Economy: Input Costs
Inflation has been muted to date, although high oil prices remain a risk.
Headline Inflation: Mature and EM
Real Commodity Prices
(in %, year on year)
(Index, 1 Jan 2007 = 100)
260
18%
220
14%
180
10%
140
6%
100
G3
Source: IIF.
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
-2%
1997
2%
60
2007
2008
Oil Prices
Emerging Economies
2009
2010
2011
Agricultural Prices
2012
2013
Metal Prices
Source: IIF.
Blackstone.
5
Restructuring Market Outlook
I. Is Stabilisation Complete?
Real Economy: Consumer Demand
Consumers 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))
1.8x
18%
1.7x
16%
Wage Growth - UK
(% 3m year on year)
8%
6%
14%
1.6x
12%
4%
1.5x
10%
1.4x
2%
8%
1.3x
6%
1.2x
-
4%
(2%)
1.1x
2%
1.0x
0%
1988
1992
1996
2000
Financial Liabilities to Income (x)
2004
2008
Whole Economy
Public Sector
Private Sector
Debt Service Ratio (%)
Sources: UK ONS and BIS.
(1)
(4%)
2012
Debt Service Ratio defined by the BIS as total interest and debt repayments, divided by income.
Source: UK ONS.
Blackstone.
6
Restructuring Market Outlook
I. Is Stabilisation Complete?
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.
Total Bank Assets
(As a Multiple of GDP)
8.0x
7.0x
7.2x
7.2x
6.0x
5.0x
4.7x
4.7x
5.0x
4.0x
4.0x
3.4x
3.0x
3.4x
2.7x
2.0x
3.4x
3.2x
3.1x 3.0x
2.6x
1.9x
2.7x
2.2x
1.9x
1.6x
1.0x
2.0x
1.5x
1.9x
1.3x
1.5x 1.4x
1.0x
0.8x 0.7x
Ireland
Cyprus
UK
France
Euro Area
Spain
GIIPS
2012
Germany
Italy
Canada
Australia
Japan
Slovenia
US
2002
Source: ECB, IMF, RBA, BoJ, US Fed, BOE, RBS Credit Strategy.
Blackstone.
7
Restructuring Market Outlook
I. Is Stabilisation Complete?
Bank Deleveraging in Europe: Still A Long Way To Go
European banks remain significantly overleveraged and have enormous
amounts of commercial real estate debt on balance sheet.
Overleveraged Banks(1)
Liabilities and Equity: Europe vs. US(2)
European banks have 2-3x the leverage of U.S. banks
Europe 200% of GDP vs. US at 100% of GDP.
Aggregate Loan to
Deposit Ratio: 117%
45.0x
40.0x
€21.1
14%
11%
9%
24.0x
Aggregate Loan to
Deposit Ratio: 77%
€8.1
41%
14.0x
2% 6%
18%
67%
6%
U.S.
U.K.
France
Germany
Top 25 European
Banks
Equity
Source: Barclays Capital research 2012.
(1) Barclays Capital research 2012; U.S. includes GSE and banking system assets.
(2) Goldman Sachs. Excludes Derivatives. Figures in Trillions.
12%
12%
Debt Securities
Top 25 U.S. Banks
Customer Deposits
Trading Liabilities
Interbank
Other
Source: Goldman Sachs.
Blackstone.
8
Restructuring Market Outlook
I. Is Stabilisation Complete?
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
European Rate expectations
(FED Overnight Rate and USD OIS Swap Curves in %)
Actual
2010 Forecast Curve
2012 Forecast Curve
2009 Forecast Curve
2011 Forecast Curve
2013 Forecast Curve
Actual
2010 Forecast Curve
2012 Forecast Curve
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2019
2018
2017
-
2016
-
2015
1%
2014
1%
2013
2%
2012
2%
2011
3%
2010
3%
2009
4%
2008
4%
2007
5%
2006
5%
2006
(Eonia Overnight Rate and Eonia Curves in %)
6%
6%
2009 Forecast Curve
2011 Forecast Curve
2013 Forecast Curve
Source: Bloomberg as of 10 September 2013.
Blackstone.
9
I.
Is Stabilisation Complete?
II.
Where in the Restructuring Cycle Are We?
III. What Lessons Have We Not Yet Learned?
Appendix
Restructuring Market Outlook
II. Where in the Restructuring Cycle Are We?
Growth Cycle
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.
GDP Growth Projections(1)
3m Rolling Industrial Production
9%
110
8.2%
8.0%
8%
Indexed to 100 in 2Q2007
DE
7%
100
5.7%
6%
5.3%
(% YoY)
5%
EA
4.0%
4%
3.3%
90
3.9%
3.4%
FR
3.0%
3%
2%
1.9%
80
1.5%
1.5%
1%
0.7%
1.1%
0.6%
ES
0%
(0.3%)
CHN
EM
World
LatAm
U.S.
(1%)
IMF 2013
Source: IMF and Haver Analytics .
(1)
IT
IMF 2014
UK
Germany
EA
70
2Q 2007
2Q 2008
Euro Area
2Q 2009
Germany
2Q 2010
2Q 2011
France
2Q 2012
Italy
2Q 2013
Spain
Source: Eurostat.
“DM” = Developed Markets, EM = “Emerging Markets”, “EA” = Euro Area; (2) Estimated impact on real GDP growth, based on 2000–1Q 2013 data.
Blackstone.
11
Restructuring Market Outlook
II. Where in the Restructuring Cycle Are We?
Default Cycle
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”.
Defaults Off Recent Peaks
Cumulative Amendments by Type
Defaults peaked in 2009 (13.1%) and 2001 (10.0%)
Since ’09, Shift Away From Restructurings
14%
100%
90%
12%
80%
10%
70%
60%
8%
50%
6%
40%
30%
4%
20%
2%
10%
Default/Restructuring
Source: Moody’s Default Rate Analysis.
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
4Q11
3Q11
2Q11
1Q11
4Q10
3Q10
2Q10
1Q10
4Q09
3Q09
2Q09
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
1Q09
-
-
Covenant Amendment Requests
Source: S&P LCD.
Blackstone.
12
Restructuring Market Outlook
II. Where in the Restructuring Cycle Are We?
The Rise of The Zombies
Record low rates and insolvency reform have mitigated the severity of the
downturn, at the expense of creating ‘zombie companies’.
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
Lower insolvencies despite higher losses (UK)
‘Zombie’ companies in the UK
30,000
40%
35%
25,000
30%
in ‘000s
180
160
140
120
20,000
25%
100
15,000
20%
80
15%
60
10%
40
10,000
5,000
5%
20
0
0
-
Liquidations (LHS)
Loss-making companies (RHS)
Source: Bank of England, Bureau van Dijk, The Insolvency Service.
(1)
Source: R3.
Having to negotiate payment terms with creditors
Unable to repay debts if small increases in interest rates
Struggling to pay debts when they fall due
Just paying interest on debts
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.
Blackstone.
13
Restructuring Market Outlook
II. Where in the Restructuring Cycle Are We?
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.
Years to get into distress(1)
Avg. Age of Distressed Credit
European Bond Issuance
Defaults peak 3 years after issuance
Average age increasing
At All-Time Highs (€ in billions)
70
6
60
5
45
40
35
50
4
40
30
25
3
20
30
2
15
20
10
1
10
5
–
–
-
Secured
Unsecured
Subordinated
Source: S&P LCD.
(1)
2004-present.
Blackstone.
14
I.
Is Stabilisation Complete?
II.
Where in the Restructuring Cycle Are We?
III. What Lessons Have We Not Yet Learned?
Appendix
Restructuring Market Outlook
III. What Lessons Have We Not Yet Learned?
Pan-European Restructuring Regime Remains Work in Progress
Lack of uniform restructuring regime in Europe and primarily out-of-court
settlements result in less predictable process outcomes.
Select Large European Restructurings(2)
Select Large US Restructurings(1)
Typically In-Court via Chapter 11
Date
2009
2008
2008
2009
2002
2009
2009
2001
2009
2010
2011
2011
2009
2009
2012
2009
2009
2010
2011
2001
Total Assets (1)
$860.4bn
$691.1bn
$327.9bn
$218.3bn
$91.9bn
$91.0bn
$80.4bn
$65.5bn
$59.3bn
$46.1bn
$46.0bn
$40.5bn
$39.3bn
$36.3bn
$32.9bn
$32.7bn
$28.7bn
$28.1bn
$22.4bn
$22.0bn
Issuer
AIG - Bailout
Lehman Brothers Holdings
Washington Mutual
Ford
Worldcom Group
General Motors
CIT Group Inc
Enron
Energy Future Holdings
International Lease Fin. Corp
PG& E
MF Global
Chrysler LLC
Thornburg Mortgage
Conseco Inc.
Indymac Bancorp
LyondellBasell
General Growth Properties Inc
American Airlines
Pacific Gas & Electric
Typically Out of Court – and Unpredictable
Process
Date
Out of Court
In Court
In Court
Out of Court
In Court
In Court
In Court
In Court
On-Going
Out of Court
In Court
In Court
In Court
In Court
In Court
In Court
In Court
In Court
In Court
In Court
2012
2003
2007
2008
2010
On-going
2012
2012
2013
2010
2012
2012
On-going
2011
On-going
2013
2011
2012
2010
2013
Source: S&P LCD, Debtwire, Capital IQ, and Bankruptcydata.com.
(1)
Total Assets sourced from the latest available information prior to restructuring.
Total Debt Issuer
€206.0bn
€14.0bn
£6.2bn
€5.2bn
€5.0bn
€4.8bn
€4.3bn
€4.3bn
€3.7bn
£2.8bn
£2.6bn
£2.5bn
£2.5bn
£2.4bn
£2.3bn
€2.7bn
$3.7bn
€2.4bn
€1.8bn
€1.8bn
Greece
Parmalat
Eurotunnel
Martinsa Fadesa
Actavis
IVG Immobilien
Deutsche Annington
Eircom
Mediannuaire
Gala Coral
SEAT Pagine Gialle
Viridian
Punch
EMI Group
Yell Group (Hibu)
Ceva Group
Preem
Endemol
Hellas Telecom
AfriSam
Country
Greece
Italy
France
Spain
Iceland
Germany
Germany
Ireland
France
UK
Italy
Ireland
UK
UK
UK
Netherlands
Sweden
Netherlands
Greece
South Africa
Process
Out-of-court
In-Court
Out-of-court
In-Court
Out-of-court
In-Court
Out-of-court
Out-of-court
Out-of-court
Out-of-court
Out-of-court
Out-of-court
On-going
Out-of-court
On-going
Out-of-court
Out-of-court
Out-of-court
Out-of-court
Out-of-court
Source: S&P LCD, Debtwire and other publically available news sources.
Blackstone.
16
Restructuring Market Outlook
III. What Lessons Have We Not Yet Learned?
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 Restructurings
UK Scheme of Arrangement Scope Increases
Year
Issuer
Issuer Country
Law of Obligation
2013
2013
2013
Icopal
Orizonia
Estro Group
Denmark
Spain
Netherlands
English Law
English Law
English Law
2013
Biffa
United Kingdom
English Law
2012
2009
2012
2012
2012
Fitness First
Vivacom
PrimaCom
Deutsche Annington
Cortefiel
United Kingdom
Bulgaria
Germany
Germany
Spain
English Law
English Law
English Law
English Law
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
2010
Rodenstock
La Seda de Barcelona
Germany
Spain
English Law
English Law
Source: Debtwire and S&P LCD.
Blackstone.
17
Restructuring Market Outlook
III. What Lessons Have We Not Yet Learned?
Amend & Extend Does Not Improve Value
Some companies have a tendency to defer meaningful restructurings, to
the detriment of overall value as they enter a cycle of distress.
Selected US “Chapter 22’s”
Amend & Extend, & Extend, & Extend…
US Businesses Emerge Undercapitalised, And Re-Restructure
A&E Defers But Does Not Improve Value
Issuer
Industry
# of Filings
Issuer
Industry
# of Amendments
Dex Media
Publishing
2 (5/09, 3/13)
Biomet Inc
Healthcare
2 (8/12, 10/12)
Hayes Lemmerz
Auto Parts
2 (12/01, 5/09)
Capio
Healthcare
2 (6/12, 5/13)
SuperMedia
Publishing
2 (11/05, 3/13)
Codere
Gaming
2 (6/10, 6/13)
Pliant
Packaging
2 (5/06, 2/09)
Elior
Food & Beverage
2 (3/12, 3/13)
Vertis
Advertising
3 (7/08, 11/10, 10/12)
Elster
Electronics
2 (5/9, 12/9)
Global Aviation
Airlines
2 (10/04, 2/12)
Formula One
Leisure
2 (3/12, 10/12)
Ballys
Leisure
2 (7/07, 12/08)
ISS Global
Services
2 (6/11, 3/13)
Journal Register Co.
Publishing
2 (2/09, 9/12)
Iglo Birds Eye
Food & Beverage
2 (8/10, 4/11)
Graphics Properties
Electronics
2 (5/06, 4/09)
Kabel Deutschland
Telecoms
3 (1/10,11/10,1/12)
Goody's Family Clothing
Apparel Retail
2 (6/08, 1/09)
Monier
Construction
2 (4/12,7/13)
Imperial Home Decor
Furnishings
2 (1/00, 5/07)
Numericable
Telecoms
2 (7/11,7/13)
Constar International
Packaging
2 (12/08, 1/11)
Mediannuaire
Directories
2 (4/11,7/12)
NBTY
Personal Care
2 (2/02, 3/08)
ProSieben
Media
4 (7/11, 6/12, 5/13, 7/13)
Key Plastics
Manufacturing
2 (3/00, 12/08)
Smurfit Kappa
Paper
2 (6/9, 2/12)
Insight Health Services
Healthcare
2 (1/10, 12/10)
Telenet
Telecoms
3 (8/9, 7/10, 6/11)
Citation Corporation
Manufacturing
2 (9/04, 3/07)
UPC Holdings
Telecoms
3 (3/9, 4/10, 2/12)
Arrow Air
Transportation
3 (9/00, 1/04, 6/10)
Van Gensewinkel
Waste
2 (3/11, 4/13)
Source: Thomson Reuters, S&P LCD, Debtwire, and Capital IQ.
Blackstone.
18
I.
Is Stabilisation Complete?
II.
Where in the Restructuring Cycle Are We?
III. What Lessons Have We Not Yet Learned?
Appendix
Restructuring Market Outlook
Appendix
Blackstone: The Leading Global Restructuring Adviser
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.
Award Winning
Attributed the most
prestigious industry
awards:
 IFR Restructuring
Adviser of the
Year 2012
Selected Global Restructuring Experience
iVG
Adviser to a
Creditor
Automotive
On-going
€600m
Adviser to the
Company
Utilities
On-going
$37.8bn
Adviser to the
Creditors
Transportation
On-going
£770m
Adviser to the
Creditors
Real Estate
On-going
€4.8bn
Adviser to the
Company
Retail
On-going, 2010
£2.5bn
Adviser to the
Company
FIG
2013
$1.7bn
Adviser to the
Creditors
Transportation
2013
$1.5bn
Adviser to the
Company
Oil & Gas
2013
$1bn
Adviser to the
Company
Infrastructure
2013
£385bn
Adviser to the
Company
Real Estate
2012
€4.3bn
Adviser to the
Creditors
Media
2012
$8.6bn
Adviser to the
Company
Energy
2012
£2.5bn
Adviser to the
PCIC SteerCo
Sovereign
2012
€206bn
Adviser to the
Company
FIG
2012
$7.6bn
Adviser to the
Company
Pharmaceuticals
2010
N/A
Adviser to the
Company
Industrials
2010
CHF2.5bn
Adviser to the
Creditors
Oil & Gas
2010
€2bn
Adviser to the
Company
Insurance
2010
$182.3bn
Adviser to the
Minsters of Ukraine
Sovereign
2009
N/A
Adviser to the
Company
Automotive
2009
$35bn
Adviser to the
Company
FIG
2008
£100bn
Adviser to a
Creditor
Infrastructure
2006
£6.2bn
Adviser to the
Company
Airlines
2005
$21.8bn
Adviser to the
Company
Energy
2002
$63.4bn
 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
Blackstone.
20
Restructuring Market Outlook
Appendix
Blackstone: A Strong Track Record of Innovation
Blackstone has recently advised on some of the most innovative restructurings in
every geography, stakeholder constituency, and asset class
Transaction
Key Innovations
Adviser 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
Blackstone.
21