1.  Glen, you’ve recently joined Deloitte from AlixPartners as part of the corporate turnaround team, can you explain your role and Deloitte’s market positioning?

Our market position is that we are building a Corporate Turnaround team in the U.K. focused on helping companies and their stakeholders through complex transformation and restructuring processes. We are providing a wide range of turnaround and restructuring services, covering every stage of a turnaround process, but specifically excluding taking on UK insolvency appointments. Where it is appropriate to use an insolvency tool to implement a restructuring, we will partner with other firms.

My role specifically is to develop and grow our company side advisory business and to lead company-side engagements with clients, working with management and boards of underperforming companies.

2.  How would you differentiate Deloitte’s new turnaround team from the likes of Teneo and Interpath (the former restructuring units of Deloitte and KPMG)?

I believe there are several differences. First of all we are part of a full-service global firm and so we can draw upon a broad range of capabilities across geographies, industries and technical services such as tax, pensions and valuation. Secondly, we are not taking any insolvency appointments in the U.K. and often we will be working hard to explore other consensual turnaround options which can be implemented without the need for an insolvency. Thirdly, our Corporate Turnaround team sits within a wider Performance Improvement team in Deloitte which provides both debt advisory and value creation services. This structure is designed in order that we work together seamlessly and can provide clients with a unique integrated offering.

3.  Are there any particular sectors your team are targeting in light of the ongoing market downturn, and how is your team positioned to take advantage?

We’re expecting an element of workflow across all sectors but there are a few obvious areas where we’re anticipating more work, such as aviation, retail and consumer, hospitality & leisure, automotive and industrials. The drivers to this workflow will differ by sector, but much of it will relate to low consumer demand, inflation, supply chain disruptions and the increasing cost of servicing debt structures that have become unsustainable as companies have needed to take on unprecedented levels of debt over the past few years.

The way that we’re positioned to take advantage is to leverage our debt advisory team to make sure that all capital structure options are investigated as early as possible, and ideally before companies become distressed.

4.  Many companies with 2023 maturities may struggle to refinance in the current market. Do you think this will cause a spike in soft restructurings or amend-and-extend deals?

The tougher refi market will inevitably result in more restructurings across the board, including both softer amend-and-extend deals plus also many harder restructurings.

In our view, and in the context of current debt levels and higher interest rates, as the volume of transactions increases it will be important  to ensure that the type of restructuring is appropriate to the situation, and provides the underlying company with a stable platform from which to thrive going forward.

For example, if a company just needs a bit of time and breathing space to grow back into its capital structure, then perhaps an amend and extend, or a softer deal is more appropriate. However, in cases where there has been a more permanent decline in the performance of the business then clearly there is a need for a harder debt restructuring in order to leave the company with a more stable and sustainable balance sheet. Perhaps a debt to equity swap could be more suitable in these instances.

5.  What are the main triggers for upcoming restructurings in the next 12-18 months? Supply chain, Russia/Ukraine, inflation, inability to refinance, or something else?

Probably all of the above. Also worth noting that many companies have taken on significant debt during the last two-and-a half years and if you combine that with working capital and liquidity pressures, some will find themselves short of cash in an environment where it is much more difficult to raise additional funding. Cash and liquidity will definitely continue to be a huge trigger especially against a market backdrop where there are fewer easy solutions to raise new money.

6. Turning to Robert for this question: private credit is seeing record numbers of private lending deals. How do you expect direct lenders to navigate the upcoming market downturn and distress in their deals?

During the last three or four years, even pre-Covid, direct lenders have focused on quality assets in sectors like TMT, FIG (financial institutions group), healthcare and life sciences; supposedly recession resistant sectors. Today, the concentration of assets in a direct lender's portfolio are overwhelmingly in these spaces. That said, they will always have problem children.

As a rule of thumb, direct lenders tend to be very relationship driven. Often lenders have exposure to more than one asset with a particular private equity house in their portfolio and what we’ve seen in the past is that lenders have been very supportive when an asset belongs to a sponsor they have an existing relationship with. When they are familiar with the sponsor, direct lenders have been happy to allow an equity injection from the sponsor, relax covenants for a period and patiently wait for the business’ performance to get back on track.

During the Covid era, most direct lenders had one or two assets in their portfolio which required some attention like a covenant waiver. So they’ve had a first taste of a market downturn. In terms of distress, what they don’t want to do is own these assets (via a debt for equity swap) or crystallize losses as that could blow up their fund. All it takes is one or two assets to blow up a fund. It’s not like private equity where a sponsor can make a massive upside on one asset which will offset losses from another asset. In response to these issues, some direct lenders have recruited people with restructuring experience to manage these situations.

7.  Alternatively, can private credit funds pick up distressed opportunities and plug liquidity issues for borrowers struggling to access syndicated markets?

There are probably two questions in there. The syndicated markets have been shut since March of this year and there are a number of hung syndicates floating around where private credit has looked to bail out banks left holding those deals on their books. So absolutely private credit has come to the rescue of banks in hung deals.

In terms of distressed opportunities, I would characterize private credit as two pockets of capital. There is the sub 10% pocket of capital which is the classic direct lender bucket. These lenders resemble the old leveraged finance banks of 10-12 years ago and primarily focus on providing leverage finance to private equity.

The second pocket is made up of special situations lenders who target more than 10% money and this group of lenders have raised lots of capital recently in anticipation of a market downturn. They are actively looking for opportunities to deploy that capital and are typically sector agnostic. We expect them to chase anything from retail, tourism, hospitality, manufacturing and really focus on these sectors which are coming under pressure from inflation.

8.  In the UK we are seeing lots of Covid-era government backed loans mature, will this trigger liquidity issues for weaker assets seeking to refinance?

The longest maturity on the CBILS loans was three years and most of these loans were signed off around two years ago meaning the majority have got less than a year until maturity. We’re already seeing these imminent maturities triggering conversations as some companies haven’t generated enough cash to pay off these CBILS loans and will have to refi the facilities with a new structure. Equally we’ve seen opportunities where there was a Covid loan and we have completely refinanced this out with a lender who was happy to roll over the facility for five years as the company’s performance had significantly improved following a brief blip at the beginning of the Covid-19 outbreak.

9.  What impact do you expect ESG to have on upcoming restructurings? Do you expect less-ESG friendly companies to have more difficulty securing rescue financings?

Short answer: no. The reason why is because rescue financings fall into that 10% plus bucket of private credit funds and those lenders are both sector and ESG agnostic. Whereas the classic direct lenders are becoming increasingly ESG focused, these special situations funds are less focused on ESG and more interested in what the underlying asset is capable of. Therefore, I don’t believe ESG will be an issue in the upcoming market downturn, perhaps in the future when we come up to a recession in the next cycle ESG will be more of a factor.