IMN’s Distressed Investing Forum 2024 wrapped up in London on Thursday, 29 February. Held deep within Allen & Overy’s conference bunker, panelists opined on the state of the European distress markets and non-performing loans on chairs upholstered A&O’s orange livery, while 9fin reporters thirstily guzzled the A2O water generously provided by our host.

Before we get into the nitty-gritty of the discussions of the day, honourable mention for best lunch item goes to the duck bao buns — a novel addition to the lunch spread, well executed, and devoured adoringly by 9fin.

Jurisditch-em

European pre-insolvency processes had something of a maturation in 2023, as we covered in our 2023 legal review. We now have cases-in-point for processes that were a bit of a mystery in France, Germany, Spain and the Netherlands — with certain exceptions.

“We completed and executed a restructuring in Italy… what’s most incredible is that the court process wasn’t the hardest part,” said a speaker on a panel. “It’s improving there — it still takes far too long, but constant evolution is occurring.”

“If we look at the UK, which has been the best jurisdiction [for certainty of process], Adler and the battle of cross-class cramdown in Part 26A restructurings had led to some uncertainty,” they added.

“I would be worried by someone who says they’re not worried about jurisdiction,” a second speaker said.

Moderator one turned to ask a third speaker whether they’d had more inbound on covenants linked to seat of arbitration.

“Once you get into litigation, all bets are off,” they said explaining that, at the point of litigation, certain “cultural differences” start to pay an outsized role in the process.

The moderator steered the conversation towards the culture of European restructurings, the increasingly contentious nature of restructuring processes continent-wide, and whether sponsors and lenders were too tightly intertwined.

“Creditor on creditor violence is a product of competition in the market… where there is competition and where pricing is tight,” speaker one said.

They added that the 20 restructurings they’d worked on in the last two years had been “pretty collaborative” but that creditor on creditor violence was distressed investing’s rock and roll — “huge in America” and coming to Europe.

“I remember the first distressed [situation] I did in the Netherlands 10 years ago, [an advisor told me:] ‘once you go back to London, I have to see these people for the rest of my life’,” the second speaker said.

There was a “cultural element” to European restructurings, they said. Unless the capital structure was large enough, the incentives to fray relationships with other market participants were simply “not sufficient”.

Touching on a final point, the moderator noted that the “the heat is being turned up on whitelists,” and their role in creating illiquid distressed situations, noting that GenesisCare’s restructuring last year exemplified this problem.

“The whitelist question is high on the list [of terms to loosen],”a third speaker said. But they noted that while one might expect the rate environment to tighten documentation on financings, lenders still had very little sway in negotiations, and documentation remained loose.

Unchecked, “whitelists will kill the syndicated loan market,” the first speaker said. Noting that a basic principle of the market was that if “you don’t don’t like it, you can sell it”.

Wave, goodbye

That we’re just six months from the next big wave of defaults has become a common refrain (read: prayer) of the distressed community for some time.

First, it was going to be the disruption bought about by pandemic-era lockdowns, and then it was going to be interest rate rises. A few bad eggs crack, but the LevFin markets are hot enough for most issuers to refinance and the wave recedes for several years.

“Two months ago, everyone thought rate cuts would be fast approaching — which drove a big spate of repricing and refinancings that pushed out potential problems by another two years,” a fourth speaker said.

A spate of A&Es at the end of last year had created a more “benign” credit environment and whitelists had made loan-to-own a more difficult strategy to execute, a moderator on another panel noted.

There were also structural changes to the market, as less funds opted for the pure-play loan to own strategies and found lenders more resistant to trade out at prices they see as “temporarily distressed”, the fourth speaker said. The decline of bank club deals also made it harder for funds to acquire substantial stakes in distressed situations.

“I don’t know of any funds that call themselves distressed funds,” said a fifth speaker. “Every fund I worked with expanded the strategies they pursue in the last decade… Europe is not a super liquid market — event driven investing is hard when there are no events.”

“Borrowers have had their way [with covenants]… they are likely to have flexibility [in distressed situations],” speaker six said.

McDermott — the case law not written

Texas-based energy services firm, McDermott was another hot topic of conversation, although there was dismay that the much-hyped contentious restructured ended with a settlement, leaving questions of forum shopping and the fairness of the distribution of the restructuring surplus largely untouched.

“McDermott is a really interesting one… always been the case that foreign companies do schemes in England,” speaker five said noting that in a post-EU directive world, every jurisdiction having their own procedure was “new”.

“WHOA (the Dutch scheme) is looking like the pre-eminent continent process… what’s interesting is that we’re now doing comparative analysis of different jurisdictions. The UK has no absolute priority rule which [puts it in a league of its own] as WHOA and Chapter 11 both have one,” they added.

The Court of Appeal’s decision in Adler should serve as a lesson to avoid “hail Mary” processes to fix a bad balance sheet, the speaker five said. The solution, in their mind, was to avoid leaving “key people” behind in restructurings lest they cause headaches further down the line.