The middle-third saw a sparse, almost empty, pipeline offering relief to advisors working flat out since the summer of 2020 and now able to take extended holidays. Readily available and cheap finance for stressed credits and willingness of investors to see through Covid-affected numbers were the prime reason for a lack of deal-flow, with names such as Douglas and Tullow Oil getting stressed refinancings away, albeit at double-digit yields for the latter. 

The gradual removal of temporary Covid measures in summer failed to unleash a flood of deals, noted one lawyer, with a number of jurisdictions extending support measures. 

When they returned in September, levfin markets were flying, and many advisers fretted about where the next crop of deals would come from. But at least the Chinese property blow-up and German real estate fears on short-seller allegations kept them busy in getting up to speed, sniffing out potential sizable mandates. 

As risk appetite waned slightly and with Q3/Q4 performance affected by input inflation and supply chain issues a few more names such as Boparan and Standard Profil appeared on watchlists. In addition, some stressed refinancings flipped into restructurings, as back-up Plan B options became Plan A – such as Haya Real Estate and Lowen Play. Despite a slight pick-up in activity there were few large deals, with the exception of Nordic Aviation - whose reorganisation plan via Chapter 11 was announced on December 20 —  to carry forward into 2022. 

Legal Beagles

Despite the lowest default rate in years at around 1%, there was still plenty to keep us interested at 9fin from a jurisdictional perspective. 

As the EU minimum standards directive for restructuring hove into view, there were important (and on the whole investor-friendly) changes in France, Germany and to a lesser extent in Italy and in Spain – whose measures were somewhat delayed. (Click on the links for primers/updates).

Changes in the French process came too late for Comexposium lenders, who despite winning their information battle in the English courts failed to stop the company pushing through a 10-year term out against their will. But the new French measures which came into effect on 1 October would say Bon Voyage to this happening again. For a podcast discussion with Weil on the comparisons with the UK click here.

Southern Europe reinforced its reputation for slowness. In Spain, we continue to await state support for Celsa from SEPI, the state fund for strategic industries, and Naviera Armas decided not to wait. In Italy, Moby and Macafferi moved along at a snail’s pace.

It was a disappointing start for the eagerly awaited and much hyped Dutch Scheme however, with no high-profile deals using the procedure. Based on 2021 deal flow, the UK remains the preeminent jurisdiction for implementation of European deals. We’ve yet to see how the changes in France and Germany will play out in practice, and based on current advisor watchlists, we may be waiting for a while. 

Following Brexit, there was widespread concern amongst market participants about the recognition of UK processes in Europe after it lost the benefit of the EU Recast insolvency Regulation. There was no failsafe put in place, with many experts expecting a slew of parallel  processes. Dutch flower business Dummen Orange was widely expected to be the first in February, but 100% lender consent meant this wasn’t necessary. No parallel parkings for now.

Getting UK deals done

2021 was the year that we bedded in the new UK Restructuring Plan, said one lawyer. 

Deepocean provided some clarity on the first application of cross-class cramdown under the new process. Justice Trower provided reasoning on fairness and the relevant alternative.

While Deepocean offered encouragement, Gategroup’s UK Plan caused widespread consternation amongst lawyers when the Swiss company sought a determination from the court that the UK Plan was an insolvency process. It prompted a letter from lawyers Kirkland & Ellis saying it would be “extremely unhelpful for the court to decide..” But Justice Zacaroli sided with the company leading to debate about what would be next for UK processes?

Virgin Active provided the first substantive challenge to the UK plan in late April with a group of landlords challenging the plan, its assumptions and questioning the relevant alternative. Advisors listening in saw some of their colleagues uncomfortably dealing with QCs under cross examination. In a setback for the landlords, Justice Snowden was at times dismissive in his judgment and laid down a marker for future disputes saying “it would be most unfortunate if Part 26A plans were to become the subject of frequent interlocutory disputes.”

Some restructuring professionals were concerned that the ruling could pave the way for more aggressive UK plans to emerge. But subsequent rulings for Amigo - admittedly an English Scheme — and Hurricane Energy showed the limits on how far companies could push. 

Amigo has sought to use an English Scheme to deal with customer compensation claims, by putting a small amount of cash into an SPV and offering 15% of profits over four years. But there were no smiles from Justice Miles,who dismissed the binary option and imminent insolvency presented by the company, urging an alternative burden-sharing restructuring. 

Hurricane Energy in late June was the first UK Restructuring Plan to be rejected at Sanction hearing stage. Similar to Amigo, a binary option was claimed by the North Sea Oil & Gas operator, but Justice Zacaroli said there was a realistic prospect that the company could discharge its obligations to bondholders, and even if he was wrong on the no-worse off test, he would have used his discretion to block the plan. 

Early summer was a busy time for the courts, with a CVA challenge for New Look from its landlords grabbing attention, most notably for its timing as its judgment was expected to land just prior to Virgin Active. Justice Zacaroli ruled against the landlords, but did provide important guidance on how the process sits between schemes and plans and the evolving views from the judiciary on the conditions to be satisfied on approving. 

The second half of the year has been much quieter, with just the Caffe Nero CVA challenge and the cross-examination of EG Group’s Moshin Issa and questions on corporate governance to keep us entertained. As expected the challenge was rejected. 

Creditor on Creditor violence might be common in the US, but it appeared for the first time in Europe with Intralot. The 2021 SUNs used their temporal seniority to grab an advantage from the 2024 SUNs gaining security over the valuable US business and better economics in the restructuring outlined in February, and which completed in August, despite a late legal challenge from the 2024s. For more detail – see here

Slim pickings for vultures

Distressed funds which had stepped in to provide emergency liquidity lines in late 2020 for companies such as Cineworld at mid-teens margins, found fewer candidates in 2021, with issuers able to source funds below 10% during the first quarter, as competition amongst providers hotted up. 

Many switched to providing private placement taps for 2020 deals such as Stonegate and Aston Martin to provide further runway as lockdowns lasted longer than expected. They were also keen participants in stressed refinancings such as Tullow Oil, Ideal Standard and Boparan. 

There were some limited opportunities at the top of the capital structure, such as Takko, but most funds switched to smaller illiquid SME trades and began to act more like private lenders, often putting in place preference shares and subordinated credit lines as support.  

“There was a cluster of names with smaller capital structures, we acted for a few funds looking to provide new money,” said a restructuring advisor. “They wanted new investors in businesses which were tapped out [from their existing lenders and sponsors],” they said. 

With stressed names often trading sub 6% yield, and few deals trading below 90, it was often tough to find the right entry point and get the size distressed funds needed. Funds with wider mandates looked further afield and outside levfin for their opportunities. The most active sectors were beyond their areas of expertise, however, such as aviation finance and leasing. 

NMC Healthcare in the Middle East was one of the few names which funds could play in size, with up to $6bn of debt up for grabs. The US offered more attractive opportunities with many deals (mostly notably Hertz) trading strongly as they emerged from restructuring. A number of global funds also piled into Chinese property sector bonds after Evergrande’s collapse, and into other Asian HY bonds which are trading substantively cheaper than European names. 

What does 2022 have in store? What will drive activity, and what could surprise us?

Carrying forward into the New Year there are just a handful of live restructurings – such as Lowen Play, Nordic Aviation, Amigo, Nostrum Oil & Gas, Moby, and Haya Real Estate. 

In addition, there’s a number of borrowers with upcoming maturities in the next 18 months that might struggle to refinance, most notably Raffinerie Heide, Matalan, Olympic Entertainment, Corestate, Moto Hospitality and Takko. Even if they do get deals away, their interest costs are likely to rise, with stressed credits likely to get away nearer to 8% rather than the 6% seen last summer. 

With the pandemic effects longer lasting than originally expected, a number of 2020 restructuring deals predicated on a snapback in activity in 18-24 months could return, said a second advisor. In the past few weeks, we have seen further drip feeding of debt and equity for Travelex, Virgin Atlantic, Pure Gym and Virgin Active. Those reliant on December revenues could suffer badly too — 9fin will look closely at the effects from the recent one-month Dutch lockdown and potential restrictions on UK hospitality between Xmas and the New Year.

While agency forecasts for 2022 defaults remain low, the benign conditions which have supported corporate credit are a changin’. Inflation and supply chain difficulties are no longer seen as transitory, and while pricing power appears strong for many companies, it may not last, and for some borrowers such as Kloeckner Pentaplast the lag effect can be several quarters. Others, such as Boparan and Standard Profil are less able to pass on costs and will struggle to avoid restructuring processes in 2022. 

“We are looking at the effects of rising energy costs and big industry users, such as construction and chemicals,” said a second financial advisor. A lot of deals will not hit their assumed recovery curves, especially travel, and transport. “We could also see the number of frauds increasing as management teams try to cover up their tracks.”

Most advisors consulted by 9fin in recent weeks are not expecting a big pick-up in restructuring activity for 2022.

Huge liquidity buffers built up during the pandemic, readily available finance for riskier credits, and rising valuation multiples are boosting issuers and keeping the business doctors away, at least for now. 

Given that PE sponsors have a lot of dry powder, many should support their existing deals if they underperform. But for some investments where the existing sponsor has already made several multiples on their initial outlay, they might walk away, especially if the numbers may not stack up – as was the case with Cofima and Ardian in Lowen Play. 

Debt advisory teams, however, will be busier in looking at capital structures, seeking to take out expensive debt raised in 2020, and remove tranches with more restrictive docs. Carnival showed the way in 2021, with a number of debt refinancings. Several companies such as AMC which should be in restructuring by now were bailed out by the meme investment community, and are expected to use this window to continue to reduce their debt burdens.  

Despite the lack of dealflow in the short-term, advisors are more encouraged by the medium-term pipeline, citing stretched metrics for 2021 vintage deals. “A lot of deals are getting done with significant add-backs and assumptions and are really at 10-12x leverage, these could easily flip into restructuring,” said the second advisor. Many have limited cash-flow for debt service at issue — and are at risk from rising interest rates, they added. 

Of 2021’s HY issuance crop, quite a few single-B names are already trading into the low 90s, such as Ideal Standard and Iceland. Incredibly loose docs, however, mean that sponsors have a lot more flexibility to keep creditors at bay, and even leak value away from them, in some cases when their asset protections are needed the most. 

It is worth remembering that 2021’s most controversial use of docs, Intralot, was based on conservative 2013 vintage language. 

Conversations are already going on with borrowers and their sponsors about aggressive use of docs but concerns about damaging relationships with investors and directors’ duties (NB these vary from jurisdiction to jurisdiction) are stopping sponsors from pushing the button, said a legal advisor. But creditors shouldn’t get too complacent, as per the docs innovations themselves. “It only takes a couple of instances for their use to become the norm,” they added. 

In 2022, directors’ duties under UK restructuring plans are likely to come under the spotlight, said the second advisor. A lot of lessons have been learned from Virgin Active and other cases, and it could be the year where successful valuation challenges and alternative plans are considered, they said. Directors will have to show evidence that alternative proposals have been looked at prior to filing, said a second legal source, who added that the courts are not best placed to evaluate this. If creditors can put together fully-funded alternatives, there is a decent chance of a successful challenge to UK Plans, they added. 

For distressed investors, it remains hard to find value and liquidity in European names 

Many stressed names remain stubbornly above 90. Despite a recent cheapening up in HY spreads – the ICE BoA Euro High Yield Index spread ended November at a high for the year of 371 bps (340 bps currently) having reached a low of 285 bps on 17 September - there is little value to be had. To illustrate, in October real yields for single-B European HY bonds turned negative, with BB hitting an incredible -200 bps, after turning negative in May.

As risk-free rates start to rise, and central bank support is finally removed, yields and spreads could normalise rapidly in 2022. Deutsche in its HY strategy for 2022 report said that 2021 was a ‘perfect calm’ and saw one of the lowest volatility years on record. But this is unlikely to last and “spreads will sell-off at some point in H1 when markets reappraise how far behind the curve the Fed is.” They go on to say that they could see HY spreads widen by as much as 120-160bps before seeing spreads recovering most of the widening later in the year. 

High Yield funds are starting to see outflows, and this could affect the supply/demand balance, at a time where a number of significant LBOs are to hit the market in the first quarter of 2022. These will be canaries in the coal mine, said the first advisor, explaining that similarly to 2007/08 there is potential for hung deals which could burst the levfin bubble. 

From a credit perspective, while debt prices show corporate debt in rude health, the prognosis on underlying health of companies might not be so rosy. 

Weil Gotshal, in its inaugural European Distressed Index Report says: “The contribution to distress from pressures on liquidity – defined as a company’s ability to pay off its current debt obligations – has not been higher since the Global Financial Crisis (GFC) in 2008-09. This issue has become particularly problematic for corporates with a market cap of less than €5bn, which are showing above-average levels of distress for the first time in over a year.”     

With European energy prices surging again in December to fresh YTD highs and supply chain problems remaining elevated, some advisors are getting ready for a rise in cases. Initial success in passing through raw material costs may not last, with many companies such as Ontex initiating further rounds of price rises in the fourth quarter. 

Renewed lockdowns are likely to place further pressure on hospitality and the travel sectors. There is also concern that the pandemic might create structural issues for some industries for whom 2019 levels of activity may never return. Even for those which can match 2019 figures,  after additional debt piled on during the pandemic, many are over-levered, and will be unable to grow into their capital structures, cautioned the first advisor. 

Pub companies, gyms, cinemas, and airport operators are cited by advisors as areas of concern. While Heathrow and Gatwick have set up escrow accounts for their latest HY issuances to avoid early defaults, these deals will struggle to get refinanced, suggested the first advisor. 

Recently volatility in the commodity sector could also result in distress for some commodity traders, noted a third advisor. At time of writing this was confirmed by a recent Bloomberg article which revealed that Noble Group is lining up a second restructuring. 

Emerging Markets is likely to be less active in 2022, with traditional areas of activity for geography-agnostic advisors, Russia and Ukraine, remaining quiet, said the third advisor. 

The recent collapse in the Turkish Lira has got some interested in trips to Istanbul, but some caution they have been here before, with the previous collapse in the Lira in 2018 resulting in few mandates. Many expect activity to be closer to home and away from levfin, with SMEs and mid-caps in the UK and Germany an area where advisory teams are busiest. 

While some of the initial concerns over Adler raised in a Viceroy short-seller report have abated, advisors continue to actively track the German Real Estate sector, with Aggregate, Signa and Corestate topping their watchlists. The interrelated nature of the market, concerns about whether transactions are at arm's-length, which may have artificially boosted valuations, and the use of aggressive accounting policies are cited. Even if these firms avoid flipping into restructuring in 2022, their ability to tap HY for cheap finance has probably gone for good. 

9fin has focused on this sector in recent weeks, producing bite-sized reports for Adler and Aggregate, as well as a series of deep-dives and QuickTakes. 

During 2021 we have expanded our analyst and editorial team and ramped up our coverage  of distressed/restructuring situations. The Friday Workout has proved popular.

We have big plans for 2022, some we can share in the first quarter. In the meantime, we wish you happy holidays, which we hope are free from distress and will return in the New Year.