Cool Heads Can Help Companies Ride the Restructuring Wave

State interventions helped many companies impacted by the coronavirus pandemic to defy gravity during 2020, and markets are preparing for a wave of debt restructuring as reality bites this year. Boris Betremieux, Head of Loan Successor Agency Europe at Alter Domus, believes loan agents can play a key role in helping borrowers and lenders take a constructive, long-term approach.

“Whatever it takes” was the phrase used by former European Central Bank president Mario Draghi to describe his approach to the Eurozone crisis back in 2012. Eight years later, the same mindset from central banks and governments across the globe helped keep the business world artificially afloat during the Covid-19 pandemic.

In the first two months of the pandemic alone, the global total rescue package – a combination of subsidies and state aid – amounted to more than $10 trillion dollars. But such state largesse cannot last forever. With support schemes expected to wind down by the second quarter of 2021, debt markets are bracing for a surge in corporate defaults and insolvency proceedings, and a wave of debt restructuring.

Choppy waters ahead

“We will see an unprecedented ‘dual-track’ recession/M&A situation play out,” says Boris Betremieux. “Some sectors, such as transport, tourism, entertainment and hospitality, remain deeply affected, while others, such as financial services and law, have emerged not only unscathed but well placed.” As a result, the business of restructuring troubled companies is now gearing up, in parallel with acquisition financings.

According to Moody’s, corporate defaults are already rising. November’s trailing 12-month global speculative-grade default rate ticked up to 6.7% (from 6.5% at the end of October), more than double the pre-pandemic default rate of 3.3%. Markets are preparing themselves for more to come.

“You would hate to refer to the pandemic as an opportunity, but it has clearly going to have an impact, particularly across Europe, that will create broader opportunities for private participants. Law firms are building out restructuring teams to meet the anticipated demand for their services. At the same time, hedge funds and private debt funds are overburdened with capital to deploy, and limited partners are applying more pressure for them to put this capital to use. We’re anticipating a busy few months.”

The increasing need for successor agents

Defaulting on debt service payments or loan covenants could also mean the resignation or removal of the agent, leading to the borrower choosing a successor agent to take up the administrative functions of their credit facility. But there are other reasons why companies will be calling on the services of a successor agent. As Betremieux explains: “In many cases, the exiting agent will resign to avoid a conflict of interest arising from the capital structure of the business. But we are also likely to see a number of traditional agents choosing to step away on a purely reputational basis. Many will want to maintain a positive relationship with the debtor and avoid being seen as enforcing or imposing strict new security requirements during a restructure.”

The role of the successor agent

Once the successor agent steps into the shoes of the exited agent, the hard work of restructuring really begins. According to Betremieux, “A successor agent needs to hit the ground running and swiftly become well-versed with the dynamics of the capital structure. Every restructuring is bespoke with its own set of motivations, strategies, pressure points, and critical path and timing. As the picture starts to emerge, the successor agent needs to be flexible, innovative, and take a practical approach to help smooth transactions at every stage.”

Companies should be wary of restructuring pitfalls

As distressed businesses take stock of their situation, senior management must ensure any restructuring is sustainable, and affords them the opportunity to recover. According to Betremieux, distressed companies should resist taking decisions that only worsen their vulnerability or see them relinquishing control. Borrowers should be particularly mindful of ‘loan-to-own’ strategies, where private debt funds will look to buy up discounted debt with the aim of taking ownership, or breaking up the debt to sell on at a profit.

“Extreme measures are rarely the best way to proceed. Companies need to look beyond the short term and focus on what will restore and maintain confidence in the long-term future of the business. The best way to achieve this is to work with lending partners who show a genuine willingness to help and are prepared to restore capital lines and fund future expansion.”

The value of developing lasting relationships

With credit facilities expected to refinance within five to six years, and with consequential opportunities for further mandates at this stage, the relationship between company, lenders and agent should be built to last.

Betremieux explains: “Parties need to know that they can safely offload the administrative burden on us and concentrate on the core of their activities, which for lenders is to deploy capital, and for companies to run their business. Alter Domus can efficiently step in and offer a solid technological platform that enables delivery of swift, clear and timely communication with all stakeholders involved in order to monitor and keep things on track through each step of the restructuring. Companies want to work with an agent that is proactive, responsive, solution-driven, sharp and adaptable. Trust is earned by working closely and constructively with the client. There are no short-cuts.”

Reasons for optimism
Ensuring all parties remain on-board during a restructuring can sometimes be a delicate balancing exercise. But Betremieux believes most parties enter the process with a constructive mindset. “Any restructuring is a difficult experience to go through, and that is true for the company of course but also for the existing creditors who would obviously prefer their investments to remain healthy. They have a clear interest in helping companies to restructure their debt in viable and sustainable ways that set them on a path to return to growth. Coordinating committees, steering committees, and companies work extremely hard to find solutions that are acceptable to all involved, and the work will be well worth it if it leads to a healthy business with a viable future.”

This article was originally published in Sensus Magazine.

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