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 In light of some highly publicised debt restructurings and rights issues, Katherine Steiner-Dicks speaks to Albert Stein, managing director of debt advisory business, MPC Longberry. Albert gives us his take on how debt restructuring has changed since the last recession. He also talks about successful cram downs; the need for consistent talent in the restructuring sector; how private equity firms are mistiming their covenant resets with banks; and how doing several restructurings versus just one solid one can cost a company millions.
Given the pressure banks are under themselves, are many private equity firms and their portfolio companies holding out on debt restructuring? How realistic of an option is this?
For many portfolio companies, not restructuring is not a realistic option. Many private equity firms are coming to debt restructuring late in the game. This is perhaps because the covenant holidays that they negotiated in the past are now exacerbating the problem. Some firms are under the impression that they do not need help. But going to the banks to change warrants or covenant resets is all about timing and market knowledge.
When should a company go to their bank to discuss covenant resets or warrants?
A company should only go to a bank to discuss changes when they really need to. But it also depends on how much the board of directors can stomach running close to the line with creditors. If directors can’t stomach being in breach, then they are likely to want to change covenants.
We’ve known of companies that have called up their banks informing them that they think they may have difficulties meeting their covenants in advance. And in these cases, the banks were all too happy to increase cash margins and fees, even when there were no valid signs that the company was actually going to be in breach.
But what I will say is that you want to avoid going too early… or too late.
When private equity firms or their portfolio companies come to you, what are their major concerns in the current climate?
It depends on whether the company is already underwater or if there is a liquidity need. If the value breaks within the debt structure then private equity firms need to know if banks will be able to feed in more capital. If not, there may be an opportunity for a sponsor-led cramdown.
A couple of years ago, a few private equity firms were successful in cramming down creditors for a number of reasons. First, there was a burning platform and the sponsors were able to convince the creditors nobody else had the time to do diligence before the company would file and value would be destroyed. Second, the banks were completely unable, for various reasons, to come up with the required liquidity themselves. Third, it wasn’t clear that the banks could get a better recovery under their own stewardship, they might not have had management or it was clear they would not have been able to co-exist as owners.
That’s passed now. Liquidity panics are being met more level headedly by the accountants doing the IBR, and the creditors usually have sufficient time to put together a counterproposal. It’s not always easy to get a counterparty accepted by a sufficient number of lenders, in which case the sponsor will have a second bite at the apple.
So, we’ve seen the tide turn from the successful cramdowns like 20/20 to the ones that were decidedly less successful, like IMO Car Wash. Somewhere in the middle we’ll find Sanitec and the developing situation at Monier.
But in all situations, the PE firm has to realise that unless they are willing to follow their investment with fresh money, it’s not likely that they’ll be a player in the restructuring.
Given the current recession is a unique one to those of the past, how well equipped are most FDs in negotiating more flexible repayment terms? And those representing international syndicates?
If it’s a simple deal involving a company and four to five club banks then a FD can generally come to a conclusion to defer instalments, if that’s all the liquidity needs require. If the banks want to demonstrate a value break within the debt and/or the creditors want control of the company, it becomes a lot more complicated. Even experienced FDs are finding this recession a little more unusual, since the banks themselves are constrained in fresh lending in distressed situations.
When it involves complex restructurings which include various tranches of security interests in different jurisdictions then the negotiations will become a full-time job. This could go on for a few months to even a year. But if the process is not done well the first time it will bite the FD right back.
Many private equity firms will go to Rothschild and Lazard because they have spent centuries building up their name. But the industry, in general, needs a more consistent level of restructuring professionals; not re-sprayed M&A or Lev Fin or Debt Capital Market bankers with little track record for restructuring complex deals.
Our restructuring experts have done this type of work all their lives. And while we can pitch certain industries, companies have come to learn that sector expertise is less important than understanding debt and restructuring. Plus, there should be sector expertise in the company already.
On the creditor side there are just a few banks, mostly money centre UK banks that have deep experienced workout teams. As much as companies abhor paying steering company fees and/or creditor side advisory fees, it’s often good value to ensure you have someone on the other side of the table who can sensibly represent their side and get consensus.
Should a company prepare itself before it discusses resets?
Yes, it needs to have clarity and realism about their business plan and prospects. Denial will make things worse later on, unless the market miraculously recovers . . . and I don’t see that happening in today’s economic environment. They should pick up the phone and talk with a restructuring advisor about their current debt structure and their creditors, since all are equally important when developing an overall plan.
It’s not always critical that they hire an accounting firm to undertake an IBR; if the company can get the confidence of their creditors that their business plan is reasonable they can save a tidy 7 figure sum.
How well are banks siding with your line of thinking when it comes to discussing covenant resets?
Some banks are more flexible than others. Some see it as an opportunity to re-price loans they shouldn’t have given out at those rates in the first place, and some see it as an opportunity to deliver a long term fix which preserves value for their institutions.
The problem is that there are a number of side agendas today. Some banks are privately saying to us that they’d rather not cut deeply today, since they can’t afford to take a hit in today’s environment. (As a cynical aside, I wonder whether it’s the relationship manager whose bonus pool can’t afford the hit.) And there are some CLOs and CDOs who can’t afford to take big write downs and assume equity positions because of their by-laws.
How can companies avoid paying more cash margins or fees to banks when they are in financial or commercial difficulty?
I don’t want to sound like Nancy Reagan here, but quite often the answer is ‘Just Say No’. However, there are a few qualifiers here. First, it depends also on how well of a relationship you need to maintain with your bank and the level of fees they plan to charge. Second, it depends on whether you can live with a covenant breach and/or a qualified opinion. Third, it also matters as to the nature of the industry. There are a few industries where the frictional costs of a non-consensual restructuring are huge on the side of the borrower. For example, in the shipping industry it would be a catastrophe if liquidity issues caused ships to be arrested in overseas ports with difficult jurisdictions.
But by and large, it is a discussion between commercial parties and it must involve some sort of compromise. We acted for Mecom, whose CEO, David Montgomery, recently said in a Daily Telegraph article that "Once banks understood they weren't going to solve their problems by mugging corporate Britain, then we were able to go back to a more even relationship." Had the banks not agreed to reasonable terms then there would have not been a rights issue.
Given this is what we do all the time; we know what private companies are paying for covenant resets and faults. We are in the business of tracking the market. We will have a good idea whether or not a bank will accept terms based on the loss of value in managing that company themselves going forward.
What are the cost benefits of debt restructurings?
Debt restructurings are all about value preservation. There is no real point to doing a restructuring that winds up overleveraging the company on exit. If it has to be restructured again within a few months then this wasn’t done right in the first place. The debt advisory industry is not one that should depend on repeat business.
 Albert Stein, Managing Director
D: +44 (0)20 7529 7803
M: +44 (0)79 8442 8000
W: www.mpcpartners.com
MPC Longberry is part of MPC Partners, a UK-based investment and restructuring advisory firm. Established in 1994, the partners have completed over 200 assignments across all industry sectors and on a global scale. Albert and his team specialise in complex financial restructurings involving multiple creditor groups. The firm’s partners have been involved in large-scale restructuring for more than 20 years and provide a range of debtor side and creditor side advisory services including debtor advisory, creditor advisory and representation, agency services and syndicate leadership and portfolio review.
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