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Martin Gudgeon Head of European Restructuring

Confidential. Restructuring Market Outlook. The Road Ahead. September 2013. Martin Gudgeon Head of European Restructuring. I. Is Stabilisation Complete?. II. Where in the Restructuring Cycle Are We?. III. What Lessons Have We Not Yet Learned?. Appendix. I. Is Stabilisation Complete?.

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Martin Gudgeon Head of European Restructuring

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  1. Confidential Restructuring Market Outlook The Road Ahead September 2013 Martin GudgeonHead of European Restructuring

  2. I. Is Stabilisation Complete? II. Where in the Restructuring Cycle Are We? III. What Lessons Have We Not Yet Learned? Appendix

  3. I. Is Stabilisation Complete? Where Are We? Financial Markets Real Economy LiquidityInjection BankDeleveraging InputCosts ConsumerDemand • Commodities reversal • Low cost of Funding • Recovering production • Inflationary pressures? • High debt levels and low debt service • Low wage growth • Margin and capex pressure • Stimulus • Asset value • Sovereign vs. Bank balance sheets • Cost of funding • Non-performing Loans • Lack of credit-worthy borrowers • HY and non-bank refinancings

  4. I. Is Stabilisation Complete? Financial Markets: Liquidity Injection • Unprecedented global stimulus has expanded government balance sheets… Monetary Authority Total Assets (USD in Trillions) UK: Holdings of UK Gilts (% of Gilt Holdings) BoE Acquires 28.6% of All Gilts 2013 Source: UK ONS. Source: Federal Reserve, ECB, and BoE.

  5. I. Is Stabilisation Complete? Financial Markets: Liquidity Bubble • …And driven down the cost of borrowing to near-record lows. Trends in Official Policy Rates (%, GDP-weighted average (both scales)) High Yield Risk Spread Falling (BAML HY BB O.A. Spread less 10 US Treasury Yields, in % - %) Source: IIF. Average Primary Yield by Rating (Euro Issuance Yield in %) NA NA Source: St. Louis Fed, BofA Merrill Lynch. Source: S&P LCD.

  6. I. Is Stabilisation Complete? Real Economy: Input Costs • Inflation has been muted to date, although high oil prices remain a risk. Headline Inflation: Mature and EM (in %, year on year) Real Commodity Prices (Index, 1 Jan 2007 = 100) Source: IIF. Source: IIF.

  7. I. Is Stabilisation Complete? Real Economy: Consumer Demand • Consumers have deleveraged since 2007. Falling rates have mitigated the impact to debt service ratios, despite recent low wage growth. Household Debt - UK (Total Financial Liabilities to Total Household Income and DSR (1)) Wage Growth - UK (% 3m year on year) Sources: UK ONS and BIS. Source: UK ONS. Debt Service Ratio defined by the BIS as total interest and debt repayments, divided by income.

  8. I. Is Stabilisation Complete? Bank Deleveraging in Europe: Larger Than The US (Relatively) • As a multiple of GDP, the Euro Area has a 4.1x larger banking system than the United States. Total Bank Assets (As a Multiple of GDP) Source: ECB, IMF, RBA, BoJ, US Fed, BOE, RBS Credit Strategy.

  9. I. Is Stabilisation Complete? Bank Deleveraging in Europe: Still A Long Way To Go • European banks remain significantly overleveraged and have enormous amounts of commercial real estate debt on balance sheet. Overleveraged Banks(1) Liabilities and Equity: Europe vs. US(2) European banks have 2-3x the leverage of U.S. banks Europe 200% of GDP vs. US at 100% of GDP. Aggregate Loan to Deposit Ratio: 117% Aggregate Loan to Deposit Ratio: 77% Source: Barclays Capital research 2012. Source: Goldman Sachs. (1) Barclays Capital research 2012; U.S. includes GSE and banking system assets. (2) Goldman Sachs. Excludes Derivatives. Figures in Trillions.

  10. I. Is Stabilisation Complete? Recent Interest Rate Expectations • Over the last 2 years, investors continued to look for a near-term increase in US and European interest rates, although no significant tightening has occurred yet. US Rate expectations (FED Overnight Rate and USD OIS Swap Curves in %) European Rate expectations (Eonia Overnight Rate and Eonia Curves in %) Source: Bloomberg as of 10 September 2013.

  11. I. Is Stabilisation Complete? II. Where in the Restructuring Cycle Are We? III. What Lessons Have We Not Yet Learned? Appendix

  12. II. Where in the Restructuring Cycle Are We? Growth Cycle • While the growth cycle appears to be picking up across the world, Europe remains polarised. China and the U.S. remain key engines of global growth. GDP Growth Projections(1) 3m Rolling Industrial Production Indexed to 100 in 2Q2007 DE EA FR CHN EM World LatAm U.S. UK Germany EA IT ES Source: Eurostat. Source: IMF and Haver Analytics . (1) “DM” = Developed Markets, EM = “Emerging Markets”, “EA” = Euro Area; (2) Estimated impact on real GDP growth, based on 2000–1Q 2013 data.

  13. II. Where in the Restructuring Cycle Are We? Default Cycle • Defaults are forecast to be at 3.0% in 2013, above the average 1920-2013 (2.7%) but below recent peaks. To date, the fix has been “Amend & Extend”. Defaults Off Recent Peaks Cumulative Amendments by Type Defaults peaked in 2009 (13.1%) and 2001 (10.0%) Since ’09, Shift Away From Restructurings Source: S&P LCD. Source: Moody’s Default Rate Analysis.

  14. II. Where in the Restructuring Cycle Are We? The Rise of The Zombies • Record low rates and insolvency reform have mitigated the severity of the downturn, at the expense of creating ‘zombie companies’. Approximately 1 in 8(1) UK companies with turnover of £50k or more are either negotiating with their creditors or struggling to pay debts when they fall due Lower insolvencies despite higher losses (UK) ‘Zombie’ companies in the UK in ‘000s Source: Bank of England, Bureau van Dijk, The Insolvency Service. Source: R3. Data as of May 2013 and October 2013 from R3 and the Office of National Statistics respectively. We include all companies in the four categories in the corresponding graph, versus the total companies with turnover over £50k.

  15. II. Where in the Restructuring Cycle Are We? Bond Seasoning • Work-outs typically peak 3 years after issuance, although in today’s world awash with liquidity this is being deferred until c.5.1 years post issuance. Years to get into distress(1) Avg. Age of Distressed Credit European Bond Issuance Defaults peak 3 years after issuance Average age increasing At All-Time Highs (€ in billions) Source: S&P LCD. 2004-present.

  16. I. Is Stabilisation Complete? II. Where in the Restructuring Cycle Are We? III. What Lessons Have We Not Yet Learned? Appendix

  17. III. What Lessons Have We Not Yet Learned? Pan-European Restructuring Regime Remains Work in Progress • Lack of uniform restructuring regime in Europe and primarily out-of-court settlements result in less predictable process outcomes. Select Large European Restructurings(2) Select Large US Restructurings(1) Typically In-Court via Chapter 11 Typically Out of Court – and Unpredictable Source: S&P LCD, Debtwire and other publically available news sources. Source: S&P LCD, Debtwire, Capital IQ, and Bankruptcydata.com. Total Assets sourced from the latest available information prior to restructuring.

  18. III. What Lessons Have We Not Yet Learned? UK Scheme of Arrangement Has Become Implementation Route of Choice • UK Scheme of Arrangement is becoming the restructuring tool of choice for companies across Europe. Selected European Restructurings UK Scheme of Arrangement Scope Increases Source: Debtwire and S&P LCD.

  19. III. What Lessons Have We Not Yet Learned? Amend & Extend Does Not Improve Value • Some companies have a tendency to defer meaningful restructurings, to the detriment of overall value as they enter a cycle of distress. Selected US “Chapter 22’s” Amend & Extend, & Extend, & Extend… US Businesses Emerge Undercapitalised, And Re-Restructure A&E Defers But Does Not Improve Value Source: Thomson Reuters, S&P LCD, Debtwire, and Capital IQ.

  20. I. Is Stabilisation Complete? II. Where in the Restructuring Cycle Are We? III. What Lessons Have We Not Yet Learned? Appendix

  21. Appendix Blackstone: The Leading Global Restructuring Adviser • Blackstone is the pre-eminent adviser to companies, governments and creditors; and has advised in more than 375 restructurings involving over $1.6 trillion of liabilities. Award Winning Selected Global Restructuring Experience iVG Attributed the most prestigious industry awards: • IFR Restructuring Adviser of the Year 2012 • 2013 Innovation in Investment Banking Award – The Bankerand 2012 Deal of the Year – The Banker (Deutsche Annington) • IFR restructuring house or deal winner in 2004, 2005, 2008, 2009 and 2011 • Acquisitions Monthly Sovereign Adviser of the Year 2010 Adviser to the Company FIG 2012 $7.6bn Adviser to the Creditors Oil & Gas 2010 €2bn Adviser to the Company Real Estate 2012 €4.3bn Adviser to a Creditor Infrastructure 2006 £6.2bn Adviser to the Company Insurance 2010 $182.3bn • Adviser to the PCIC SteerCo Sovereign 2012 €206bn Adviser to the Creditors Real Estate On-going €4.8bn Adviser to the Company Retail On-going, 2010 £2.5bn Adviser to the Company Airlines 2005 $21.8bn Adviser to the Company FIG 2008 £100bn Adviser to the Company Energy 2012 £2.5bn Adviser to the Creditors Transportation 2013 $1.5bn Adviser to the Company Pharmaceuticals 2010 N/A Adviser to the Company Industrials 2010 CHF2.5bn Adviser to a Creditor Automotive On-going €600m Adviser to the Company Automotive 2009 $35bn Adviser to the Creditors Transportation On-going £770m Adviser to the Company FIG 2013 $1.7bn Adviser to the Company Infrastructure 2013 £385bn Adviser to the Company Oil & Gas 2013 $1bn Adviser to the Minsters of Ukraine Sovereign 2009 N/A Adviser to the Creditors Media 2012 $8.6bn Adviser to the Company Energy 2002 $63.4bn Adviser to the Company Utilities On-going $37.8bn

  22. Appendix Blackstone: A Strong Track Record of Innovation • Blackstone has recently advised on some of the most innovative restructurings in every geography, stakeholder constituency, and asset class

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