While fears of another downturn loom, the European financial markets have innovated, evolved and grown.
Following the collapse of Lehman Brothers and the period that followed, the markets have more understanding of the credit risk spectrum. This includes jurisdictional risk, available restructuring options and the complexity involved in any enforcement process.
Further, restructuring is not the unknown prospect it was pre-crisis, as a generation of issuers, bankers and lawyers have all been through years of turmoil—and come out the other side much wiser. There is a larger pool of professionals who understand what it means to consider solutions for a debtor or issuer facing a liquidity or covenant crisis, including what entering into a restructuring process means and the key issues that are likely to arise.
The certainty around relevant restructuring processes—including the English scheme of arrangement—has improved as the body of precedent has grown. High yield debt has also been issued in record volumes in recent years. Now, as the market considers the chance of another downturn, there is an expectation of a wave of high yield bond restructurings, and thought of the solutions that may follow.
Non-traditional finance steps in
However, many companies are not even getting as far as needing restructuring advice, due to another shift within the industry.
There were fewer high yield bond restructurings in 2015 than some commentators had forecasted, due in the main to the available liquidity in the market. Further, non-traditional finance providers, being largely credit funds, have stepped in to offer a different option to issuers where traditional lending institutions have been unable to provide additional funding or refinancing options.
It has become increasingly common for issuers to seek non-traditional financing solutions in the event of financial difficulty, allowing them to amend terms or to action softer restructuring options. Borrowers often do not care what form their finance takes. What is important is how much money can be borrowed, what interest rates are going to be like, what terms are going to be attached, and when a covenant might be breached that puts the borrower in default.
These financings, which avoid a full scale restructuring, form part of a larger move towards a more flexible debt market on both sides of the Atlantic. The low yield environment and strong liquidity have also gone some way to encourage lenders, such as fund managers and large institutional investors, to be a little more lenient—as long as the terms are right—as a default is arguably in no one's interest. However, alternative capital still has a much higher yield expectation—and protection—than traditional high yield debt.
Changing the law on high yield
In 2014, German car park firm APCOA blazed a trail for a new restructuring solution when it became the first company to request lender consent to amend the governing law of its bank debt, in order to create sufficient connection to the UK to use a scheme of arrangement.
Since this decision, several companies with high yield debt and no immediately apparent connection to the UK, including DTEK (a Ukrainian power company), have requested holders agree to change the governing law of their high yield bonds from New York to English law, so that the company can use the flexibility of an English scheme of arrangement. This is partly due to high yield bonds tending to be widely held and any amendment to key economic terms typically requires 90 percent consent. This step may also be a more palatable option for companies who do not believe that a local law process can achieve a solution they are seeking. The English scheme of arrangement therefore forms a more user-friendly option for companies negotiating a solution to the capital structure.