On Monday 17 November 2014, Weil held its inaugural European Distressed Investor Conference at The Dorchester in London. A summary of the key discussion points follows.
- Latest developments in the European banking sector
- How recent changes affect regulatory regimes for banks and development of bank restructuring regimes (e.g. living wills, “CoCo” bonds and stress tests)
The Panel A discussion focused on the latest developments in the European banking sector, including recent changes to the regulation of banks and the development of European bank restructuring regimes. The panel was chaired by Stanley Pignal (Banking Editor for the Economist) and the panellists were Simone Verri (Goldman Sachs), Martin Gudgeon (Blackstone), James Worsnip (AlixPartners) and Tobias Geerling (Weil Gotshal & Manges).
The panel discussed briefly what happened on the recent bank restructurings in Cyprus and Portugal and debated what would happen if a European bank that was “too big to fail” had to be restructured tomorrow. It was agreed that the main driver for any future bank restructuring was more likely to be liquidity issues, rather than solvency concerns, and that a key challenge for governments and regulators would therefore be assuring depositors (not only retail but also corporate and other more sophisticated depositors) that their cash is safe. The panellists thought it was unlikely that we would see the same kind of “shotgun” marriages arranged over a weekend to save a failing financial institution that happened during the early years of the financial crisis (including, for example, the Lloyds/HBOS deal and the various building society mergers in the UK) given the difficulties those combined institutions have experienced since then.
In light of the EU Bank Recovery and Resolution Directive (which comes into force in the UK in January), the panel then considered the risks and opportunities for investors in bank securities including senior debt, capital contingent, or “coco”, bonds and other forms of subordinated bank debt and the need for banks to hold Total Loss Absorbing Capital (TLAC). The consensus amongst the panellists was that the shift of bank insolvency risk from the tax payer to creditors means that investors will need to change the way they analyse the credit risk of bank debt which, amongst other things, should take into account: which forms of bank capital are first loss sharing and then second loss sharing; the basis upon which emergency liquidity can be provided to a bank and how that is treated upon its insolvency; and how banks that are being resolved can be split into good and bad banks and what the litigation risk is if, for example, the split does not respect the waterfall of priorities. The new bail-in powers were also discussed. The impact of the bail-in powers on a bank restructuring, how the powers would be exercised and the impact on creditors, particularly the interaction with the operation of financial market contracts, was considered to be an area requiring further careful consideration. In conclusion, the panel thought that a bank restructuring would still be complex (although bail-in and TLAC should facilitate a restructure). This underpinned the view that the bail-in legislation was not an absolute solution, hence the introduction of ring-fencing legislation on bank activities.
The panel then discussed whether more NPL disposals are expected following the recent AQR results and the general view was that activity in this area had been unexpectedly slow this year but was expected to pick up next year as banks aim to dispose of assets which are too expensive to maintain on their balance sheets to improve their leverage and T1 capital ratios and release capital which can be better deployed elsewhere. It was expected that hedge funds and other shadow banks, which do not have the same cost of capital as institutions funded by depositors, would continue to drive these deals on the buy side, which would also be facilitated by improved liquidity provided by the recovery of the ABS market. It was noted that a relatively small number of specialist distressed investors had been acquiring these portfolios so far although it is expected that more investors will become active in this space as more banks begin to make portfolio disposals.
- Recent developments in restructuring across Europe (e.g. latest deal issues, new money and venue)
Panel B, comprising Winston Ginsberg (TowerBrook Capital Partners (UK) LLP), Rick Morris (Goldman Sachs International), Peter Marshall (Houlihan Lokey) and José María Gil-Robles (Garrigues, Madrid) and chaired by Andrew Wilkinson (Weil, Gotshal and Manges) considered recent developments in restructuring across Europe.
Peter Marshall kicked off the panel with an insight into restructuring trends in Europe over the past 12 months. Whilst sectors such as retail, shipping and Spanish renewable energy have been hit amongst the hardest in 2014, key examples being Vivarte and Phones 4 U, the main theme has been one of variety, with restructurings across a number of sectors. Other key themes discussed included the revival of new money in restructurings (e.g. Telepizza), viewed as comparable to the 2005 days, and the attitude of shareholders in restructuring, contrasting the position taken by sponsors and family shareholders.
The recent Phones 4 U administration sparked debate around the role of bondholders in high yield restructurings. Bondholders are, by their very nature, large in number, difficult to identify and unlikely to be in a position to provide new money. Nevertheless, the ICA mechanics in new bond only and pari structures are giving bondholders a seat at the table, making early stage negotiations on restructurings problematic. The contrast is stark compared to a typical LBO restructuring.
José María Gil-Robles led the discussion on the impact of recent reforms to national insolvency laws in Europe, focussing on Spain which has undergone a wave of recent reforms. The impact of the reforms is still to be seen, however, Andrew Wilkinson noted that without predictability of outcome of litigation and confidence in the local judiciary system, the recent reforms may not be sufficient to dissuade debtors from taking advantage of UK schemes of arrangement and US Chapter 11.
The panel concluded with a discussion on the pros and cons of the three principal forums for a European restructuring: home country, Chapter 11 and a UK scheme of arrangement.