In this era of government bail-outs and economic disarray, after 18 months of massive uncertainty due to the global pandemic, which represents one of the most challenging human crises ever, INSOL has gathered a panel of restructuring and asset management experts from around the world to discuss trends in distressed asset investment. Despite the very low rates of defaults, the panelists asserted that investment opportunities remain possible. The disparities between the growth forecasts outlined by each panel member, depending on their home countries, are particularly interesting.
Some of the key insights were the following:
- A « slow burn » on the distressed markets has only been noted since the primary lenders and corporate borrowers managed to overcome the liquidity crisis. This is due to unprecedented support from both central banks and governments through guaranteed loans and other COVID-19 emergency relief measures;
- Consequently, instead of having double digit default rates like in 2008, these factors have allowed default rates to peak at 5% only during the pandemic and to decrease now at 2 or 3 %;
- However, as the “whatever it takes” approach adopted by most of the governments and central banks will not last long: opportunities in the distressed markets shall take place within the next 12 to 18 month period according to the panel;
- From a macro level perspective, governments will be compelled to unwind stimulus support measures. However, from a micro-level perspective, governments will face political challenges to withdraw support from certain companies, especially around election periods;
- COVID-19 has exacerbated structural challenges for companies, therefore as soon as government relief is phased out, companies that have borrowed significantly above their sustainable debt levels may run out of options;
- Companies have borrowed more and are coming out of this situation with more debt (e.g. government loans, rent arrears, unpaid taxes). In relation to financial debt, borrowers should have more time to deleverage, especially because of covenant lite arrangements and more flexibility. Nevertheless, some companies may face liquidity issues for other reasons, for example due to an increase in working capital requirements, inflation etc.;
- Another important question is should investors act sooner than the occurrence of a distress catalyst? Doing so could create value for more holders (e.g. regarding zombie companies). The answer depends on the categories of holders and their investment objectives. Some lenders who bought in the secondary market may choose to equitize their claims and gain control of the company instead of agreeing on amend and extend arrangements. However, this is not always an option for par lenders;
- Another consequence of the crisis is a buildup of NPLs sitting in banks. In general, distressed investors are experiencing difficulties with banks disposing of their NPLs. Without a push from regulators, the natural position of banks is to hold NPLs. For example, in Saudi Arabia, banks (which are controlled by sovereigns) are reluctant to trade NPLs for a discounted price without a profit sharing mechanisms;
- On the question of whether a strong national debt/restructuring law makes any difference on banks’ decisions regarding NPLs, the panel replied that insolvency regimes are very different from one region to another. Some national insolvency laws are very structured and inflexible, while others are less so. Nevertheless, the discussions between the panelists showed that it is crucial to operate each system, whether flexible or not, in an optimal way; On the topic of the opportunities that will take place during the next twelve months, the panel have different views. European panelists think that there will be fewer distressed asset investment opportunities in Europe, whereas South African expert Shaun Collyer and Ahmad Alanani from UAE are expecting more opportunities within their respective regions. For a view on the deal landscape in Asia Pacific, read Baker McKenzie’s recent report covering key sectors hit hard by the pandemic, including automotive, aviation and luxury fashion.
In conclusion, distressed investments require skills and human resources to be successful. The market is complex, depending significantly on local rules and market conditions. Only time will tell if we will see the predicted increase in activity. We look forward to discussing at the next INSOL conference!
- Ahmad Alanani : Chief Executive Officer & Founding Partner at Sancta Capital based in United Arab Emirates.
- Salil Shah : Director, Financial Restructuring & Special situation banking at Houlihan Lokey in London.
- Galia Velimukhametova : Senior Investment Manager at Pictet Asset Management in London.
- Shaun Collyer : Director of Africa Special Opportunities Capital in South Africa.
- Andrew Wilkinson : Senior European Restructuring partner and Co-Head of the London Restructuring practice at Weil Gotshal & Manges LLP in London.