Interesting factors in the European distressed debt market; or why there is unlikely to be a market for European distressed debt
1. It is estimated of the £6tr European debt £1.2tr is distressed, what about the unknown gap in between?
2. Debt buyers seem to have very little concept of what they are buying the complexity, scale and challenge, in the debt package. The bankers seem to have no idea of the complexity of the reality of the businesses in these packages
3. Debt restructuring is NOT at the root cause of these businesses succeeding; look at the list of UK CVAs most are marginal non viable with the existing structure / business model
4. Debt sellers have inflated view of the value, and are misaligned with buyers so there is a stalemate
5. Bank debts that are being serviced do not have to be provisioned, so there is little imperative
6. Debentures drive the banks control of the UK insolvency and UK turnaround process
7. Predictable insolvency the UK has the benefit of supporting investors the more flexible French / Spanish regime are less certain
8. Bank work outs are taking longer up to 2 years. This delay deteriorates value cannot invest in cap ex- destroys independent manufacturing businesses, who slowly decline
9. The Sub 50m focus on serving bank debt is costly to other creditors who suffer
10. UK Reputational risk limits the appetite to moving debt on, Euro banks seem more sensitive even selling at lower price to a “safer buyer” to save reputational fall out
11. Spain are not lending at all to SMEs, building has fallen from 1.5m flats pa to 0.2m pa leaving properties empty and owned by banks / Casas. Valuations will drop if debts are exchanged, so no property trading. Cash and operational strengthening used to work it’s not working now, the level of difficulty is 10x as foundations are not sound. Although there is a shift to simplify the process, Spanish insolvency laws have been subordinate to labour laws making outcomes unclear
12. France the issue is liquidity not debt burden with 0% growth, weakness of businesses are at the core and their business models need changing. There are separate creditors meetings for senior debt vs. mezzanine finance
13. Countries at danger of exiting Euro make it very difficult to get your money out, or may lose entire investment
Key factors
1. Look at the list of UK CVAs they are weak businesses as a consequence of 1997-2008 good times and global not European challenges. This is a very complex debt package with ridiculous complexity to manage and recover any value from. The TMA only have 6400 members globally a drop in the ocean!
2. A dramatic change to business model is required which requires a dramatic thinking outside box / award winning experience to unravel; in response to the ongoing volatility 2009-12 and beyond
3. Real innovation is required current work out groups made up of traditional types are not a good fit / are taking too long / may never recover the situation!
4. Trading bank debts trades deal / deal are happening; so target companies direct
5. Regional focus is required to support these changes. But the capacity of small teams does not exist, nor do the skills
6. Investment is in the stable European economies, where it is possible to get your money out, and with established insolvency regimes
7. Turnaround is the wrong title as no-one wants one or would admit to one
Icebreaker view the focus on pulling gems out of the debt pile is worthwhile but the endless debate on when the damn will burst is ridiculous, as restructuring the debt is NOT the issue it’s the businesses are often fatally flawed and should be closed. Focus on the positive opportunities to increase value, with respect to the global environment rather than scrambling through the bones.
The fitter businesses in the Far East growing in the toughest markets will ride roughshod over the EU unless the complacency is addressed by bursting the bubble and creating a real business environment with a realistic fiscal and lending structure, vs. the low interest rates and money printing hiding the issue and creating a soft environment further widening the EU / Far East competitive gap