London, August 7, 2007 LAWFUEL – The Legal Newswire – Key participants in the European buyout market are virtually unanimous in their belief that investors are in for a shock in the next wave of leveraged buyout restructurings, according to a survey conducted by White & Case and In-House Lawyer magazine. The survey polled senior figures at leading banks, which were bookrunners for over $60 billion (more than half) of all European leveraged buyout loans in 2006, partners from sponsors that account for $30 billion of invested funds, and insolvency practitioners and turnaround specialists from leading firms in the field.
Ninety-four percent believe that the introduction of so many new financing structures in the market, which are as yet untested in a restructuring scenario, along with the arrival of new market participants, means that investors are going to be in for a surprise in future leveraged buyout restructurings. Moreover, nine out of 10 respondents think that covenant-lite deals, the use of which has developed and seemingly fizzled rapidly in Europe recently, would change the timing and severity of restructurings.
“The growth of high yield, mezzanine and second lien financings in the European market, without historical structural subordination, means there are a lot of structures out there which are untested in various European jurisdictions and which therefore may not behave in line with historical experience. Not only that, but the influx of new players in the market in recent years, in particular hedge funds and other distressed debt investors, will lead to new and different approaches in future restructurings. The next wave is likely to be very different to those at the turn of the last credit cycle,” explained partner Dan Hamilton, head of White & Case’s Financial Restructuring & Insolvency practice in London.
While at the time of the survey, most respondents were confident of the strength of the market, when asked if they thought the current nature of the European leveraged finance market was unsustainable, 59 percent thought that it was, with more than three-quarters (79 percent) of this figure believing the bubble would burst in the medium term.
Interestingly, the research revealed a divergence in opinion between lenders, sponsors and turnaround specialists on the sustainability of the leveraged lending market. Investment bankers were far less circumspect, with only 36 percent believing the market to be unsustainable, but a clear two-thirds majority (67 percent) of sponsors believed this to be the case. Unsurprisingly, turnaround specialists were the most hawkish, with nine out of 10 (91 percent) taking this view.
In descending order, the top three industry sectors voted most likely to experience loan default in the next year were Retail, Heavy Industry and Manufacturing, with the UK, Germany and Italy listed as the top three countries for likely defaults in the same period.
Opinions are divided on whether the European leveraged loan market is better equipped today to deal with potential loan defaults than it was five years ago, with 51 percent of respondents thinking it is and 46 percent thinking it is not. This perhaps reflects the fact that on the one hand, there are more insolvency professionals today than five years ago and also a far more developed secondary debt market, but on the other hand there is a whole range of untested structures which have not necessarily been planned for.
When asked who the most influential players in the next wave of restructurings would be, respondents believed that investment bank distressed debt teams, followed by hedge funds, will be the most influential.
“Restructuring and turnaround professionals are going to be of fundamental importance in navigating the next cycle of restructurings, but the research acknowledges the importance of the players that have the real financial firepower, namely the investment banks and hedge funds,” commented Hamilton. “Hedge funds were something of an unknown quantity in restructuring circles just a few years ago, but are now permanent and familiar fixtures.”
Please visit www.whitecase.com/leveragedfinanceoutlook for a full copy of the survey.
About the Survey Methodology
Senior researchers from In-House Lawyer magazine carried out telephone research in March to May 2007 to poll members of the European leveraged finance and private equity community on their views about the future of the European buyout market. Detailed responses were obtained from 41 individuals consisting of senior figures at leading banks, who were bookrunners for over $60 billion (more than half) of all the European leveraged buyout loans in 2006, partners from sponsors who account for $30 billion of invested funds, and insolvency practitioners and turnaround specialists from leading firms in the field. The subsequent report on the findings was drafted by White & Case in conjunction with In-House Lawyer.
About White & Case
White & Case LLP is a leading global law firm with more than 2,000 lawyers in 35 offices in 23 countries. Our clients value the breadth and depth of our US, English and local law capabilities and rely on us for their complex cross-border commercial and financial transactions and for international arbitration and litigation. Whether in established or emerging markets, the hallmark of White & Case is our complete dedication to the business priorities and legal needs of our clients.