What are the current developments in the German restructuring market?
The current market has been very quiet for the past couple of years, which is mainly due to the large supply of liquidity by the European Central Bank’s corporate sector purchase program. This has been dried out now, and we expect to see an uptick in restructuring activity, in particular in leveraged buyout financings, high yield issuances and also in the Schuldschein market for non-investment grade issuers where there have been exaggerations.
Kirkland has ample experience in advising sponsors, issuers and borrowers in these type of financings, and we therefore believe we are also uniquely positioned to advise stakeholders in the restructuring of this type of financing.
In terms of industry sectors, we see two sectors where we expect restructuring activity to increase. The first one will be sectors affected by disruptive technologies, in particular bricks-and-mortar retailers, where online shops will have a massive impact on the business model; and the other will be automotive, where the switch to e-mobility will also affect the business models.
What is your opinion on the new draft European directive on preventive restructuring?
We are very glad that the directive has finally been passed. It will increase the toolkits for restructuring practitioners all over Europe and support a rescue culture there.
How is it beneficial for companies in distress and their creditors?
It harmonizes the restructuring laws throughout Europe, even though it still leaves a lot of flexibility for member states to transpose it into national law, so we might still see some forum shopping, which we’ve previously had to England, but then now to other European jurisdictions. But it still is a very good starting point for establishing a rescue culture in Europe.
What are some of the challenging issues that can come up in future restructurings?
I would put it down to two factors: stakeholders and complexity. First, we will receive more involvement from governments, be it either in bank restructurings or in restructurings of corporate borrowers, which are relevant for a nation’s gross domestic product, such as Agrokor; or be it corporate borrowers who are a national lender who have a large exposure and therefore are relevant for that nation’s government. And second, we will see more and more sophisticated special situation investors who have experience with these restructuring situations and who will increase the complexity of these negotiations.
In terms of complexity, we will see more complex corporate capital structures. We will see more complex and more aggressive documentation that weakens creditor protection. In particular, where we have covenant light and covenant loose loans; we have larger baskets for additional indebtedness; we have transfer restrictions that make it difficult to change the investor base; and we will see more aggressive tactics deployed by stakeholders, such as litigation or buybacks by sponsors and block building to prevent the acceleration of indebtedness.
The restructuring teams at Kirkland have a strong track record and are therefore uniquely positioned to support complex cross-border restructurings and to help clients achieve successful outcomes in these scenarios.