The panel, moderated by Marco Goetz, Senior Director, Alix Partners, was composed of subject matter thought leaders Donatus Albrecht, Chief Investment Officer, Aurelius; Dr. Uwe Goetker, partner at McDermott Will & Emery; Jan Erik Gross, UniCredit; Dr. Max Mayer- Eming Managing Director, Macquarie Capital and Dr. Dennis Schulze, CFO, HC Starck. Given the diversity of the speakers’ backgrounds, each panellist brought unique insights on the most current developments regarding the German and European distressed M&A market.
The panel opened with a discussion about which regions and industries provide the most distressed M&A opportunities, noting fashion, retail and automotive as the key industries for distressed investment opportunities. The panellists agreed that due to poor management and/ or special situations, (e.g., a sudden lack of demand or insolvent customers) all sectors provide their own unique distressed/turnaround investment opportunities.
The panel then moved to a general discussion of the distressed market environment, noting that due to the low base rates and alternative sources of financing (e.g., specialized debt funds), the market is currently flooded with “cheap money” at low interest rates and without critical covenants. Due to these conditions, strategic investors have become competitors to professional turnaround investors, as the strategists are able to offer relatively high prices for distressed targets. Because of this environment, many underperforming companies can also survive for an elongated period. As a result, the number of targets for turnaround investors is currently artificially low. As the headwinds for the economy currently gather some strengths, the panel predicts this situation will soon change.
The experts then turned their discussion to the most recent draft of the European directive “on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures” and its potential consequences for the restructuring market. The draft EU directive aims for a harmonization of preventive restructuring frame- works across Europe in order to prevent insolvencies and ensure the viability of debtors. The draft directive is expected to be adopted by May 2019, with a maximum period of two years for implementation by the European member states. The preventive restructuring frameworks will provide for a stay of individual enforcement of up to four months, extendable for to up to 12 months and which—due to the European rules—could force banks to treat a loan that is stayed for more than 90 days as a non-performing loan, requiring an equity backing. In addition, the draft directive provides that (i) creditors can be divided into classes with sufficient commonality of interests and (ii) creditors can be compromised by a qualified majority vote. It was the panellists’ common view that such restructuring plans could result in higher financing costs for businesses in the future, if the results prove to be debtor friendly.
In addition, the panel discussed the debtors’ position in restructuring situations and agreed that appropriate stakeholder and expectation management, as well as transparency and sound information, are keys for success. However, if possible, asset sales and carve outs as part of a restructuring should avoid fire sale scenarios in order to avoid negative impacts on potential prices.
The panellists concluded with a prediction that 2019 would be an exciting year that will bring additional, interesting distressed investment opportunities as many anticipate the economy may begin to slow down in the coming years.
Dr. Uwe Goetker,
McDermott Will & Emery