For the doctors of debt, downturns are boom times
With more and more companies in distress, Mark Leftly reports on the accountants and investment bankers whose books are overflowing
Sunday 14 September 2008
As Italian unions fought hard to salvage jobs at Alitalia on Friday, potentially wrecking any hopes of a takeover that would secure the airline's future, there was one little-noticed appointment. NM Rothschild, the London-based investment bank, was named as an adviser to Augusto Fantozzi, the man overseeing the bankruptcy of Alitalia.
This was yet another example of one of the few growing markets in the era of the credit crunch: debt restructuring and advisory work. These guys do well whenever there is a downturn – previous boom times include the 1989-90 recession and the bursting of the telecoms bubble at the turn of the millennium.
There is a subtle difference between the advisory service and a restructuring. The former helps businesses that are unable, for example, to make interest payments, by negotiating with creditors to relax their terms. Part of their brief here is to ensure that covenants are not broken. A covenant essentially means meeting the business plan – so debt must not go above a percentage of a company's market capitalisation, which is difficult in a time of plummeting shares. The covenants are put in place by creditors to provide guarantees on their lending.
A restructuring is more fundamental. This means tearing up the balance sheet: failing businesses can be sold or wound up; there could be a change of control.
The same names keep cropping up among those advising on restructuring the big debt piles of $1bn-plus, and they can be divided into two groups: investment banks, such as Rothschild and Close Brothers, and the big four accountancy firms. The latter generally do more detailed analysis of figures and can provide administration services should the business fail.
The former focus more on straight advice. "Our job is to save businesses, so we don't provide administrators," says one banker.
In all, there are nine groups that seem to dominate the market and provide independent advice – that is, they do not seek to take a stake in the company they are helping.
The following names are among the kings of the $1bn-plus brigade.
Joe Swanson- Houlihan Lokey, co-head of European restructuring
Mr Swanson, a New Yorker, is restructuring €7bn (£5.6bn) of debt for Martinsa-Fadesa, a Spanish property group that is in administration. Houlihan Lokey is also one of several restructuring teams advising on Four Seasons, the hugely indebted UK healthcare chain.
And Mr Swanson, 41, predicts that even bigger assignments could follow, as the massive leveraged buyouts of 2006-07 will need debt restructuring as companies miss interest payments because of cash-flow problems.
"There's no question that the effects of the credit crunch are being felt," he says. "We have 20-plus live deals at the moment and the size [of debt] we are working on has gone up. Many companies will be struggling [with their debt] in 2009-10."
Mr Swanson has built up the practice with 41-year-old co-head Peter Marshall, a Brit, since Houlihan Lokey and Close Brothers severed their restructuring joint venture in 2002. The team now has 35 people working Europe-wide.
Matthew Prest - Close Brothers, head of restructuring
Mr Prest cuts quite the dapper figure in a Sixties-style suit, his smoothness contrasting with the cheekier demeanour of Daniel Morland, the head of debt advisory work at Close. This double act is working on an impressive range of projects, including Bank of America and Mizhuo on their £270m loan to BC Partners, which funded the private equity group's purchase of estate agent Foxtons last year.
Mr Morland, 41, says that although the number of projects they are working on, about 30, is similar to two years ago the balance between different kinds of problems has changed. Whereas in 2006 the emphasis was on simple debt tweaks such as equity injections, today more projects are focused on revamping the balance sheet.
Mr Prest, 36, hints that there could be even more dramatic restructurings in the offing: "So far, banks have been unwilling to bite the bullet and don't want to take writedowns, so there is minor restructuring in many cases."
Andrew Merrett - NM Rothschild, co-head European restructuring
Mr Merrett, 36, worked for Mr Prest at Close before grabbing his chance at Rothschild 18 months ago. It has been a good move; business is booming.
"There has been a significant uplift in our workload this year," he says. "In 2007 we did about a dozen deals; so far in 2008 we're running at more than double that number." Including the work of co-head Sophie Javary in France, senior restructuring banker Richard Millward and head of debt advisory Tom Smyth, Rothschild has completed four $1bn-plus deals this year and is working on 10 more.
The property sector has been a particularly fertile area, with work including: the £800m debt repayment of McCarthy & Stone, the retirement homes business co-owned by media baron Richard Desmond and Scottish philanthropist Sir Tom Hunter; the mandate for Foxtons' owners, pitting Mr Merrett against his erstwhile colleagues at Close; and the successful renegotiation of a covenant waiver for housebuilder Barratt Developments.
Martin Gudgeon - Blackstone, head of restructuring
Another Close graduate – he was one of the main figures there in 2000-02 – Mr Gudgeon moved to Blackstone from Rothschild last year. This created the vacancy that Mr Merrett filled.
Most famously, Mr Gudgeon, 41, landed the mandate to save the most infamous casualty of the credit crunch, Northern Rock.
Blackstone is today working on three restructurings of heavily debt-funded buyouts from 2007, and two major property deals. The latter include the banks that lent €500m to Level One, a German property fund. This could prove to be one of the year's most complicated reorganisations as the company has nearly 200 subsidiaries.
Mr Gudgeon warns that debt problems are likely to spread to those groups that both manufacture their own products and rely on people's disposable income for sales. "Companies with consumer exposure plus raw materials issues will find themselves squeezed at both ends. Can you recalibrate that [type of] company?"
Richard Stables - Lazard, Co-global and European head of restructuring
An 18-year veteran of Lazard, Mr Stables, 44, has worked on some of the biggest debt reorganisations in recent years, winning 'The Banker' magazine's 'restructuring house of the year' award in 2003 for leading Marconi's £4bn debt-for-equity swap.
His team is believed to be working for the Sanahujas on the restructuring of €4bn debt the family used to buy Metrovacesa, the Spanish property giant. In all, Lazard currently has around 50 bankers working on restructuring deals.
Mr Stables believes that debt advisory and restructuring should be seen as very different skills, with the latter suited to the mergers and acquisitions background that he possesses: "Restructuring is more akin to a mergers and acquisitions deal as you often have issues of change of control, business strategy and disposals to consider, as well as the rebuilding of the whole balance sheet."
Lazard's UK debt advisory team is headed by Michael Grayer, who joined from GE Commercial Finance this year.
Tony Lomas - Pricewaterhouse Coopers, chairman of business restructuring
Mr Lomas has chaired the practice for three years and has worked in the debt field since the mid-1980s, so the 51-year-old should know what he's talking about when he says: "We are in the early phases of these large, large, complex restructurings. This will go on into the coming year."
The current malaise, Mr Lomas says, is similar to that in the early part of this decade, when there were dire problems in the energy and telecommunications industries.
He adds that there was an "upturn" in restructurings worth hundreds of millions of euros last November, and that the figures is now in the billions.
The accountancy giant is currently working on eight restructurings of £1bn-plus, compared to "just a couple last year", says Mr Lomas. No one industry stands out as being in particular difficulty, bar the property sector, he adds.
It is understood that PricewaterhouseCoopers is another party involved in the restructuring of the Four Seasons healthcare group.
Alan Hudson - Ernst & Young (E&Y), partner in the restructuring practice
Although Mr Hudson does not have a grand title, he is a member of the four-strong leadership group running the accountancy firm's UK restructuring team.
And what a huge team it is: 300, its headcount having grown by 40 per cent over the past year. There are also 24 partners and the practice works across Europe. It is a little unfair to compare this figure to the likes of Rothschild and Close as E&Y also has an administrations group and people advising on working capital for high-growth businesses. However, with an ambition to double revenue to around £100m in two to three years, Mr Hudson is certainly in charge of a powerful restructuring team.
He cites "big-ticket retail" as one of his practice's growth areas; E&Y has reportedly been hired to help bail out furniture groups Land of Leather and ScS Upholstery. Mr Hudson also cites health care and housebuilding as big markets for the practice.
The 42-year-old has been at E&Y for 23 years, joining six months after leaving school.
Philip Davidson - KPMG, head of restructuring advisory
Mr Davidson, 44, joined KPMG's corporate recovery team in 1989, just before recession hit. "I had two weeks of kicking my heels and then I had five years where I didn't even get home at weekends."
So far, the credit crunch has not produced quite the same workload, but KPMG is working on five $1bn-plus restructurings compared to only one 14 months ago.
One client is believed to be the creditor to Taylor Wimpey, the troubled housebuilder, though Mr Davidson declines to confirm the appointment.
However, he does say that most of KPMG's work is on the creditor rather than the debtor company side.
And it is in this area, he argues, that restructuring becomes problematic. "Ten years ago it might get complicated because there were a number of banks lending from both overseas and the UK.
Now you've got different types of creditors, like CDOs [collateralised debt obligations], US pension fund-type investors and banks, all with different investment restrictions."
Nick Dargan - Deloitte, head of reorganisation services
The accountancy firm was straight into the restructuring market as the credit crunch bit last year, advising on so-called structured investment vehicles, including Golden Key, which held $1.4bn (£800m) of assets, and Cheyne Finance, a $7bn fund.
Mr Dargan, 48, says that when the financial services failures spread to the wider economy, opportunities arose in the property sector. Next up, he adds, are sectors that rely on "discretionary spend", pointing to Friday's collapse of XL, the UK tour operator that left 90,000 British holidaymakers stranded overseas.
"Higher energy prices mean airlines and tour operators will be hit," says Mr Dargan. "People won't be buying cars, taking holidays and perhaps not having meals in restaurants."
He says that Deloitte's restructuring team has grown by about 25 per cent to 250 over the past 12 months, with another 50 appointments expected soon.
He has worked at Deloitte for 26 years, for 20 of which he has been involved in debt restructuring.
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