Borrowing and Lending Transactions: The Trends
With the M&A sphere constantly fluctuating, lawyers must remain very mindful of the challenges ahead but remain fully prepared to navigate those challenges and to take advantage of the opportunities and trends ahead.
Aymen Mahmoud does just this, as he explains below the trends he has noticed recently and the impact it has on companies.
Of the recent significant matters that you have advised on, have there been any notable trends that you can tell us about?
Willkie acts across a range of borrowing and lending transactions both on a domestic and cross-border basis. In the last 12 months we have seen borrowers more readily utilizing the direct lending markets to avoid bank-led syndication risk despite any increased price differential. The ability of credit funds to deploy sizeable financing cheques (enough to take down full underwrites required by borrowers) is seeing them increasingly selected to finance large and complex capital structures. The European regulatory framework has also improved to better solve for alternative capital to lend in jurisdictions where those jurisdictions previously presented challenges. For our clients, and the European private equity market, this increased access to liquidity has combined with the speed of execution to allow parties to transact quickly and efficiently and without the risk that their deal will be flexed on terms or economics. At a time of macro eco-political market uncertainty, dispensing with this risk has become increasingly attractive to borrowers.
In previous years, P2P transactions were typically large-cap transactions that relied on the large underwriting capability of the bulge bracket investment banks.
We have also seen an uptick in the number of public-to-private (P2P) financings in which publicly listed companies are acquired by private equity or corporate institutions and re-registered privately. This is partly due to the acquirer’s desire to maximize value from such assets which are harder to do when looking at a secondary or tertiary buy-out. This is a particularly complex process from a financing and M&A standpoint, being subject to significant regulatory overlay. It is imperative to have a strong working relationship between the financing and public M&A teams of all of those involved to navigate the regulatory framework and timing challenges. For private equity firms who raise money in dollars or euro and benefit from a favourable exchange rate against Sterling, the equity markets can be a particularly attractive place to get a good deal, especially at times where political uncertainty has led to depressed Sterling denominated share prices.
It is clear that more and more companies are finding themselves dealing with stressed or distressed situations with a capital structure that is considered difficult to sustain in the long-term.
In previous years, P2P transactions were typically large-cap transactions that relied on the large underwriting capability of the bulge bracket investment banks. Increasingly, however, the liquidity available to the direct lending market has made it possible to use credit funds to complete a P2P financing instead of a more traditional bank. In light of the ‘rule of six’ (which regulates the number of lending institutions that a borrower may engage in discussions with), being able to interact with a single credit fund for all of the lending needs for a particular transaction has proven to be desirable to private equity houses.
Finally, it is clear that more and more companies are finding themselves dealing with stressed or distressed situations with a capital structure that is considered difficult to sustain in the long-term. There is much market commentary on many of these types of names but there remains an ever-growing need for practitioners across the finance and legal industries with both a financing and a restructuring background that are able to navigate these ‘special situations’ and the associated issues. We can see from the previous cycle that distressed can provide their investors with significant returns at the right time.
The first and often preferred method for handling a restructuring is often a consensual one.
What are the different methods for handling debt restructuring? Do they have any particular benefits or downsides?
Europe and the US have historically had quite different insolvency regimes, with most European insolvency regimes being recognised in other European jurisdictions. More recently, some of the more US-centric restructuring tools around moratoriums, cram-down mechanics and rescue financings have started to pervade the European restructuring market such as in the UK and the Netherlands or more generally in the EU Directive on Insolvency.
The first and often preferred method for handling a restructuring is often a consensual one. In these situations, the relationship between different classes of creditor is critical, together with their relative bargaining power, considering things such as the strength of their security, their intercreditor position and how easy it is to organize them as a collective. In a consensual restructuring, lenders often forego their rights for a limited period and often subject to certain conditions to give a borrower time to organize itself for a restructuring. During this time, groups of creditors will try to join together to form a consensus and the company may enter into a restructuring agreement with its creditors which documents the terms of any restructuring. This is typically less costly than the more formal procedures and has the benefit of maintaining creditor/borrower relationships and protecting the company as a going concern.
There has been widespread interest and debate around M&A activity in light of the current political climate (and in turn, the economic consequences of that climate).
Beyond that, there are several procedures available to creditors under English law, depending on the applicable facts. For example, a company led ‘Scheme of Arrangement’ under the Companies Act is a flexible process which is not a formal ‘insolvency’ process but allows for a restructuring of the balance sheet of a primary obligor. Disadvantages include publicity, with documents filed at court, there being no automatic protection such as a stay and the cost of some of the more complex arrangements can be significant.
By contrast, the recently publicized ‘Creditors Voluntary Arrangement’ is a compromise between the unsecured creditors and a borrower with no court sanction and has been used recently by retail businesses to rationalize their leasehold liabilities. This is also a very flexible process which is not court-driven and is therefore not business destructive in that the company proposing the ‘CVA’ remains intact, preserving value.
How would you describe the state of M&A in the UK given the current political and economic climate?
There has been widespread interest and debate around M&A activity in light of the current political climate (and in turn, the economic consequences of that climate). It is clear that there has been consolidation in certain sectors (e.g. energy) but also that there has been significant growth in the chemical and technological industries, where disruptive innovation can move a particular market very quickly. We are fortunate to represent extremely sophisticated types of capital which combine strategic and opportune investment strategies to maximize returns both in a booming M&A market but also in a quieter one and in each case on a global scale. It is reasonable to expectthat greater political certainty would help to stabilize domestic M&A across a greater number of sectors.
The financial markets are sometimes as emotive as they are calculated.
Is there a particular time of year that M&A deals become the most common? Why would you say this is?
The financial markets are sometimes as emotive as they are calculated. We often see an increase in M&A activity during quarters one and four, with people buoyed by a more restful period! That aside, different markets are of course subject to their own movement factors and what is a busier time for M&A in one jurisdiction, sector or industry may not be the same as for another. Our job as advisers is to be on hand to react to the needs of our clients with regard to the markets that they are investing in and the timescale for their investment.
Aymen Mahmoud, is a Partner at Willkie Farr & Gallagher (UK) LLP. He is a partner in the finance and capital markets practices in London and acts across a range of complex debt financing transactions for private equity funds and their portfolio companies, hedge funds, corporate borrowers and issuers and other financial institutions. His practice encompasses direct lending, leveraged buyouts, domestic and cross-border syndicated senior, second lien and junior lending, high yield debt offerings, special situations and distressed debt trading, and restructurings. Aymen commented: “We believe that our international footprint and focus on responsive client service will be critical to those successes and we will continue to develop the best local market talent to ensure maximum benefit to our clients. We would like to thank our existing clients for the support they continue to show us and our future clients for the opportunity to work with them!”
Willkie is an elite international law firm of approximately 700 lawyers located in ten offices in six countries. For more than 125 years, we have represented companies across a wide spectrum of businesses and industries. The firm is comprised of attorneys who are recognized as some of the world’s foremost practitioners in their respective areas.