(Bloomberg) -- Creditors’ patience with Europe’s delinquent borrowers is wearing thin, with lenders now more willing to seize the assets of companies that fail to pay their debts.
The series of shocks that hit financial markets since 2020 — from Covid-19 to Russia’s invasion of Ukraine to the sharp rise in interest rates — encouraged a degree of forbearance from lenders as they waited to see how companies would perform once the dust settled. Now those convulsions have dissipated, creditors are asserting their right to compensation.
This year has seen enforcement — or the threat of it — play a central role in debt talks. Creditors are currently running a sales process for Hotel Bauer after seizing the Venetian landmark from the ruins of Rene Benko’s Signa empire. Elsewhere, Carlyle Group took over London Southend Airport following a dispute over an alleged breach of the terms of a pandemic-era rescue package. And Oaktree Capital Management won control of Italian football club FC Internazionale Milano after its Chinese owner defaulted on a loan.
While data on private transactions is scarce, around half a dozen restructuring specialists surveyed by Bloomberg News are seeing a rising trend.
“There are an increasing number of situations where there is a real threat of enforcement, with lenders willing to take action if a long-term consensual solution is not agreed within a sensible timeframe,” said Andrea Trozzi, a senior partner at AlixPartners.
Several factors contributed to this shifting dynamic. The light-touch loan extensions and amendments agreed during the last few years of market volatility have failed in many cases. The performance of some companies hasn’t recovered, leaving sponsors struggling to exit even as the pandemic-era upheaval eases and rates look set to fall.
In the case of smaller companies or assets, enforcement can prove cheaper than restructuring, which is typically a lengthy process that can become very expensive if it goes to court. It could also yield a similar outcome: wiping out the equity holders and handing creditors the keys.
These enforcements mostly happen for private debt, where loans are backed either by hard assets such as real estate, or equity in companies. The original owners may be unwilling or unable to sell the assets, either due to a disagreement on valuation, a failure to find a buyer. Equally, they may be reluctant to inject new money into a struggling business burning cash. And in some cases creditors may think they will do better running the business.
Luxembourg Favored
Enforcement for European borrowers typically happens in Luxembourg, a jurisdiction where the process is very straightforward.
“Some creditors have pursued a loan-to-own strategy from the beginning, and usually have an interest in the asset when they purchase the distressed debt,” said Ana Nicoleta Andreiana, a Luxembourg-based partner at law firm Loyens & Loeff who regularly advises creditors and companies on enforcement discussions. “Others see enforcement as more of a pure deleveraging strategy.”
If enforcements run contrary to the sponsor’s plans, they can get complicated. A takeover by mezzanine lenders of Signa Prime Selection’s Hotel Bauer thwarted plans by the administrators of Benko’s crumbling real estate empire to sell the five-star property to another buyer. Lender King Street Capital Management, its new owner, is now running its own sale process.
In some situations, the debt structure might not be the most suitable for enforcement, particularly where there are multiple tranches of debt with creditors’ exposure spread throughout. Even in the case of a loan from a direct lender, problems can arise when different investors in the same asset manager hold claims of varying seniority, as one could incur losses if the other pushes to enforce, according to Chris Howard, a London-based partner at law firm Sullivan & Cromwell.
Last Chance
A coordinated solution between an owner and creditors may still be the preferred route. In many instances, such as for London Southend Airport, the two sides struck a deal on a consensual handover. The airport’s owner, Esken, ended up accepting a deal entailing its takeover by its own creditor Cyrus Capital Partners and its preservation of a minority stake in the Carlyle-controlled asset. However, it eventually filed for administration.
Alternatively, lenders can add in clauses to documentation to pave the way for enforcement, to give borrowers one last chance.
“Some of these lenders amend and extend their debt facilities, but it’s gotten to a point where if it’s gone on for a long time they can add a mechanism to pull-the-trigger at some future date,” said Mia Drennan, founder of loan agency firm GLAS, which also provides enforcement services. “This is a plan B where the lenders will take over control, if the company doesn’t produce the desired results within a specific time-line.”
This approach was seen in the restructuring of furniture maker Keter Group last year, where the creditors agreed to extend the maturity of term loans but also asked for a sale of the company and established specific time milestones to be respected. In case of any breach, creditors would take over. Lenders eventually acquired ownership of Keter after it couldn’t find buyers at the right price.
This kind of framework, whereby creditors offer sponsors some relief on the debt on the condition they launch an accelerated sales process, can be called a “euthanasia sale,” Sullivan & Cromwell’s Howard said.
“If the sponsor is seeking to retain a free option on the outcome by stalling, no new money is forthcoming and there is potentially deteriorating performance — then lenders may have no choice but to give both the sponsor and the portfolio company a bit of a whack around the head.”
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