Will corporate slide lead to debt write-off?
The corporate world is in as much financial distress as the rest of the economy, but opinions remain divided about whether or not it is best to let some sleeping debts lie
WE’VE HAD massive write-downs for property developments and much discussion on writing off some residential or buy-to-let mortgage debt – but what about corporate debt?
In light of Irish Banking Resolution Corp’s (IBRC) recent €100 million write-off of debt it was owed by Siteserv, is this a floodgate starting to open?
Until recently, there had been a marked reluctance by banks to write off or downsize loans. Indeed, the corporate restructuring market has been dominated by receiverships, examinerships and liquidations when corporates have run into problems, such as when a business is hopelessly over-borrowed and cannot service its interest, or has a cash call it cannot meet.
For Tom McAleese, a senior director with restructuring firm Alvarez Marsal, there have been fewer restructurings to date than may have been expected in the corporate sector because it has been “less traumatised” than others. “The corporate sector is in better shape than other sectors such as real estate,” he says.
Leo Casey, a director with IBI Corporate Finance, notes that the relative inactivity on the corporate side is down to a number of factors. “For the first few years of the recession, everyone was grappling with the enormity of the challenge and the banks were in survival mode,” he says.
For Jon Moulton, chairman of Better Capital, a UK private-equity firm, there is “quite a number” of distressed Irish companies, but he notes that there has been “no rush” to sort them out. “Basically, there is no overwhelming benefit to sorting these things out quickly, so in some ways it’s about kicking it down the road, extending and pretending and hoping for the best,” he says.
Part of the reluctance in moving on a istressed company is due to the possibility that the economy might pick up and the company might be able to trade out of its difficulties.
For Casey, the banks will likely continue to focus on this approach. “Why put a business on the block when you might get a much better recovery on a loan when the economic cycle improves?” he asks. “It’s logical and makes sense.”
While Moulton concedes that such an approach is a “perfectly legitimate strategy”, he argues that letting companies “roll on with silly balance sheets” is bad for the economy and slows down growth. He would rather restructurings were done now rather than later. “Do it too fast rather than too slow,” he advises.
However there are now signs that things are starting to change. Casey notes that he has seen an increase in restructuring activity over the past 12 to 18 months, and he thinks it will increase further.
“I don’t think you’ll see a flood of such deals, but you’ll see a steady trickle of deals until there is a shift in the economy,” he says.
Indeed, last month, IBRC took a write-down on its debt of more than 70 per cent, when it supported the sale of business support services group Siteserv to a vehicle controlled by Denis O’Brien.
However, some in the market have noted that the deal might act as a poor precedent for future debt restructurings, given the premium that shareholders in the firm received at the expense of the lender. It could have been argued that shareholders of the insolvent firm were entitled to next to nothing – or at the very least not a premium of 96 per cent on its recent share price.
Another option for distressed companies could be for banks to “park” the debt, by letting debt that cannot be serviced go interest-only with no obligation to repay for some time to come. Or to consider debt for equity swaps.
After all, not so long ago, it seemed that debt for equity swaps would be the saviour of both distressed Irish businesses and their lenders.
“There was a lot of chatter about debt for equity swaps,” agrees Casey, but adds: “At the end of the day, a bank taking an equity interest in a business is a whole different approach and involves a different skill set. In a small economy like Ireland it’s more challenging to do that.”
McAleese agrees. “Banks don’t lend to become owners of businesses; however they may consider equity as part of a restructuring.” And if banks do put more Irish corporates on the chopping block, you can expect there to be plenty of takers, with numerous private equity players waiting on the sidelines, hoping to nab themselves a bargain.
In 2010 for example, Moulton’s Better Capital acquired the debts of Calyx from Anglo Irish Bank at a discount, and more recently in the Siteserv deal, the Sunday Times reported that a number of global players, including Anchorage Capital Partners, Lincolnshire Management, and Och-Ziff Capital Management had expressed interest in the deal.
“There are a lot of private equity funds looking for deals, and clearly private equity firms are opportunistic and looking to exploit situations by taking contrarian views on the business,” notes Casey.
He adds that appetite from private equity funds can drive competitive interest, as it “encourages strategic acquirers to get involved”.
“There is more private equity raised than there’s a home for right now; arguably there is an over-supply of private equity, and an under-supply of opportunities,” he says.
Of course private equity funds, and their love of the leveraged deal, are also constrained by the tightness in credit markets. But even if there is a sudden wave of restructurings, it’s unlikely that this would hit the banks further.
“They [banks] have been taking provisions on their loan books for the past couple of years including corporate loans,” notes McAleese.
And when it comes to debt write-downs, it can be academic how much money was put in the first place. “They’re not actually losing the debt – they’re just choosing to say ‘we know it’s worthless’,” says Moulton.