Are liability management exercises going to happen in Europe?

Talking about liability management exercises in Europe is interesting stuff for advisers, but we’ve not seen them occur with the frequency that many people thought a few months ago. Why is that?

First, it may be too soon. Many companies don’t need to deal with their balance sheets right now. We know that there’s not a huge amount of debt maturing in the next 12 months. Financing conditions are improving. And lots of credit funds have geared up, or are gearing up, to help with any funding gap. Where valuations permit, we’re seeing far more holdco and PIK holdco solutions than liability management exercises right now. So it may be a better strategy to wait and see where interest rates peak before thinking about debt and capital structures.

Second, up-tiering is seen as aggressive. Exit consents under New York law (so including high yield bonds issued in Europe) are well established – but even there we’ve seen litigation. In an English loan world, litigation – or at least a challenge – is an even greater risk. People can debate the case law, but it does need to be considered. And there are other levers to pull in Europe anyway. A scheme of arrangement (although it may be more expensive for the sponsor in more than one way) does provide more certainty.

Third, priming (or drop down or J Crew) transactions are difficult. Not because of the financing documentation – that’s the easy bit. They are difficult because getting assets or businesses structured on a stand-alone basis is hard. It’s operationally difficult. We’ve done deals for investors which have exited successfully in the face of the wider business going bankrupt – so we know they work. But they aren’t easy to do. So they are probably only justified in the bigger capital structures where there is a specific asset or business which can be financed or where there is an interesting bridge to a sale or a goodco / badco opportunity.

Fourth, there are larger issues at stake. Could sponsors face worse financing terms in the future if they are aggressive now? Europe is a smaller market than the US with fewer options for financing. So sponsors will need to balance reputation and the franchise – and the need to be seen as a good custodian of loose financing terms – against the need to keep hold of the keys on their most prized assets.

Fifth, do sponsors want to do them? These transactions take up a massive amount of time and resources – and that doesn’t include formulating and then implementing a turnaround business plan. Yes they can alleviate the need to put new money in, but bandwidth on a restructuring is always a problem and if a sponsor has already taken out its original equity investment, is it worth tying up deal teams for months or years on companies which are past their sell by date? Out of all of the restructuring options available, simply handing over the keys may sometimes be the best option out of a bad bunch.