Nobody doubts that European debt restructuring has been transformed in the last three years. Consensual restructurings have started to replace formal, court-based insolvency proceedings. And US bondholders, with their more aggressive style, have shaken up the traditional, bank-led European approach.
That in turn has re-shaped the market for advisory services to creditors. In Europe, the big four accountants' established relationships are with senior creditors – usually the local clearing banks or the US investment banks. With their well-staffed, multi-country teams equipped for big due diligence projects, the accountants are a natural choice for senior lenders, who will need large teams to look through a debtor's books and report on potential problems in a restructuring.
Blurring lines
But now, the accountants reckon they can take instructions from other lenders. PwC's Business Recovery Services (BRS) team has led the charge. At the beginning of 2003, a PwC team led by BRS partner Kevin Ellis acted as financial adviser to the bondholders of Song Networks in the restructuring of its $550 million high yield notes.
That could mean direct competition for the niche investment banks who have traditionally advised the bondholders in European debt restructurings – the likes of Close Brothers, Lazard, or the European end of specialist US outfits such as Houlihan Lokey Howard & Zukin or Greenhill.
"There has definitely been a blurring of the lines of demarcation between niche investment banks, European accountants, and the new arrivals from the US, such as AlixPartners, or Alvarez & Marsal," says KPMG's head of restructuring, Philip Davidson. "We compete more directly with one another at pitches."
Alvarez & Marsal and AlixPartners are turnaround management professionals. Another import from the US, they take a role similar to that of accountants in European workouts, taking over cash management roles and taking seats on the boards of debtor companies.
The accountants do run risks in acting for US bondholders. At the very end of 2002, in the English High Court, Mr Justice Jacob gave judgement on a petition by bondholders to put Colt Telecom into administration. Hedge fund Highberry, holding around 7% by value of certain notes issued by Colt and instructing KPMG, took an extremely hostile position, arguing that Colt was heading for insolvency, despite its status as a FTSE 250 company with a market capitalization of over £550 million and a strong balance sheet, and therefore would not be able to pay back the bonds.
Putting Colt into administration could have forced a debt-for-equity swap in Highberry's favour. Colt said that Highberry was looking to make a quick profit on the discounted notes.
The judge agreed with Colt. He said the petition was "shaky, tentative, and speculative" and "should never have been launched". This was, by implication, highly critical not just of the bonds but also of KPMG, and its team leader, Richard Heis.
KPMG is reluctant to comment publicly on Colt, but it does point out that, regardless of the adverse commentary the case attracted, it has not dented the firm's reputation for integrity.
Aggression is a fact of life in restructuring. "The whole of the UK market is being influenced by US bondholders and they are taking positions in senior debt as well as bond debt," says Davidson. "To say that we wouldn't act for bondholders is to rule ourselves out of a big chunk of work."
PwC points out that there are different categories of non-senior bank lenders that have interests in European restructurings. Privately placed notes with a lengthy fixed coupon are often bought by primary investors with their own long-term fixed obligations, such as pension funds. High yield bonds are liquid, and the institutions that hold them have different risk outlooks. While PwC regularly accepts instructions from primary investors (where it does "a terrific job" according to one observer), the firm says it has strict client acceptance procedures and would decline to act for distressed debt funds that it thought were not behaving properly.
And on recent landmark restructurings, the bondholders have instructed bankers in Europe, including Greenhill on Marconi, Lazard on Vantico, and Houlihan Lokey on Petroleum Geo-Services.
This explains why the investment banks aren't yet running for cover. "The big sale processes still go to the investment banks," says one banker. "We are investment bankers and our job is to do deals. Ultimately that means either raising capital or negotiating debt-for-equity swaps." The accountants, focused on the voluminous job of forensic accounting, don't threaten to take this work from the banks. "They're busy clarifying what the numbers are."
Working together
The banker also points out that the UK, with its unique insolvency practices, is different to the rest of Europe. "If things go wrong, then in the UK and in the UK only, accountants run the company," he says. "On the continent, other professionals take control."
So instead of taking work from each other, investment banks and accountants will probably work together in 2004. "On big-ticket deals, there are potential joint mandates with the bulge bracket investment banks," says one restructuring specialist at a big four accountancy firm. "An appointment like that could change a lot of perceptions."
Despite the growth of consensual, out of court, negotiated workouts and restructurings in Europe in the last three years, the capacity to handle formal insolvency proceedings is a selling point for the accountants when they pitch to bondholders. In distressed M&A, for example, using a pre-packaged administration to effect a sale of all or part of a company before it goes into receivership can give both banks and bondholders more control over the sale process without losing as much value.
And in negotiated deals, the threat of formal insolvency proceedings is regularly held in reserve or constitutes an important plan B for bondholders. When distressed debt investors MatlinPatterson and Apollo Management fought for control of chemicals company Vantico, in 2003, MatlinPatterson, in its capacity as holder of Vantico's bonds, had KPMG standing by to put Vantico into administration in the UK. Although a deal with the holder of the bank debt was eventually done, the threat of administration gave the bonds extra bargaining power.