Change font size:   

 
Abigail Hofman:

Abigail Hofman:

I wonder if ______ is an extremely optimistic person or in a cocoon of senior management denial

The US treasury market reaches breaking point

The US treasury market reaches breaking point

The structural issue that could cause the world's market of last resort to grind to a halt

weeklyFiXLiquid real estate
Skip Navigation LinksHome :: Back Issues :: High-yield specialists find a place in the sun

February 2002

High-yield specialists find a place in the sun


A rash of European high-yield defaults has pointed up the skills of specialist law firms practised in pursuing the interests of bondholders.




       
As the European telecoms sector and its investors work through a painful restructuring, a few US law firms and boutique investment banks are being kept very busy. This is a source of irritation to the big City of London law firms that have eschewed the representation of bondholders in favour of their existing relationships with primary lenders.
As telecoms companies and other industrials grapple with the downturn, defaults have become increasingly common. Restructuring firms that can combine experience of high-yield litigation in the US with track records in Europe are finding themselves in great demand.
By the end of 2001 there was high-yield debt of around $60 billion in issue by companies with a material European presence. Martin Reeves, director of European credit research at Alliance Capital, says: "The resources needed to deal with this situation have not been required before. There was a 16% par default rate for 2001 and some predictions for 2002 are that this could rise to around 30%. However, even with these defaults, the market should continue to grow."
European high-yield issuance took off four-and-a-half years ago, powering build-out in the telecoms sector but creating problems for investors. The key point is that, in contrast to the US, the preferred structure for European high-yield issues leaves bondholders in a weak position if the issuer defaults.
Uppermost amongst bondholder headaches in Europe is the fact that bankruptcy laws favour senior lenders. In mid-April last year, the collapse of UK shipbuilder Cammell Laird sounded warning bells, underlining how exposed they could be. The affair was played out under English law but it soon became clear that most European countries offered even less creditor protection. Over half the European high-yield deals have been structured in the UK, with most of the remainder being based in Germany. And while German bankruptcy law has recently been modified, it has yet to be significantly tested. Nor do the systems in France, Spain, Italy and the Netherlands do bondholders many favours.
Also, the lack of any harmonization in insolvency laws in Europe makes multi-jurisdictional workouts unpredictable. Bondholders are fighting back, however, and managing to exert some influence, notably in the cases of Brunner Mond, Polestar, Derby Cycle, Netia, Marconi and Versatel.
These victories owe much to the specialist law firms that have, so far, made this market their own, as well as to the predominantly US investment banks that have moved into Europe, exporting know-how gleaned from the highly leveraged US market. For bondholders, knowing how to push their claims, as well as identifying what these claims are, can be difficult.
Without a caucus representing at least 50% to 75% of the ownership of an issue, bondholders can find themselves without leverage to have impact on a restructuring. In the main, it will be the financial advisers and lawyers that pull together bondholder groups before deciding on a course of action. Joseph Swanson, senior vice-president of boutique investment bank Houlihan Lokey Howard&Zukin explains: "To get any kind of consensus it is essential to have complete transparency and it is the responsibility of financial and legal advisers to make sure that exists."
Bernard Douton, a director in the restructuring group at NM Rothschild, adds: '"Bondholders are starting to get wary of the arrangers - who sold them the paper in the first place - organizing tenders for the issuer to buy those same bonds back at a fraction of par. The need for an adviser independent of the deal is now clearer than ever."
Ultimately, however, the type of deal struck will depend on the health of the company. Swanson says: "At the outset of any restructuring, noteholders take a view on the prospects and value of the company. To the extent the business plan makes sense, noteholders are typically willing to exchange debt for some combination of new securities and cash. However, absent a viable business, noteholders will prefer the company to repurchase their debt or, in the absence of liquidity, enter into formal insolvency proceedings and liquidate the assets." But, he says, with no clear framework for resolving differences among stakeholders, the outcome of deals in Europe remains uncertain and will depend on the capabilities of the parties managing the process.
Advising on these decisions under English law, New York law, and any number of other European insolvency regimes, has been keeping the two market leaders - Cadwalader, Wickersham&Taft and Bingham Dana - busy. These two US firms have shot to prominence in the European bondholder market over the past year, reaping the rewards of a forward planning process that involved Cadwalader's London managing partner, Andrew Wilkinson, opening the firm's London office in early 1998.
Wilkinson, had been convinced that law firms would need a convincing cross-border US/UK restructuring capability to cope with the inevitable surge of bond restructuring work that would flow from Europe's growing infatuation with high yield. "We have been targeting this work from the outset and it has paid off, to the extent that we have now been involved in between two-thirds and four-fifths of all European high-yield defaults in the market," he says.
At Bingham Dana, financial restructuring partner James Roome underlines the problems now facing the big City firms looking to target this work. "To an extent," he says, "they have no natural client base in this area and because of their close client relationships with the debtors and the primary lenders they often find themselves conflicted out. This is not the sort of work that needs huge resources - we get hired because we have expertise and a track record, in Europe as well as the US."
Both lawyers stress that bondholders are getting more of a fair say, especially investors in many of the newer entrants to the European telecoms market, which were highly leveraged from the outset. Wilkinson outlines the key issues: "Recovery rates for bondholders are significantly lower in Europe than in the US, generally because high yield ranks behind obligations to banks and subsidiary debt. Many insolvency laws in Europe are designed principally for the protection of secured creditors and appear to proceed on the assumption that in order to secure commercial lending, insolvency laws ought to be designed to protect the lenders' interest."
  Page 1 of 2  Next | Single Page







So Goldman Sachs and Morgan Stanley are becoming banks? I want one of those accounts! I want a Goldman toaster

A trader suggests the former investment banks might benefit from using old marketing techniques to entice customers to open new accounts

  1. US treasury market reaches breaking point

  2. Top 10 financial definitions that are funnier since the credit crunch

  3. Top 10 reasons to tell your boss you deserve a bonus this year

  4. Nomura’s great leap forward: Will Lehman takeover help fulfil its global ambitions?

  5. Eksportfinans turns to government for funding

Latest Issue

December 2008
Ruromoney Jobs Post a job

Home | Mobile site | Contact Us | Debt markets | Equities | Foreign exchange | Banking | Alternative Investments | Regions and Emerging markets | Polls & Awards | Structured credit | Back issues | Euromoney store | Useful links and Related events | Site Map

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms and Conditions, Privacy Policy before using the site.

All material subject to strictly enforced copyright laws. © 2008 Euromoney Institutional Investor PLC.