Abigail Hofman: The rise of restructuring
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Abigail Hofman: The rise of restructuring

Bankers like to think of themselves as entrepreneurs and when the leveraged finance market died many specialists were reborn as restructuring professionals.

In mid-September, I decided to descend to the coalface and mine a seam of new bankers. I stumbled across an interesting centre of excellence at Morgan Stanley: the European restructuring team led by Simon Parry-Wingfield and Ben Babcock. Parry-Wingfield is a bookish, bespectacled Englishman who joined Morgan Stanley from Goldman Sachs in April 2004 as a leveraged finance specialist and ran Stanley’s European leveraged finance practice. Bankers like to think of themselves as entrepreneurs and when the leveraged finance market died many specialists were reborn as restructuring professionals.

Last summer, Morgan Stanley recruited Ben Babcock, who has an extensive restructuring background, from Merrill Lynch. Simon’s capital markets skill-set and Ben’s restructuring expertise meant that the restructuring practice took off. In the past year, the team has worked on more than 30 restructuring assignments. The opportunity for Morgan Stanley is that in a restructuring a company needs an independent adviser who has no conflict of interest with the lending banks. There are a limited number of European firms with strength in this area.

Restructuring is a true advisory business and the advice is normally offered during a period when key executives’ stress levels are high, if not off the charts. “I often find myself being part adviser, part psychiatrist,” Babcock, a quirky Canadian with a wry sense of humour told me. “We often undertake bilateral negotiations with each lender,” Parry-Wingfield explained. “You need a tailored strategy for each bank. Sometimes it can feel like hand-to-hand combat.”

HeidelbergCement is an interesting case study. The company over-expanded and took on excessive debt to fund the Hanson acquisition in 2007. There was a limited free float as the majority of shares were held by the billionaire Merckle family. In a bizarre story within a story, the patriarch, 74-year old Adolf Merckle, committed suicide in January as his spider’s web of industrial holdings unravelled. In the spring, HeidelbergCement’s chief executive, Bernd Scheifele, realizing that he could no longer rely on his major shareholder for financing, appointed Morgan Stanley to advise on a capital-raising and a restructuring of the company. Lenders needed to be cajoled to extend maturities and the capital base of the company needed to be strengthened. However, no equity investor would put up money if they thought there was a liquidity problem, so the company could not turn to the equity market without a solution to the debt conundrum. Yet the spring of 2009 was probably the period in recent history when banks were most unwilling to lend. “The crescendo of fear,” as Babcock describes it.

Of course, the carrot was that the banks didn’t want to write off the debt either. In June, after many long nights of intricate negotiations, Babcock and Parry-Wingfield received 100% consent from more than 50 banks to roll over their commitments to the end of 2011. In September, HeidelbergCement undertook a €4.4 billion equity-raising and secondary stock sale (the Merckle family and certain banks sold some shares) that was oversubscribed. “It’s key to work with a client who listens,” Babcock told me. ”Heidelberg’s chief executive listened and executed to perfection.”

A strong restructuring practice is a profitable niche for an investment bank. Restructuring is the antithesis of commoditized business. Essentially, you are saving someone’s life and the price for such a service is probably inelastic and immaterial. In addition, relationships forged in war are never forgotten. Thus the restructuring firm is likely to receive ancillary business like capital-raising and debt-issuance mandates. “Good restructuring practitioners are like heart surgeons,” Babcock mused. “ I’m pleased to say that I haven’t lost a patient yet.” 

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