Fuelled by quantitative easing (QE), companies have spent over 15 years financing their growth off the back of ultra-low interest rates.
The era of cheap borrowing has finally ended.
The days of easy money are over
The recent monetary policy tightening by Central Banks means multiple companies are now having to urgently restructure their debt. Having access to the right sort of expertise will be key to ensuring that debt restructurings are as friction-less as possible for all parties involved.
Sparked by a catalogue of black swan events (i.e. the COVID pandemic, war in Ukraine and the Middle East, etc.), inflation has soared – forcing Central Banks to intervene with successive interest rate rises.
These interest rate hikes are proving to be a problem for companies which borrowed heavily when rates were at near zero or even in negative territory. While many companies have successfully managed to reduce their near-term debt piles, S&P Global Ratings highlighted there is still a lot of speculative grade debt (BB+ or below) circulating, which is due to mature imminently.
Reports also suggest that up to 51% of this speculative grade debt is comprised of floating rate instruments (in comparison to just 18% of investment grade debt), meaning some corporate issuers are already facing a tight squeeze1 . In contrast, borrowers on fixed rates have until their debt reaches maturity and is refinanced, before the higher financing costs kick in2.
The future looks challenging
Interest rate movements in 2024 and beyond are looking quite volatile, and this will pose challenges for heavily indebted companies.
Although markets are pricing in two quarter point rate cuts by the US Federal Reserve in 2024, some experts have warned that interest rates could potentially rise to 8%, due to the persistently sticky inflation being caused by the high amounts of government spending3. Even in a best-case scenario whereby rates and yields both fall in unison, rates are still unlikely to return to their 2008-2021 levels.
“The recent rate increases have made it harder for companies to raise funding for refinancing purposes or to invest in their businesses. At the same time, the deteriorating economy is creating problems, especially for those corporate issuers which are highly leveraged,” said Joost Mees, Managing Director – Head of Luxembourg, at JTC Group.
Who are the main players in debt restructuring?
The challenging market headwinds are expected to result in a flurry of corporate debt restructurings and refinancings.
“Once a company looks like it will break one or more of its covenants or if it is closing in on a default, then creditors or by a main group of creditors lead will reach a decision – advised either by lawyers or restructuring specialist firms – that a debt for equity swap is the most sensible option available to extract the maximum value. In some cases, this might be less than the original value. Although in some cases a company might initiate this process with the creditors to reach a consensual deal with such creditors” explained Dewi Habraken, Senior Director – Business Development.
But who participates in these sorts of transactions?
Aside from the company, lawyers or restructuring specialist firms and the creditors themselves, several hedge funds (distressed debt managers) and private credit funds will engage in debt restructurings by proving new money or taking over a part of the existing debt, as the returns can be potentially lucrative. It works as follows:
“A distressed debt hedge fund or private credit manager will acquire a company’s debt at a discount. Through their stake in the debt tranche, the manager will then be able to influence the restructuring or bankruptcy proceedings at the company. Assuming the manager can successfully turn around the business, they will then subsequently sell the debt or the company on for a healthy profit” continued Dewi.
Debt restructurings – the intricacies and challenges
Debt restructurings can be notorious intermediated and complex undertakings, however.
“Similar to any other type of debt restructuring involving a Luxembourg security package, many (bond/loan) restructurings will use the so-called double ‘LuxCo’ (this is put in place at the beginning of the term of the bond or loan as security feature for the creditors – Luxembourg legal system could be considered as a lender friendly jurisdiction as share pledges could be enforced without the involvement of a court decision) and the enforcement of a Luxembourg share pledge as a clean way to transfer control from the bond issuer group to the bondholders,” said Joost.
He continued: “The challenge, however at the beginning of an enforcement process, is getting the required majority of creditors to agree, and determining whether the enforcement is at risk of conflicting with foreign proceedings or, on the contrary, be part of the implementation. Facilitating coordination between the bondholders can be quite testing too, while timings are also notoriously difficult to predict. Hence it is important for all parties involved with such enforcements, to be guided by lawyers and restructuring specialist firms”.
Choosing the right partner
Given how complex debt restructuring can be, those involved in the proceedings need to ensure they have the right specialist support.
This is an area where third-party professional service providers can help.
“JTC Group has worked on a number of complex debt restructurings over the past decade and has vast experience in this area, having worked on numerous restructurings including a German fibre-optic network operator; a provider of explosion protection products; a Netherlands-based retailer, and a real estate company,’ added Dewi.
For instance, JTC Group can assist with the establishment of the new ownership structure, often structured as an orphan structure Dutch Stichting or Stichting Administratiekantoor, with a Luxembourg company underneath, to warehouse a part of the enforced asset, whereby JTC also provide administration, management and domiciliation (i.e., registered office) services, while consolidating the services for existing LuxCos within the structure, if they exist.
Moreover, in the Netherlands, JTC Group has served as the court-appointed interim manager together with, and upon request of, the insolvency administrator to ensure compliance with local legal and administration requirements.
“Ultimately, the tide of debt restructuring is rising, and managers and companies need to act fast to keep their heads above water,” said Joost.
If you are interested in exploring how JTC can help with debt restructuring services, contact our dedicated and experienced team:
Joost Mees, Managing Director – Head of Luxembourg, [email protected]
Dewi Habraken, Senior Director – Business Development, [email protected]
[1]S&P Global – February 5, 2024 – Credit Trends: Global Refinancing: Maturity wall looms higher for speculative grade debt
[2] S&P Global – February 5, 2024 – Credit Trends: Global Refinancing: Maturity wall looms higher for speculative grade debt
[3] Financial Times -April 8, 2024 – Jamie Dimon warns rates could stay high as market mood shifts
