PR OFILE


Moving down to distressed names, “This is one of the most exciting times for European distressed since the market started in 1992” enthuses Forbes-Nixon and again different outcomes will ensue: historically, roughly one in five CCC rated credits defaults, so this will provide further supply.


CLO Calls First generation, 1.0, pre-crisis CLOs from between 2000 and 2007 are past their re-investment periods and are de-leveraging quite fast which tends to increase their financing costs as tranches amortise from the top down. This results in them becoming called, and then sold in a Bids Wanted In Competition (“BWIC”) process that can allow the nimble and cash- rich investor to pick up paper at discounted prices. In fact the 2000-2003 maturities have all been called and Alcentra expects a continuing acceleration of deal calls from the 2004-2007 period, when Alcentra itself issued five CLOs in Europe. Already in 2015, some 20 1.0 CLOs have been called compared with six in 2014 and five in 2013.


Jurisdictional differences and forum shopping In late 2015, corporate distressed situations are attracting Alcentra’s attention and Forbes-Nixon argues that probably only a handful of players in Europe have the analytical resources to take full advantage of the opportunity set. “Specialists with a track record of distressed investing in Europe, who can analyse and price credits, and understand the different bankruptcy regimes, and have raised enough capital to take advantage of the opportunities” are the ones well positioned to pick off the anomalies from the cascading avalanche of paper.


Some managers are buying large portfolios of hundreds of loans, but Alcentra generally prefers to pick individual loans – and is also picky when it comes to jurisdictions. “The UK and Ireland are strongest for senior secured lenders and creditors, with very high recovery rates” says Forbes-Nixon, who adds that 35% of loan market issuance has come from the UK. PWC’s Portfolio Advisory Group Market Update for 2Q 2015 claims 60% of European loan transactions have come from the UK and Ireland. The next tier is Germany, Austria, Switzerland, the Scandinavian countries and Benelux, which have “reasonably strong creditor processes” in Alcentra’s experience. Then “France is getting better but still has some issues while Spain, Portugal, Italy and Greece pose additional risks for senior secured lenders”. Southern Europe is not out of the question but discounts would need to be very deep and the same applies to Eastern Europe. A wrinkle here is that companies in Southern Europe can sometimes make use of legal forums in Northern Europe. English courts are sought after by estranged spouses seeking divorce settlements, by offended oligarchs wanting to silence critics –


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and by senior creditors after their pound of flesh. Alcentra’s Deputy Distressed Portfolio Manager, Laurence Raven, who was previously an analyst in the proprietary trading group at Merrill Lynch, has sat on multiple creditor committees. Raven, who joined Alcentra in 2008, observes “Schemes of Arrangement continue to assist in the restructuring of debts of a number of European companies.” He explains that this can arise from shifting the domicile or headquarters of a company, or by proving some alternative nexus with the UK, such as the presence of an English obligor or by having finance documents governed under English law. Some Southern European companies, which also have US law governed High Yield bonds are making amendments to their bankruptcy processes in response to domestic borrowers choosing to restructure debts abroad. For instance, Raven points out that “Spain last year developed homologation as an equivalent to a Scheme of Arrangement. This can allow for a cram down process with majority lender support, which is certainly now more creditor friendly than before”. Raven foresees a steady improvement in creditor rights in France, where he thinks courts want to streamline restructuring processes; though he regrets “France is one country that does not permit companies to forum-shop and re-domicile or move abroad to take advantage of more efficient and creditor friendly regimes to consummate processes, so the blessing of a domestic court is still needed”. The legal side is so important that Forbes-Nixon says “we spend as much time looking at legal and bankruptcy processes as we do on fundamental credit analysis”. Documentation and execution specialist David Wallace joined in 2015 from law firm Linklaters where he spent seven years on restructuring deals. He elaborates “there is no one size fits all approach. It is not easy to predict what happens in a restructuring process and sometimes it is not even easy to predict which jurisdiction will oversee the completion of a financial restructuring”. Indeed some deals are multi-jurisdictional. A UK advertising publication which was UK- headquartered, but which had a large US business and a Spanish-headquartered business used a UK Scheme of Arrangement to bind dissenting creditors, but also needed to obtain Chapter 15 recognition in the US and get approval from the Spanish authorities as well, recalls Wallace.


Alcentra’s legal eagles, including Wallace, have to explore whether senior creditors will take all or if junior ones could hold out. There are judgements to be made about the estimated cost and duration of the restructuring, which are “easily determined in more predictable jurisdictions but less so elsewhere”. Among many influencing factors Wallace considers whether the management team has the expertise to carry on running the business,


who the advisers are, and how different classes of creditors may be impacted. “Every case is different with its own idiosyncracies” Wallace reveals. Alcentra invests in all parts of the capital structure, and in October 2015 the disconnect between secondary market pricing of bonds compared with loans caught Wallace’s attention. Loans have hardly flinched in the third quarter and there are several reasons to think bonds will soon provide a supply of distressed opportunities. Wallace doubts if companies that easily raised covenant-lite finance four or five years ago would be able to pull off the same trick today. “Amend and extend is much harder in bond markets because it is difficult to identify who owns the bonds. There is far more process risk for bond restructurings, and prices can fall for pernicious technical reasons. Bondholders are ratings driven which results in forced sellers after a downgrade”. Added to these factors is simple market volatility: High Yield bonds have recently been gyrating with equity-like volatility, and have been harshly punished for profits warnings. Market over-reactions can create opportunities for Alcentra, even without events such as defaults or failed attempts at refinancing.


Sectors in Play and Recent Trades Alcentra can invest in all industries, and after the oil price crash, Deputy Distressed Portfolio Manager Eric Larsson, who joined Alcentra in 2015 from Mount Kellet Capital Management, finds oil and gas has a big presence in his watch-list of names, and “October saw the first large default on an oil and gas issuer” he points out. Wallace agrees that oil and gas is rich in opportunities with “the UK still a very big driver and many Norwegian issuers suffering”. The second biggest source of opportunities is financials, where “there are some interesting situations for example in Austria and Portugal, which show how huge bank balance sheets can drive the market”. Spanish construction is still another hot spot for distressed deals, years after that property bubble burst. Away from broad sector dynamics, in most industrial segments “there are more idiosyncratic situations of companies levered too much” notes Larsson.


Though it sounds as if a deep pool of opportunities is materialising very rapidly, 28 years of experience tells Forbes-Nixon that patience can be needed to harvest returns from some credit stories. “The three biggest drivers of our returns this year were all classic, distressed situations where we planted the seeds several years ago, and they came to fruition this year” says Forbes-Nixon, who adds that Alcentra had been following the firms for up to 10 years. All of them also involved equity exposure, underscoring how Alcentra invests over the entire capital structure; but Alcentra’s route into the equity was different in each case.


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