Restructuring in volatile times

Andrew Shutter, partner at Cleary Gottlieb in London, weighs up political uncertainty and its effect on restructuring insolvency

In the last 12 months, there has been greater tumult in the political world than in the restructuring world. Strangely, the elevated levels of political volatility have not been reflected in corporate distress, despite predictions that may have been called unproven before their time. Speculation has not been in short supply, however.

Will Brexit be the end of the UK scheme of arrangement? Will the remaining 27 EU member states accelerate the harmonisation of insolvency laws in the EU to make UK schemes less necessary as an reorganisational tool for non-UK companies in the EU? Will legislation be passed to prevent the use of schemes by EU debtors and creditors, or deny them recognition? Will Spain take over the mantle as the jurisdiction of choice for mega-restructurings?

And beyond Europe, will US President Donald Trump's policies cause massive defaults in Mexico? Will trade wars bring about corporate meltdown in China?

One thing we may have learned in 2016 is not to make too many predictions. So far, the corporate world has being slow to respond to predictions of trouble ahead. Even oil prices have been on an upward trend since the start of the year and the Baltic Dry Index is up more than five-fold from its historical low in 2016. This uptick came too late to save Korean shipping company Hanjin, whose restructuring failed. However, its fellow Korean leader in this market, Hyundai Merchant Marine, successfully managed to cut its debt and charter lease payments to a significant extent in a mid-year restructuring.

Money is still cheap and hunting for yield, ready to come to the rescue of weaker credits that might not have been able to refinance in less benign borrower-markets. The European Leverage Loan index is riding high and S&P Global Ratings has the number of distressed credits at below 2007 levels.

However, leverage levels are rising and the proportion of leveraged loans having no meaningful maintenance financial covenants is above 70% for 2016 and Q1 2017 according to S&P Global Ratings.

For those brave enough, the decade-long work out of the financial sector in Europe is still ongoing. It is now into the post-EU Bank Recovery and Resolution Directive (BRRD) implementation phase, where politicians, regulators, distressed asset purchasers and (let's not forget them) creditors try to work out how to apply the new resolution tools to banks with very little debt to bail-in, except bonds held by retail (voters).

It feels that speed of legislative innovation in intervention in the world of restructuring and insolvency had never been higher, with Croatia's Lex Agrokor being an extreme example.

Now that there are elections in France, the UK and Germany this year, the political roller-coaster may rattle on for a few more turns. The results could bring more surprises or surprise us by going as predicted by the polls to restore a level of stability that will give politicians the confidence to finally allow the restructuring or insolvency of unsustainable businesses that are currently being sustained for political reasons.

About the author
		Andrew Shutter Partner, Cleary Gottlieb Steen & Hamilton London, United Kingdom T: +44 20 7614 2273 E: ashutter@cgsh.com W: www.clearygottlieb.com Andrew C Shutter is a partner based in the London office. His practice focuses on the origination and restructuring of international debt and equity financing transactions. He represents issuers, borrowers, and financial institutions in international capital markets, syndicated bank lending, high yield, derivatives and securitisation transactions. He also has experience in sovereign debt restructurings including advising Greece on its 2012 €205 billion ($219 million) restructuring which is the largest bond restructuring ever completed. His experience for corporates includes advising a group of Polish companies on a 2015 scheme of arrangement, Celsa (UK) Holdings, and its UK subsidiaries on the restructuring of their English and German law senior facilities and Truvo in its €1.5 billion global restructuring. He has advised loan to own creditors in many complex situations including Oerlikon and Quinn. He authors a column on restructuring in the Global Restructuring Review. He is internationally recognised for his expertise in restructuring/insolvency by Chambers UK, and in debt capital markets by The Legal 500 UK. He is also distinguished as a leading lawyer in banking and finance by Chambers Global, Chambers Europe, Chambers UK and The Legal 500 UK. He joined the firm in 1997 and became a partner in 2001. He speaks Spanish.