Collapsed oil prices and Ebola have hit businesses hard, while European plans to copy UK restructuring tools could challenge British courts’ dominant role.
City Link, Phones 4U, London Mining – in recent months we have witnessed the unexpected collapse of some industry giants. However, for the most part, the market was kind to ailing companies in 2014.
Liquidity in the debt markets, particularly in the high-yield space, has meant those businesses in need of a cash injection have been able to find one. Meanwhile, low interest rates have also helped to maintain momentum.
In fact, for restructuring and insolvency lawyers 2014 was patchy to say the least.
“It’s been quieter, with fewer formal insolvencies,” says Slaughter and May restructuring partner Ian Johnson. “There’s been so much liquidity in the market which has allowed companies to refinance.”
Despite the relative peace and quiet on the insolvency front there were a few pockets of action, and areas including oil, mining and financial services have kept the City’s restructuring partners on their toes.
Oil and mining
The oil and mining sectors had a turbulent 2014 as a result of a prices slump. The price of oil plummeted by almost 50 per cent by June, while those for iron ore tumbled to a five-year low. According to Bloomberg, iron ore producers have cancelled or stalled 22 mining projects since July. As a result a number of mining companies are looking to restructure their assets, including London-based Anglo American, which is looking to dispose of a handful of its mines.
The Ebola outbreak in western Africa has also been a factor, with London Mining an example of a business that fell victim to the consequences of the disease. The London-listed business toppled over the edge in October 2014, calling in PwC as administrator. The mining giant turned to Travers Smith for advice, while PricewaterhouseCoopers instructed Clifford Chance.
Johnson says the market should expect more turbulence.
“If there are more oil debt defaults companies will be renegotiating with lenders,” he says.
Meanwhile, the financial services market had its own hurdles to jump in 2014. A particularly large one came in the form of the European Central Bank’s (ECB) asset quality review, finalised in October, which found that a number of banks still have capital shortfalls.
“Some banks need to offload assets,” says Kirkland & Ellis restructuring partner Kon Asimacopoulos. “In the next few years they will sell off portfolios of non-core loans in part to comply with regulatory stress tests and asset reviews.”
In 2014 banks including Santander and Barclays shed some non-core assets. For example, Barclays offloaded its retail banking arm in the UAE and its Spanish operation in a bid to plug its capital hole.
While these sectors are set to keep insolvency and restructuring lawyers busy, a number of other factors are likely to affect the way they work in 2015.
One trend is the shift away from traditional lenders and towards alternative credit providers.
According to Asimacopoulos, “Banks are no longer the primary lenders of last resort. Hedge funds and private equity houses are the new world.”
Johnson echoes this sentiment, noting that “UK clearing banks are less active than they used to be in the restructuring space as they have tidied up their balance sheets and are involved in lower risk lending”.
For restructuring lawyers, and particularly those specialising in creditor-side transactions, developing relationships with a broad base of potential lenders is now critical.
Another key change for restructuring lawyers relates to the UK’s administration and schemes of arrangement processes – for years the preferred restructuring tools of European companies. However, that may be about to change, as jurisdictions including France, Germany, the Netherlands and Spain implement legislative changes in an attempt to replicate aspects of the UK system.
While it is early days for the new systems, Johnson suggests that if they gain credibility, companies could restructure domestically over time rather than in the UK courts.
“That might have a bearing on the law firms that are instructed,” Johnson suggests.
London Mining had struggled to overcome a number of obstacles including collapsing iron ore prices, crippling debt, a dispute with Glencore and, most recently, the outbreak of Ebola in Africa.
When it went into administration in October general counsel Rohit Bhoothalingham instructed longstanding adviser Travers Smith – the same firm that advised on its AIM IPO in 2009.
Administrator PwC looked to Clifford Chance for legal advice.
Phones 4U went into administration in September after EE, O2 and Vodafone withdrew their products from the retailer’s stores. This was a rare instance of a business with high-yield bond issuances going into administration in the UK.
The company’s lenders were advised by CMS Cameron McKenna and Clifford Chance.
Other key restructurings and insolvencies in 2014
- Apcoa Car Parks
- Punch Taverns
- City Link