The European restructuring landscape has been evolving rapidly, driven by a confluence of economic, legal and market dynamics. For private credit investors, understanding these trends is crucial for navigating the complexities of distressed and special situations.
The Backdrop: Economic Pressures and Market Volatility
The European credit market has been significantly impacted by quantitative easing, the COVID-19 pandemic, a prolonged period of higher interest rates and geopolitical tensions. Inflationary pressures are further complicating the economic outlook, affecting corporate profitability and debt servicing capabilities.
Deglobalization trends, trade tensions and conflicts are disrupting supply chains and increasing operational costs for European companies. This would be further exacerbated if the United States decides to impose significant tariffs on goods imported from Europe (a possibility that has been raised in the event of a second Trump administration).
The anticipated imminent interest rate reductions should ease some of the pressures on borrowing costs, but the pace and scale of these reductions over time will determine the ability of over-leveraged companies to survive and the level of dislocation in the market.
Private Capital Trends
Direct lending and asset-backed lending are experiencing a boom, driven by the need for flexible financing solutions. Direct lending offers several advantages, including flexibility and speed.
Emerging markets asset managers are increasingly exploring opportunities in Africa and the Middle East. These regions offer attractive returns but require careful risk assessment and management. More generally, deal-making in emerging markets differs significantly from developed markets. Strong covenants and effective FX risk management are crucial for navigating these environments and ensuring successful investments.
Restructuring Trends
European borrowers are increasingly adopting U.S.-style financing structures and documentation. This trend is accompanied by an increase in pre-insolvency measures, allowing companies to address financial distress earlier. In particular, innovative liquidity solutions, including debtor-in-possession (DIP) financing and rescue capital, are being used to support distressed companies.
Consensual Out-of-Court Deals
The implementation of the EU Restructuring Directive has resulted in various new preventative restructuring measures being introduced across Europe, including the Dutch WHOA framework and the German StaRUG.
This has provided private credit investors managing distressed investments with increased opportunities to achieve consensual out-of-court deals, which are generally more efficient and give the opportunity for greater returns than resorting to formal insolvency proceedings.
In parallel, restructuring plans in the UK have continued to evolve and provide a pivotal tool for senior creditors to impose transactions on dissenting classes of creditors, including trade creditors and landlords.
These developments will likely result in the increasing use of interlocking restructuring schemes across borders as demonstrated by the recent McDermott restructuring. McDermott International, a global engineering and construction company, implemented a cross-border restructuring of circa. US$4 billion of debt using concurrent UK and Dutch restructuring plans. This coordinated process enabled McDermott to use the cross-class cramdown available under the UK restructuring plan to discharge and release circa. US$2 billion in unsecured litigation claims.
McDermott’s UK plan was the first restructuring plan to be implemented since the Court of Appeal’s landmark decision in Adler, which has provided a revised framework for the exercise of the courts’ discretion when considering whether to bind dissenting classes to a restructuring plan. THE CRED’s key takeaways from the Adler decision can be found here.
Liability Management Exercises (LMEs)
Implementing liability management exercises in Europe presents specific challenges compared to the U.S. Notable differences include legal frameworks, lending structures and sponsor-backed deals. The approach of the courts makes the creditor-on-creditor violence seen in the U.S. (up-tier and drop-down transactions) less likely to become prevalent in the UK and Europe. The UK courts in particular are generally more accessible and responsive than those in New York, making it easier for parties to obtain injunctions preventing these types of transactions.
Europe is also a smaller market with fewer participants willing to take aggressive action that will upset their peers.
In this context, a more tailored approach is needed to successfully implement an LME in Europe.
By staying informed and adaptable, private credit investors can navigate the evolving restructuring environment and capitalize on emerging opportunities.
