Europe Conference 2011 – Post Conference Review
Recession or Recovery was the theme of the 2011 Europe Conference held in Helsinki this year. Read the post conference review or download conference slides.
27 October, 2011
Jouko Karvinen – Stora Enso, Restructuring and Rethinking (PDF 3.9Mb)
Volker Beissenhirtz – A new paradigm in restructuring, The German Perspective (PDF 100k)
Houthoff Buruma – Banks in trouble, the future handling of Bank crises in the Netherlands (PDF 3.7Mb)
Chris Laughton – INSOL Europe (Powerpoint Show 100k)
By John Willcock, Editor, Global Turnaround
These are exciting times for the Turnaround Management Association (TMA) in Europe. Although there have been conferences for the continent’s growing number of chapters before, there was a sense in Helsinki that this was perhaps a turning point for the drive to build a truly pan-European network.
Lisa Poulin, this year’s TMA President, had flown from the US together with Ron Sussman, Vice President, to attend both the conference and an important meeting of all European chapter heads. It was significant that the conference was hosted by one of the ‘youngest’ chapters, Finland, and the enthusiasm and efficiency of the locals, led by conference chairman, Christian Jakovlew, was remarked upon by the attendees.
This European conference follows a similar pan-Asian conference, in what Alan Tilley, vice president of international relations, calls a process of building ‘three pillars’ of the global TMA network; the Americas, Asia and now Europe. Also represented at the meeting were chapter representatives from Germany, Spain, Italy, France, the Netherlands, Ireland and Poland. Michael Cappy was there representing a Swedish chapter that is in the process of being re-launched, while chapters about to achieve lift-off’ included Romania, Russia and Turkey.
The TMA outside the US is now growing at a rate of 20 per cent a year, with 16 international chapters. Tilly said growth in some places like China was “explosive”.
Sovereign debt crisis
The economic background to the conference might be described as equally volatile. By the time you read this, Greece may have departed the euro. Certainly the possibility of a sovereign debt default in the Eurozone was a common talking point. Donal O’Mahony of Davy Capital Markets in Dublin gave an excellent, if chilling, graphic tour of the origins and nature of the current crisis. Just how countries like Ireland managed to end up with banking sectors with liabilities many multiples larger then their gross domestic product will be looked back on as a catastrophic policy error.
O’Mahony titled his session: Ireland’s sovereign debt crisis – case and effect;’ A model restructuring or a burden for future generations.” His conclusion seemed to be that it was both. Ireland’s ‘bad bank’ NAMA has bought around 80 billion euro’s worth of soured property loans from the five big banks at average discounts of over 50 per cent. Working that vast loan book out has immediately challenged the resources put into the fledgling agency. The workout process will take far longer than was originally forecast, said O’Mahony, while sales from the agency were only in their infancy. The UK real estate market has recovered better than its Irish counterpart, he said, not least because of London’s position as a global financial centre, and this will enable NAMA to sell off around 20 billion euro of British assets, including many landmark buildings like the Connaught Hotel and the Citi office building in Canary Wharf.
But sales will be limited to 10 per cent of NAMA’s portfolio in the first few years, he said, “in order to gauge valuations.” In a world where many real estate markets have simply stopped working, valuation becomes akin to alchemy. But banks need valuations for the portfolios to rebuild their shattered balance sheets.
English Schemes of Arrangement or ‘going to London’
Another big talking point of the conference was the increasing use of pre-insolvency procedures or ‘hybrids’ for restructuring companies; in particular, the use of the English law Scheme of Arrangement by big German and Spanish businesses. Recent instances of companies “going to London” to take advantage of the more user-friendly English corporate reorganisation legislation include the German companies Tele Columbus and Rodenstock, and the Spanish companies La Seda and Metrovacesa.
So it is a live issue. German and Spanish turnaround managers and lawyers are wondering; will this trend continue? Or even increase? Both the panel session on cross-border legal issues, chaired by Lars Westpfahl, and my own session, ‘A new paradigm in restructuring,” discussed this increasing use of Schemes.
To sum up both panels on this issue, there seem to be two camps. The first regrets that work that should be carried out in its own jurisdiction is instead being ‘forum-shopped’ off to ‘Las Vegas-on-the-Thames,’ London. Even British practitioners admit that Schemes are far too expensive, take too long and generate huge amounts of paper. A general opinion is that the cost of Schemes could be cut by a half to two thirds without effecting quality.
Perfectly reasonable alternatives to English Schemes are being developed; the Spanish is the most far developed, whilst German legislation which is set to come into force this autumn, elections permitting. This first camp anticipates that these measures, along with similar pre-insolvency procedures in other countries like France’s sauvegarde (or ‘Chapter 11′ la Francaise’) will end the need to go to London.
Others are not so sure, and they include many practitioners from Germany and Spain, the countries most affected so far. For instance, when the new German law is enacted, it will take several years of trial and error to ‘bed it down’ and make sure it works according to the market’s expectations and requirements. Dr. Volker Beissenhirtz of Schultze & Braun said in Helsinki it would take “two or three years of use to bed it down.”
By that time, many companies may have already used the English Scheme. For the second camp, the market has already issued its verdict. London is the place to be.
This begs the question; it is all very well for a London court to authorise the use of Scheme over German and Spanish companies; who is to say that the courts in Germany and Spain will take a blind bit of notice of such Schemes?
A key test case is at this moment making its way through the German civil courts appeals process. Ironically, it is an English Scheme proposed for a solvent German insurance company. Whether this particular Scheme is accepted by the German appeal court or not will form a powerful precedent for this version of forum-shopping, practitioners believe.
How many German businesses are waiting for this decision before opting for an English Scheme. According to one German lawyer at Helsinki, German bankers are predicting between 40 and 90 German companies will ‘go to London’ if the appeal court gives the green light. Of course, the law means very different things in different parts of the world. Alexander Yerofeyev of Ernst & Young in Moscow captured the audience’s attention when he observed: “We have laws, but they’re not mandatory.”
‘Where will my work come from?’
My own panel at Helsinki, ‘A new paradigm in restructuring’, aimed to answer an important question for attendees; where will my work come from?
Fabrice Keller of Duff & Phelps in Paris, and current head of the TMA in France, started his talk by recounting “something I’ve never seen before; a bank refused to receive a cheque from an investor, because it would have triggered a provisioning.” This was a constant theme in the discussion; banks refusing to provision adequately, and not wanting to agree to turnarounds or restructurings for the same reason. Private equity houses don’t want restructurings at all,” he added. “This is the calm before the storm.” When this storm of insolvency and turnaround work may break was a bone of contention on the panel. Keller reckoned the storm would break in France “within six months.”
Dr. Volker Beissenhirtz of Schultze & Braun in Germany opted for “when interest rates rise one per cent.” Adrian Thery from Garrigues in Spain commented: “Banks won’t want to get rid of assets until they have recapitalised their balance sheets, and this will take many years.” David Lovett, European head of restructuring at AlixPartners, said: “It’s a case of when interest rates go up, not if.”
Even a small rise will have a big impact on many companies,” added Lovett.
Keller meanwhile sees in France a shift to operational turnaround, particularly cash management. He has also witnessed a strange phenomenon. The French state set up a number of strategic investment funds in 2008 to support industry in the aftermath of the financial crisis. This had the perverse effect of sucking out all activity from the non-State marketplace. These funds were like vacuum cleaners, sucking up all the deals,” says Keller. “In 2010 alone they did 400 deals. But now the Government no longer has the funds to continue this. So it will let the private sector back in.”
Dr. Volker Beissenhirtz of Schultze & Braun who splits his time between Berlin and London, described a similar experience to the low levels of restructuring and turnaround in the UK: There was mezzanine finance coming due to the tune of 4.9 Billion euro in Germany this spring, and yet no sign of this generating turnaround or restructuring work.
Not only has there been no impact on turnaround work, mezzanine investors report they have been repaid on time. “So where is the money coming from?” Beissenhirtz asked rhetorically.
The new German insolvency law due to be enacted in 2012 might perhaps be a purveyor of a ‘new paradigm,’ he added. It holds out the promise of earlier creditor involvement, debt for equity swaps and other moves towards a more ‘user-friendly’ system.
Beissenhirtz accepted legal reform is important for Germany, since a number of big German companies have recently ‘gone to London’ for restructurings, such as Rodenstock. Both have used the English law Scheme of Arrangement, a flexible tool derived from the Companies Act rather than insolvency legislation. The Scheme “seems to be the way forward,” says Beissenhirtz.
While there is a court case pending in Germany on whether English Schemes of German companies will be recognised in Germany, they remain the default mechanism of choice. And even when the new German legislation comes in, he says, it will take two to three years of use to ‘bed it down’.They are not looking to lend new money. They are showing no initiative to restructure. They are just looking to extend and pretend.”
“The banks do not have the human resources to wok on every distressed situation,” Thery told the conference. We are seeing a lot of liquidations. We are also seeing third party purchases and auctions by banks.” There are also loan-to-own options, he said, where owners of distressed businesses have been forced by bank inaction to go out and find a new buyer for the bank’s debt. Everything is going in slow motion,” said Thery. “While the banks are in crisis, I fear this situation will continue.”
Meanwhile Thery described Spain’s new legislation which should reduce the need for English law Schemes of Arrangement, in the shape of a ‘refinancing agreement’. It will be enacted in October, he said, but might be delayed by elections. Perhaps it is more like the UK’s Corporate Voluntary Arrangement (CVA), he added. Our legislators are thinking also about other pre-insolvency schemes,” said Thery. Our legislative body is quite aware that insolvency instruments are not providing answers to our problems.” Thery said there was quite of lot of operational turnaround and refinancings going on in Spain, some refinancings “might be for the second or third time round. So there is a lot of work for practitioners,” he concluded, “but not as much as expected.”
David Lovett, European head of restructuring at AlixPartners, said the UK restructuring and turnaround market was “very quiet. There is far more activity in other markets we are in involved in, such as the Middle East.” The big problem in Europe at the moment, said Lovett, was the impact of weak financial institutions on the rest of the economy. It’s a big concern of turnaround practitioners,” said Lovett. “It’s very difficult for companies to get a rational view from banks.”
Banks are worried at the moment about all sorts of issues; what are their core and non-core operations, for instance? How is their relationship with the bank regulators and government working out? They might have balance sheet issues or want to exit a particular sector, he observed. Any one of a myriad of internal factors like these could impact on they way they answer a query from a particular debtor, said Lovett, and their answer may have nothing to do with the debtor’s viability or otherwise.
We spend a lot of time at the moment advising companies on what they should do to avoid becoming a victim,” he said. The last word should be left to Jouko Karvinen, CEO of Storaenso, one of the biggest forestry companies in the world. Karvinen was sent in to turn around the giant, and has ruthlessly sold off forests and cut out underperforming subsidiaries, much to the horror of many Finnish commentators. The company is now back to financial health and heading for better things, he told the audience, after many years of painstaking turnaround work. Then he was asked: “Did you use any external turnaround?” No”, he replied; at which the audience let out an audible sigh of disappointment. Which was a fitting conclusion for the conference; good work will always be difficult to find.