December 2019 Issue
The distressed M&A arena has been operating in the shadow of increasing global economic and political uncertainty, as well as tension caused by the ongoing US/China trade war. With firms in distress due to overleveraged balance sheets and in need of liability management, a robust change management programme is key to enhancing the opportunity for meaningful value creation. And while the future is hard to predict, it seems likely there will be an uptick in distressed M&A activity.
FW: What do you consider to be the main trends and developments to have dominated the distressed M&A market over the past 12 months or so?
Butler: Generally, global M&A deal volume has been down, and deal value has been up. The market has been challenging in some industries and market segments, so the view of 2019 is really dependent on the prism viewed by the kind of deals a particular investor is focused on. Much of the market activity in the first half of 2019 was dominated by mega deals – deals valued at $10bn or more – with the middle market slowing down considerably over the last year. Looking at distressed markets within the US, business bankruptcies continue their decade-long decline – down 5 percent in 2018 from 2017 and more than 50 percent from 2008. Retail filings represented about one-third of all business bankruptcies with at least $10m in liabilities and most of those were quick sales or liquidations. Overall, the largest M&A transactions in 2019 have been led by strategic purchasers with synergistic economies of scale acting as a key source of value creation. Globally, healthcare, tech and energy have been the driving industries in M&A activity. In the US, energy is the largest section of the high-yield market in 2019 but investors have backed away as the cost of capital has increased. Facing pressures from debt service challenges and sceptical investors, about twice as many US oil and gas producers have sought bankruptcy protection in 2019 compared to 2018.
Husnick: Traditional brick and mortar retail companies continue to struggle, due in large part to a historic shift in consumer buying habits and advances in logistics technology that permits ‘same day delivery’ in many areas of the country. Distressed investors continue to look for ways to extract value from failing retailers. The most obvious source of value after inventory, which is typically used to repay asset-backed lenders, is intellectual property (IP), such as brands, trademarks, websites and loyalty programmes, including customer lists. IP is often excluded from the collateral package of asset-backed lenders and, therefore, is available to serve as collateral to secure additional funding in and outside of a distressed situation. This bifurcated collateral structure creates opportunities for distressed investors to take secured positions within a stressed or distressed company. For example, certain secured lenders took a first priority security interest in the Toys R Us IP property. The value of the IP and the rights associated with ownership and licensure of the IP took centre stage throughout the proceeding as multiple sets of creditors fought over the use of the Toys and Babies brands around the globe. Now, less than one year after Toys wound down its US operations, the creditors whose investments were secured by Toys’ IP are preparing to open new stores. Oil and gas and healthcare also continue to provide opportunities for distressed investors. For example, there has been some consolidation in the oil and gas industry, as companies that restructured previously look to use additional balance sheet capacity. In addition, many oil and gas companies with overleveraged balance sheets remain in need of liability management, restructuring or other strategic alternatives. Finally, legislative and regulatory uncertainty and advances in technology have disrupted the healthcare industry, creating additional opportunities for distressed investments.
Bhatia: 2018 was a great year for M&A in India with transactions over $100bn – the first time this has happened. A significant uptick in the M&A activity was driven by distressed M&A which was triggered by the introduction of the Insolvency & Bankruptcy Code (IBC). The number of large deals – $250m and above – has also seen a steady increase over the last few years. While the first half of 2019 was slow and has not been able to keep pace, we expect distressed M&A to remain vibrant for the next 18-24 months. The key players in distressed M&A in India have been the strategic corporates that saw this as an opportunity to both expand and strengthen their market position. Most of the large distressed M&A assignments were seen in the steel sector, which saw interest from large business houses in India and globally. In parallel, due to the difficult liquidity conditions and lack of domestic capital, divestment of non-core assets or non-strategic businesses is an important factor driving the overall deal volume for distressed M&A.
Durrer II: In the last 12 months, the distressed M&A market has operated in the shadow cast by global economic uncertainty and tension caused by the ongoing tariff war between the US and China. Encouraged by the White House, the US Federal Reserve has undertaken steps to mitigate any ripple effects and has been somewhat successful in that regard. Recent months have seen more Chapter 11 filings that do not have a clear exit strategy, such as that of Forever 21. One analysis is that such ‘free-fall’ Chapter 11 filings are a symptom of the uncertainty that is dogging the distressed M&A market. Time will tell.
Quade: Markets have largely remained dominated by supply problems. Too much money chasing too few deals has not significantly changed in the last 12 months or so. Increasing economic and political uncertainty around the world suggests that distress is increasing, and, in the UK and other countries, there has been an increase in the number of insolvencies. Strategic trade buyers continue to value stressed or distressed assets higher than funds as they have greater opportunities for synergies, so it is a tough market for funds which have a lot of dry powder. Another issue is that there are not many truly distressed situations where a transaction is possible. So many troubled businesses have stayed alive on the back of cheap money with overleveraged balance sheets which have seen multiple refinancings and financial restructurings but never addressed underlying operational issues. Rescue transactions are not always possible, and many such businesses will eventually have to go through an insolvency process resulting in an asset purchase. As we have seen in the last 12 months, some have gone straight to liquidation.
“Because of the huge amount of capital that is still chasing a smaller number of deals, the collective appetite of distressed investors remains voracious.”
FW: How would you characterise the current appetite of distressed investors? What are the advantages – and potential disadvantages – of participating in this market?
Husnick: The distressed market continues to be relatively quiet, although activity has picked up in recent months. Recognising that the 10-year bull run will likely come to an end at some point, a number of funds are in the midst of raising capital that will be deployed in special situations during the next downturn. Unfortunately for those with capital to invest, the scarcity of available deals has driven down investor return.
Bhatia: While the distressed market has been led by strategic investors, financial investors are actively evaluating assignments, but more to test the waters for future potential opportunities. Our assessment is that financial investors will increasingly play a more important role in the distressed M&A market. The secondary loan buyout market is already thriving, with investors across Asia, Europe and North America participating. Early participants in the secondary market have made handsome profits; it is about being relevant. New companies are entering the National Company Law Tribunal (NCLT) process almost daily, and certain sectors like steel, power, real estate and infrastructure stand out as particularly vulnerable. Many companies in sectors such as manufacturing, textiles, consumer and metals are also overleveraged and likely to face the chopping block. We expect select investor interest in these sectors in the next 12 months. Distressed M&A can happen through the IBC route or the Inter-Creditor Agreement (ICA) route, as defined by the Reserve Bank of India (RBI). The IBC, while it had initial success, has been a mixed bag with investors keen to see improvements in two key areas: resolution timelines and the availability of good quality information on the corporate debtors. Against this backdrop, the RBI’s push for the ICA route is encouraging, however we observe that lenders are not as cooperative, thereby delaying the resolution process.
Durrer II: Because of the huge amount of capital that is still chasing a smaller number of deals, the collective appetite of distressed investors remains voracious. The obvious disadvantage of participating in a market like this is the risk of overpaying for a distressed asset. The advantage of participating in this market is that leverage is available to mitigate the risk of overpaying. The investors that perform the best in this environment will be the ones who can source and close transactions on a proprietary basis without competition.
Quade: Distressed investors currently have a voracious appetite for debt deals but are less enthusiastic for equity investment, with the focus generally on certain well-defined markets – both geographically and by sector. Equity investors at present seem to prefer to support a strategic or trade deal rather than direct investment. Debt appetite tends to be mainly for large, single-ticket deals or prepackaged portfolios. The advantage of participating in this is the potentially high returns, if you really know your market and particularly if you are prepared to invest time in turning around underlying assets. The disadvantages are the levels of competition and a lack of realism from vendors on pricing. Many jurisdictions also make true turnaround and restructuring a challenge with many risks. Lastly, there is a lack of backable management teams with the requisite skills and experience, partly as good teams do not tend to stick around in distressed situations and partly down to the focus over the last decade on financial restructuring and a lack of operational turnaround meaning the right experience just is not there.
Butler: Distressed M&A transactions are attractive if the acquisition price is below the target’s intrinsic value. Fortunately, market values often deviate from intrinsic values in the stressed business environment. The goal is to be positioned to act where there is misalignment between the two valuations, while avoiding overvalued transactions which often occur in competitive auctions situations. In the current market, the supply of capital is decidedly outpacing quality, value accretive targets which is putting pressure on the investment metrics of available deals as well as on returns for funds that are not completing investment transactions.
FW: What particular challenges does the distressed M&A process generally involve, compared to ‘traditional’ M&A? For example, what considerations need to be made when structuring and financing this type of deal?
Bhatia: One of the biggest challenges for distressed M&A has been the access to quality information. Under the current setup, promoters of the distressed company have either already been removed or they have limited financial upside. In such circumstances, they are not very cooperative and the information they leave behind for a resolution professional is sketchy. Lack of good information can lead to an incorrect estimation of the ability to turn around an asset, and thus could result in under or over payment. The other common challenge seen in India has been the lack of consensus building among various classes of creditors. Multiple transactions have been shelved at the very last stage because a small proportion or one of the creditors – at times less than 1 percent interest – did not agree to the resolution plan. Then there is the issue of contingent and past liabilities, which makes the valuation, legal and negotiation process extremely tedious. Lastly, but equally important, are suggestions of past misdeeds by distressed companies, especially when some of the transactions of these companies are classified as fraudulent or preferential.
Durrer II: Distressed investors need to commit deal resources in order to be taken seriously and obtain coveted exclusive negotiating rights from a seller in connection with a given transaction. That often translates into hiring a full suite of advisers, including legal, financial and accounting, to address a variety of due diligence (DD) needs from contingent liabilities, consent issues, deal structure, quality of earnings, change of control issues and the like. Those expenses can really add up, and in the distressed M&A arena, it is unlikely that a seller can absorb or mitigate those. It is not unusual for a distressed investor to insist on so-called ‘broken deal’ discounts from their chosen advisers to eliminate a portion of that cost if a transaction does not close.
Butler: Transaction risks in a distressed M&A transaction are often more substantial than traditional M&A but should correlate with increased potential returns. Buyers often prefer an asset purchase transaction in order to limit assumed liabilities and face occasional pushback from sellers who would rather close a stock purchase structure. This saves them time and money as they do not have to retitle transferred assets or seek consent for contracts that contain standard anti-assignment language. That said, a ‘secret sauce’ in many successful stressed acquisitions is thoughtful transaction structuring that mitigates risks and enhances the opportunity for meaningful value creation.
Quade: It is always much harder to gain a good understanding of a business in distress, yet time will always be one of the scarcest commodities. Sale processes are nearly always on an accelerated basis as insolvency looms and also when the sale is out of an insolvency process. There is insufficient time for a normal, full DD process and the quality of information available can be poor. Pricing the deal is therefore difficult. There can also be a variety of stakeholders whose competing interests have to be considered and the capital structure of the business may also be complicated, particularly if there have been previous multiple refinancings. Often, there are no multilateral agreements, so any one party can kill a deal. Structuring the deal with secured debt helps to mitigate downside risk but short-term serviceability is likely to be a challenge. In some jurisdictions, the law is tightening around the validity of debt if serviceability can be questioned from the outset.
Husnick: Traditional M&A can move relatively slowly as buyers engage in significant legal and operational DD. Such efforts are often significantly streamlined in the distressed context, whether out of pure necessity since the company can only survive so long until the deal must close, or out of legal convenience, where a buyer can purchase assets free and clear of liens, claims and encumbrances in a bankruptcy process, reducing the need for certain legal DD. Second, traditional M&A can often be completed without a great deal of public disclosure until after a deal has been negotiated. In contrast, distressed M&A usually requires a public marketing process with the oversight of a bankruptcy court or an official committee of unsecured creditors. Third, litigation in traditional M&A is relatively uncommon when compared to litigation in a bankruptcy, where the bankruptcy court provides a convenient forum for parties to air their grievances.
“While the distressed market has been led by strategic investors, financial investors are actively evaluating assignments, but more to test the waters for future potential opportunities.”
FW: What strategies and methodologies should be employed to value distressed companies, identify and manage potential risks, and lay the groundwork for maximising return on investment down the line?
Durrer II: Most distressed investors engage with a distressed M&A transaction because they already have a good sense of or experience with the underlying industry. Often, they ask themselves, does this company need to exist? Has this industry been hopelessly disrupted by a new, advancing technology? Ultimately, an investor should have a fairly good sense of what kind of exit they would envision post-investment and on what time horizon. At a minimum, an investor should have specific ideas in mind regarding how to turn the distressed asset around, either through management changes or other synergies arising from existing, comparable investments.
Quade: It is paramount to have the ability to move quickly. Any acquirer should ensure they have identified and lined up the best advisers who understand distress, understand the local culture and restructuring regimes and know the industry. They should be involved as early as possible to commence whatever DD is possible and start planning. Valuation needs to consider both the post-acquisition plan and the eventual exit. From this you can work backwards to a target return for the investment. For strategic trade buyers, the focus should be on synergies to be gained. In both cases there will be investment needed post-acquisition, whether for working capital, capex or other operational improvements. This can often mean that the value of the distressed business as it stands is nearly zero. The post-acquisition plan needs to urgently address the underperformance of the business and any integration synergies to be achieved. Implementation of the plan needs to be carried out quickly and management frequently struggles to achieve this alongside their day-to-day responsibilities. Engaging specialists with niche skills in turnaround and integration can often ensure that the planned value enhancement is achieved or bettered and that this is done quickly and efficiently.
Husnick: Distressed investors need to be mindful when valuing distressed companies of the negative effects of distress on a company’s operations. Stressed or distressed companies often pull certain levers to extend runway and preserve liquidity – reducing capital expenditures, stretching trade vendors or reducing available services for customers. These actions can have a short-term benefit, but often have longer-term, sometimes irreparable, effects on the value of the company and its brands. While it is not always easy to calculate cost and benefit in these situations, distressed investors should not assume a dollar saved is a dollar earned.
Butler: Successful acquirers of stressed businesses have a thoughtfully developed exit strategy in place at the time of acquisition. They target underperforming companies that have an inherent reason to continue to exist and match their performance improvement capabilities to create value. Distressed investors with long-term value creation goals employ robust DD programmes in order to assess business models, management, IP, industry headwinds and company-specific challenges, including governance and legal issues. Reactive, auction-centric processes present their own challenges: preliminary interest is generally gauged from a deal book and a constructed financial model, with some investors focused on pursuing transactions with prices below their valuation model and who do not always carefully assess asymmetrical risk, or transactions that have been financially engineered to meet market hurdle rates.
Bhatia: The typical valuation approach for distressed assets would be either scenario-based or valuing a business as a going concern, and then applying a distress discount. While valuing a distressed asset is not easy, building a strong and reliable model would depend on identifying key risk factors, such as management structure, revenue and cost drivers, cost base and operational viability. Another important aspect to take into consideration while arriving at deal value is to factor the likely costs that can come up due to delay in deal closure and to arrive at a fair value for the assets.
“Distressed investors need to be mindful when valuing distressed companies of the negative effects of distress on a company’s operations.”
FW: What type of due diligence should an investor in distressed assets carry out pre-acquisition? What additional diligence should an investor aim to do once it has acquired the distressed asset?
Butler: Effective DD is closely aligned with investors’ staged investment processes. Following an initial assessment to determine whether an investor will commit resources to evaluating the potential opportunity, followed by separate phased investment committee approvals around indications of interest, letters of intent and funding authorisation. Each step of the investment process should involve graduated DD requirements. What are the major challenges and opportunities that can be identified early on? What’s the view about management? Who are the major stakeholders in the deal and what is the likelihood they can be influenced? What does the investor’s expert network think about the industry, the company and management? What is the underlying story that makes the company available for investment? Is there a proprietary path to a transaction? Does the transaction timetable align with internal resource allocation and other investment activities? What is the high-level assessment about the business plan and financial model? Subsequent steps include a granular evaluation of the balance sheet and the income statement, development of a business model, an assessment of deal structure, an evaluation of third-party reports, including detailed background checks on key players and an evaluation of assessments from counsel, retained independent financial advisers, potential co-investors and expert networks.
Bhatia: When considering investing in distressed assets, a good place to start is by analysing the genesis of the distress. In some cases, this may simply be business risks playing out. For example, the company or asset may have been overleveraged, anticipating a demand-supply cycle that did not materialise. It is not that the asset itself is necessarily ‘bad’ but rather that certain unfortunate circumstances led the asset into turbulent waters. The pre-acquisition DD should be like what is done for the standard M&A – reputation and integrity DD, financial DD, technical DD, commercial DD and legal DD. The scope should be customised and should factor in the reasons that led to the asset becoming distressed. There is limited access to good quality data in a distressed M&A. To ensure that, post-acquisition, the acquirer is aware of the real risk, companies should carry out a fraud risk review which looks at hard data like enterprise resource planning (ERP), contracts, vendor and employee master, debtors and write-offs. This allows the company to ascertain whether it acquired a company with only business risks, or with business and fraud risk.
Quade: As much DD as possible should be undertaken pre-acquisition. Financial DD is clearly important, but operational issues and the reasons for distress need to be probed. Targeted commercial DD can also uncover a lot of valuable information about the business and its relationship with its customers and suppliers, as well as its competitive position. The management team should also be looked at to gauge its competency and effectiveness and whether any changes need to be made. In the immediate post-acquisition period, any areas that could not be adequately reviewed before the deal should be completed. The strategy and plan should also continue to be reappraised and adapted as necessary. This can be part of the remit of a post-acquisition team where external specialists are involved. If not, then some reappraisal independent of the management team should be carried out. Clear key performance indicators (KPIs) should be set across the business and performance robustly monitored against them, quickly addressing issues when KPIs are missed.
Durrer II: One unique aspect of investing in distressed assets is the pace of the transaction is often accelerated, which puts pressure, and a premium, on DD. Some distressed investors are well-equipped with this expertise in house, but, inevitably, outside advisers will often be necessary. One of the best ways to entice a seller to work with a distressed investor is to commit such resources early. Management meetings are especially valuable to get at information that may not jump off a spreadsheet or make itself known in a virtual data room. Sometimes, accounting and quality of earnings diligence can be postponed until post-closing, but only with a commensurate ‘earn-out’ or other mechanic for post-closing price adjustments.
FW: How should parties manage the competing interests of the various groups associated with a distressed transaction? To ensure a smooth process, is it important to preserve relationships with key stakeholders?
Husnick: Stakeholders of a distressed company – whether justified or not – are often sceptical of management, advisers and other stakeholders. Transparency and communication are key to overcoming such scepticism, ensuring that stakeholders are generally moving in the same direction and reaching deals. While different stakeholders undoubtedly have different, and sometimes competing, interests, there is almost always common ground that can be used to build consensus.
Bhatia: A distressed M&A is no different from any other transaction. While the circumstances are not the same, every stakeholder is still trying to maximise value. Analysis of past data suggests that performance of a distressed asset is relatively weaker than that of performing assets over 1-2 years post-acquisition. This does not necessarily indicate that the acquirer paid more than what it should have, but instead suggests that the turnaround of a distressed company is not easy and takes time. To ensure that the operational turnaround of the company is successful, continuing relationships with key stakeholders does help. Unless one suspects fraud or conflict of interest, continuing with the vendors, customers, intermediaries and employees who understand the company can help to achieve better outcomes, and allows the company to focus on growth and efficiency.
Quade: Unless stakeholders are being replaced as part of the transaction, relationships are absolutely essential. Stakeholder management is an essential part of turning around any distressed situation. Establishing clear lines of communication early on helps a lot and these should be maintained openly and honestly. Setting and managing stakeholder expectations is key to these relationships and in order to do that you must understand each stakeholder’s own position and requirements. Often, there is a mutual interest for achieving success. However, different stakeholders’ understanding of the overall situation, their own internal requirements and their relative leverage in negotiations can be quite different.
Durrer II: Quality dealmakers are able to tease out the parties who matter, what they want and what they fear. Understanding these elements of a transaction enhances the likelihood of a ‘win-win’ transaction where everyone gets something that they want and need. It is rarely wise to burn bridges, particularly in the distressed investing space. It is a small world and aggressive behaviour in one situation can sometimes haunt the perpetrator in a later transaction.
Butler: Understanding who the major stakeholders are in a potential transaction and what their competing interests should be is an essential element of any preliminary transaction assessment. Deal flow should come not only from referred opportunities but from a proprietary internal corporate intelligence process. It is not unusual for a firm to identify an interesting opportunity created by its own internally developed investment thesis in situations where it does not, at least initially, have a seat at the table or an immediately obvious pathway to engagement. Once the decision to devote resources to a potential transaction has been taken, careful attention needs to be paid to the target’s internal corporate governance culture and its interaction with key stakeholders. The general inclination is to establish and nurture relationships with stakeholders, particularly those who can influence the transaction outcome, as well as those parties that may be outcome determinative for value creation post-transaction. Often, investors rely on a carefully constructed communications plan to help with these efforts.
“In the immediate post-acquisition period, any areas that could not be adequately reviewed before the deal should be completed.”
FW: For its part, how should a distressed company go about preparing information to maximise the chances of a successful sale? What initial preparations might prove useful?
Bhatia: If a distressed company thinks of itself as either a performing company looking for growth capital or a potential investor looking to acquire, the transaction will move forward much more smoothly. Setting up a dedicated data room and ensuring that all the data available is made accessible to the deal team is important. This will create trust and allow for more rational assumptions being built in. This will also ensure that the transaction moves forward faster, thereby improving the probability of a successful closure.
Butler: Generally speaking, stressed companies only have one, or maybe two, chances to present effectively to the investment community. Effective information presentations often involve competent financial and turnaround advisers who have vetted the company’s current situation, and help the company present challenges and opportunities realistically and transparently. Thoughtfully crafted virtual data rooms will accelerate both potential investor assessments and feedback to the distressed company, so that it can allocate its limited resources to counterparties that may actually get to a close. Stressed businesses are just that: they are experiencing one or a series of material challenges to their business plan, business enterprise value and, perhaps, very existence. Unvetted and externally unsupported business models created by an internal finance group that has missed most or all of their recent financial projections are unhelpful. Undisclosed liabilities or operational problems often kill deals. Arrogant and unresponsive management teams both seal their own fate if the transaction is completed but more often raise the ‘noise’ level in the assessment process that leads to investment teams turning to other opportunities.
Durrer II: Sophisticated advisers and governance are valuable tools to enable a distressed company to complete a transaction successfully. This is simply because those professionals can identify how the company became distressed but also what information a potential investor will want. The more reliable and relevant information that the shepherds of the process can mount for the potential acquirer, the greater the likelihood of a successful closing. Close trust and clear communication among the advisers and management will also enhance the opportunity.
Quade: The sale process for a distressed business is one where, even more so than a non-distressed business, surprises can quickly cause buyer confidence to disappear and a transaction to founder. It is therefore important to anticipate how a potential investor will approach the transaction and ensure that as many questions are answered in the data room as possible. All the usual information should be present but there needs to be explanations. These must include how the business has become distressed, what actions have been taken and with what results. Have turnaround experts been hired to at least stabilise the position? There needs to be a clear explanation of why this is a viable business that an investor can make money from. In particular, forecasts and valuations need to be robustly supported with key risks identified and how they can be mitigated. Communication is also important. Owners need a realistic view of value, lenders need a realistic view of their likely outcome and management need to recognise the realities of change.
Husnick: Distressed companies need to be prepared to respond to many of the same diligence requests expected in a non-distressed M&A transaction. Unique to the distressed M&A world is whether the tools available in a bankruptcy can unlock additional value for stakeholders. For example, buyers, as well as stakeholders evaluating bids, will want to understand if there are any unprofitable contracts or leases that the company would like to ‘leave behind’ in the bankruptcy process. Buyers will also want to understand the time and expense associated with a bankruptcy so they can evaluate whether the potential collateral damage to the business outweighs the benefits of a bankruptcy filing.
“Understanding who the major stakeholders are in a potential transaction and what their competing interests should be is an essential element of any preliminary transaction assessment.”
FW: What are your predictions for the distressed M&A market over the coming months? Are there reasons to expect an increase in activity?
Quade: Given current economic and geopolitical uncertainties, the future is hard to predict. Due to the risks of a global slowdown, potential recession and a tightening in the credit market, it does seem likely that there will be an increase in the number of distressed businesses. However, the current cycle has been a long one, with low interest rates and excessive bank forbearance. Many businesses have been stressed or distressed for a long time with many going through multiple refinancings and financial restructurings. The underlying operational issues have not been properly addressed and, in some cases, it may be too late. I would expect to see an increase in the number of companies going straight to an insolvency process and for there to be more liquidations as opposed to pre-packs or quick administration-type processes. If there is an uptick in distressed M&A activity, it is likely to be around more asset purchases after an insolvency and building a business afresh from that point.
Durrer II: Professionals continue to debate when we will experience a true down-cycle given the absence of one over the last 11 years, excluding, perhaps, the oil and gas industry. Although rising interest rates suggested that a down-cycle was looming, the US Federal Reserve has retraced some of its recent steps. I continue to believe that we are on the verge of a traditional down-cycle, and that it will come in the next 24 months. So called ‘free fall’ Chapter 11 cases have become more frequent, and I believe that will likewise continue.
Husnick: It is impossible to predict exactly when the markets will turn, but it is hard to believe that this 10-year bull run will continue unabated for another 10 years. I suspect there will be a steady source of work over the coming months and, at some point in the future, we will all be very busy.
Butler: 2019 will defy the ‘middling expectations’ that were put in place for it by many market observers last year. The geopolitical concerns anticipated by investors and the interest rate hikes people expected to occur are not going to happen now, and with the moderated Fed policy, we think the amount of direct investment inflow into the US is going to continue to make this a very robust M&A year. That said, we believe there are storm clouds threatening on the horizon. On a global basis, M&A deal volume appears to be cycling down, deal value is up and there remains a lot of capital in the market. Today’s challenging political climate and its influence on global trade and business operations, as well as the resulting strained relations with China, have had a significant impact on the cross-border M&A industry and segments of the domestic M&A industry with substantial challenges to some industries and market segments. Looking ahead in the US, the Federal Reserve continues to double down by further lowering rates and reopening its balance sheet to acquire assets as we head into a US presidential election year where the incumbent administration will do whatever it can to buoy the economy. That combination would predict a modestly robust M&A market in 2020 followed by substantial recessionary uncertainty in 2021.
Bhatia: With the Indian economy facing some slowdown pressure and continued weakness of the banking sector and non-banking financial companies (NBFCs), the activity in the distressed space is likely to pick up in the near- to medium-term. The value of debt downgraded in India tripled to $19bn in the last 12 months, reflecting that distressed assets are piling up. While things have been slow during the first half of 2019, implementation of a more disciplined and time bound resolution process under the IBC will rekindle the interest. Similarly, better understanding and belief in a common goal among lenders is essential to support distressed M&A through the ICA. India remains an attractive investment destination and financial investors will be keen to evaluate potential turnaround opportunities.
One of the most highly regarded dealmakers and thought leaders in the restructuring, corporate reorganisation and M&A communities, Jack Butler has been credited as one of the principal architects of restructuring solutions for dozens of companies across a diverse range of industries. His recent transactions include leadership of merchant banking relationships in the food, consumer electronics, legal tech and transportation industries, among others. He can be contacted on +1 (312) 757 2330 or by email: jack.butler@birchlake.com.
Matthew Quade has 19 years of turnaround, restructuring and M&A experience working for a wide range of stakeholders across a variety of industries – a career which has taken him from a ‘Big 4’ accountancy firm to a major international bank, a global consultancy practice and to building his own successful business before joining BM&T. Mr Quade has advised and taken executive management roles in businesses from £5m to £1bn across Europe, the US and in the Middle East. He can be contacted on +44 (0)203 858 0289 or by email: mquade@bmandt.eu.
Chad Husnick is a partner in Kirkland & Ellis’ restructuring practice group. He represents debtors, creditors, equity holders and other stakeholders in all aspects of corporate liability management, restructuring, bankruptcy and insolvency proceedings. He has represented clients in a variety of industries, including energy, retail, infrastructure, manufacturing, transportation and distribution, hospitality and gaming, real estate, automotive, and printing. He also teaches an advanced seminar on corporate restructuring at the Law School at the University of Chicago. He can be contacted on +1 (312) 862 2009 or by email: chad.husnick@kirkland.com.
Tarun Bhatia is a managing director and head of South Asia in the business intelligence and investigations practice of Kroll, a division of Duff & Phelps, based in the Mumbai office. He has extensive experience in evaluating, measuring and monitoring risks across corporate India over the past 15 years, and is a well-regarded industry expert for financial services and structured finance. He can be contacted on +91 22 6294 8166 or by email: tarun.bhatia@kroll.com.
Van C. Durrer II leads Skadden, Arps’ corporate restructuring practice in the US and advises clients in restructuring matters around the Pacific Rim. He regularly represents public and private companies, major secured creditors, official and unofficial committees of unsecured creditors, investors and asset-purchasers in troubled company M&A and financing and restructuring transactions, including out-of-court workouts and formal insolvency proceedings. He can be contacted on +1 (213) 687 5200 or by email: van.durrer@skadden.com.
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