Insights

Viewpoint

July 2015

Read the latest key issues, trends and sector updates impacting the restructuring arena from Deloitte.

Welcome to Viewpoint. This is a quarterly review of the key issues and trends in the restructuring arena.

One step closer to Grexit?

On Sunday, the Greek public voted “no” and rejected the creditor proposals that would have ushered in greater fiscal discipline, but provided much needed liquidity to the country. In voting “no” is Greece now on an inevitable path towards an exit from the Euro?

Leaving the Euro area offers two powerful attractions for Greece: devaluation and default. A devalued currency should help raise competitiveness and default could provide an escape from years of punishing debt repayments. Both, of course, come with severe risks. Moreover, exiting the Euro would set Greece on a course riddled with uncertainty.

We can only observe the unfolding course of events in Greece. Given the risks, any organisation with material exposure to Greece needs to understand how, in detail and in practical terms, it would respond to the country’s departure from the Euro area.

David O’Neill, Director, Restructuring Services Crisis Management Lead:
“A Grexit will present multiple challenges and risks for both corporates and investors.

  • Redenomination to a weaker currency and the introduction of FX controls will cause disruption to local banking systems and cash flows, putting cash held in the country at increased risk.
  • Greek banks will need to recapitalise. However, without ECB assistance the sector will likely need to undergo restructuring. A crisis in the banking sector increases the risk of contagion on the broader Greek economy, and could affect otherwise healthy businesses.
  • Investors will be concerned about asset valuations and increased risk of credit default by Greek businesses facing higher finance costs on non-Greek loans.
  • Organisations will face increased counter party risk, from recovering outstanding debts through to supply chain disruption.
  • Organisations with subsidiaries in Greece will need to address concerns around impairment of intercompany debts and asset write-downs.

However, every crisis provides an opportunity to emerge stronger. Investors and corporates alike will use the situation to acquire undervalued assets, while others will drive financial benefits through, for example, reducing supply chain costs.

Throughout this crisis, what will set apart the winners from the losers is the ability to respond decisively and quickly, with capable resource, to adjust to the situation as it continues to evolve and to seek out value accretive opportunities.”

Click here to read more about the implications arising from the Greek financial crisis.

Restructuring Infrastructure - Bridging The Gap 

Infrastructure projects rarely go wrong: historical default rates have been encouragingly low for this asset class. But when deals do go wrong, restructuring them can become spectacularly complex. This is because the very qualities that make infrastructure assets so attractive to investors – the essential nature of the services to the wider public, strong regulatory oversight and watertight contractual frameworks – tend to magnify the difficulties of a workout.

So, how can infrastructure investors bridge this gap between theory and practice to enable successful restructuring of infrastructure assets? Where are the risks and what are the key components to a successful resolution?

Ben Davies, Restructuring Services Director:
“In our experience, many of the resolution processes put in place at the inception of a deal are largely theoretical rather than based on prior restructuring experience. At a time when a huge amount of capital is seeking a home in infrastructure projects worldwide, a key point of our paper is to focus investors’ minds on the benefits of spending time at the outset of a new deal thinking in detail about the downside risks in order to get comfortable that the commercial and contractual mechanics in place to resolve any future issues are genuinely realistic and deliverable.”

This paper introduces some of the components contributing to that complexity and sets out a tried and tested five-stage approach to resolve distressed situations in the infrastructure sector.

Click here to view the paper.

Adult Social Care – Continuing Challenge

We have very recent hands on knowledge across the adult social care space including:

  • Running the Life Style Care 2011 portfolio (22 ex Southern Cross Homes) in insolvency – one of the largest trading insolvencies of a care home group in recent times;
  • Advising on the sale of Executive Care Group (27 care homes) – successful delivery of a complex transaction implemented via sale of multi-Lender debt positions;
  • Advising the lenders to a distressed home care provider; and
  • Providing buy side support for the acquisition of 60 freehold care home properties.

Across these and other assignments, we have successfully deployed cross-service line teams from our Restructuring Services, Transaction Services and Corporate Finance Advisory practices which all have in-depth sector expertise. In addition David Jones is one of the pre-eminent advisers in the sector and recently won the HealthInvestor Awards Corporate Finance Adviser of the year for the third year running. This is a market in which we continue to see significant activity and expect to do so for the foreseeable future.

Rob Harding, Restructuring Services Social Care Sector Lead Partner:
“The adult social care market continues to see significant challenge, brought about by ongoing pressure on the local authority funding model. At the same time, businesses are facing material cost pressure as a result of the increase in the minimum wage and the national shortage of nursing staff is driving the need for both agency staff and increasing pay rates.

Over the past few years, we have seen a number of structural changes in the provision of social care, most notably an attempted move to more of a “home care” model. However, we are now seeing increasing stress in that particular area of the market – the fundamental problem of under-funding remains. To compound matters, care providers are now subject to a new inspection regime with different rating categories providing a steep learning curve. Furthermore a new Financial Oversight regime has been implemented focussing on the largest providers to ensure continuity of care in the event of distress – an area that the CQC as regulator is very much focussed on. Given the sensitive nature of the industry and the extent of change to which it is currently subject, it is key that specialist advice is taken at the earliest opportunity”.

Promotions

We are delighted to announce the promotion of one new partner and seven new directors effective as of 1 June 2015, reflecting our ongoing investment in our restructuring business.

Promotion to Partner:
Will Newton, Financial Institutions Group (FIG)
Will has 27 years’ experience as a senior banker and advisor working in the UK, Western Europe, CEE/CIS and Asia. Since 1991, he has focused primarily in the areas of risk, restructuring and portfolio advisory. As Partner in the FIG he will be responsible for all FIG strategic advisory across Europe, including bad bank establishment and operation, non-core deleveraging, wind-down & closure and carve outs.

Promotion to Director:
Rahul Bhansali, Amo Chahal, Rob Connold, Sandy Duncan, Richard Harrison, Harry Morgan, Jack Parkinson.

Restructuring Services FY15 Year in Review

FY15 proved to be a truly interesting and exciting year for Restructuring Services in terms of the diversity of projects that were worked on in different jurisdictions and sectors.

Nick Edwards, Head of UK Restructuring Services
"Over the last 12 months, we found ourselves working in all corners of the globe and supporting challenged sectors such as Financial Services and Oil & Gas. We have also seen an increase in the range of projects we have worked on requiring support on Accelerated M&A, Supplier Risk Management and Cash Management & Forecasting to name a few."

To see a cross-section of the projects Restructuring Services worked on during the course of FY15 - click here.

Did you find this useful?