Deloitte RS Viewpoint
Read the latest key issues, trends and sector updates impacting the restructuring arena from Deloitte.
- RS Sector Outlook Series
- Deleveraging Europe 2015-2016
- Deleveraging in Central and Eastern Europe
- UK-US M&A Deal Corridor
Welcome to Viewpoint. This is a regular review of the key issues and trends in the restructuring arena.
Coming Soon: Deloitte RS Sector Outlook Series
The Deloitte RS Sector Outlook Series is a Restructuring Services series that will bring the industry challenges facing corporates in the UK & Europe to the surface. This series will delve deeper into sectors that are stressed and will provide industry insights, real-time news flashes, analysis of the market and key considerations for how stakeholders can emerge stronger.
Look out for the first issue in this series, Mining - Finding the Balance, which will be sent to you soon.
Leases: New Financial Reporting Standard – Potential Implications for Lenders
Following the release of an exposure draft in 2010, the International Accounting Standards Board (IASB) has finally released IFRS 16, a new standard on lease accounting. This standard will require lessees to account for all leases on their balance sheets, including those which had previously been treated as operating leases and accounted for only in the profit and loss account as an “in-year” expense. This will include leases of retail and commercial property, equipment and vehicles. Accordingly, affected corporates will see:
- The assets and liabilities on their balance sheets increase significantly, with a potentially material impact on covenant calculations;
- The cost profile of their income statements change, with costs skewed towards the early years of leases and greater volatility due to the frequency of recalculation;
- The nature of costs in the income statements change, with a positive impact on EBITDA, but a greater weighting to finance costs and depreciation, again potentially impacting calculations of covenants. Depending on the wording of finance documents, this could also have an impact on cash sweeps, management bonuses and the like;
- The accounting benefits of sale and leaseback transactions could be negatively impacted; and
- The financial reporting benefits of ‘OpCo/PropCo’ structures may be challenged.
IFRS 16 applies to all companies applying IFRS and is likely to filter eventually through to companies applying UK GAAP / IFRS for SMEs.
“The new financial reporting standard for leases will significantly impact many corporates’ reported earnings, assets and liabilities, and will change the classification of expenses and cash flows, such that reported results, and the associated impact on covenant tests, may well vary materially.
Whilst IFRS 16 is only applicable to periods from 1 January 2019, lenders and their corporate borrowers should start evaluating the potential impact of this now, to avoid surprises when the standard is implemented. It may have a bearing on current negotiations regarding future covenants, cash sweep mechanisms, management incentive structures and the like.
We anticipate that the new standard will have the greatest impact on businesses with large portfolios of short-leasehold property, such as retailers, pubs/restaurant chains, or other sizable assets under operating leases (e.g. aircraft/shipping fleets).”
Deleveraging Europe 2015-2016
The Deloitte Deleveraging Europe 2015-2016 report looks back at market activity throughout Europe in 2015 and makes predictions on the future of the European loan sale market in 2016.
2015 completed sales were €104.3bn, up 26% from 2014's total of €83bn in sales of European non-performing loans (NPLs) and non-core assets (NCAs).
We predict that 2016 is set to be a record breaking year for European loan sales, topping €130bn, as European financial institutions tackle over €2tr of NPLs and NCAs.
Increased regulatory pressure and capital requirements for banks and insurance companies will continue to stimulate divestitures as a result of Basel III, Solvency II and IFRS9.
"Non-performing loans are a significant drag on banks' overall performance, both financially and operationally. Selling these types of assets becomes a good option to improve capital positions, with banks under increased pressure from regulators and shareholders to clean up their balance sheets.
Regulatory changes along with market pressure to improve returns continues to force a further shift in the marketplace with banks also seeking to sell performing, non-strategic loans that don’t fit their return on capital targets. Sophisticated banks are really paring back to core, profitable business lines and either exiting or offloading risk in those areas that don’t deliver their overall strategic objectives and return expectations."
A Closer Look into Deleveraging in Central and Eastern Europe
With over €52 billion of non-performing loans (NPLs) held by banks in Central and Eastern Europe, the region’s loan sale market experienced increased activity in 2015 which is expected to continue into 2016, according to analysis from Deloitte. Investors will be spurred on by improving GDP and other economic data, with forecasts for 2015 indicating that recession will not be seen in any of the nine countries covered by Deloitte’s research.
The significant NPL volumes are prevalent across the region’s banks, with 65% of the banks in the region having an NPL ratio greater than 10% and the median NPL ratio being 13.3%. The regulatory environment as a whole has improved over the past year, with policy makers focusing on handling NPL-related problems and taking specific measures in several of the CEE countries. NPL transactions are viewed by regulators and banks as a method of improving the capital adequacy of the individual banks as well as a way of stimulating the credit market given the NPL volumes are a substantial factor constraining credit supply in the region.
The latest research report released by Deloitte covers nine countries across Central and Eastern Europe, with data covering macroeconomic and bank performance, including an overview of asset quality across the largest players in each country’s banking sector and loan sale transactions over the last 24 months.
"The CEE NPL market gathered momentum in 2015 with a greater focus from regional banks to resolve their NPLs. This coupled with increased appetite from investors chasing higher yields than in western Europe, resulted in a reduction in the price gap which in turn led to a higher number of transactions last year – a trend we expect to continue in 2016."
Deloitte: UK-US M&A Deal Corridor Reaches £60 billion in 2015, and is Expected to Increase in 2016
Last year outbound M&A activity from US buyers into the UK reached £32.7 billion, while outbound M&A from the UK to the US was worth £25.6 billion, a total of £58.3 billion, according to new analysis from Deloitte. By volume, US acquirers completed 322 M&A deals in the UK, while the UK managed 176 deals in the US last year, but increasing deal activity in every quarter. This means within the trading block of North America and Europe, the bilateral cross-border deal corridor between the US and UK is the most active.
"There is an exceptional appetite for deal making across the Atlantic, coinciding with a slowdown in the emerging markets, a strong US dollar and sterling, and a similarity of business structures and styles. US and UK companies are holding record levels of cash balances, and with slow organic earnings growth, they are increasingly pursuing higher profits through M&A.
US outbound private equity (PE) deals account for over 30 per cent of UK investment across the US/UK deal corridor. The high level of US PE activity in the corridor is partly due to the size and resources of the US PE sector. PE houses in the US hold a large amount of money chasing a limited number of attractive acquisition opportunities, making investors more willing to look outside the US for targets. The UK PE market is smaller, and investment money is more likely to be geographically restricted by mandate. The result is very strong competition for good UK businesses among both US and UK PE investors.
A good showing in the US and UK economies, the strength of their currencies, low interest rates and the availability of funding will ensure transatlantic M&A activity remains high in 2016."
Special Situations M&A Leadership change
Over the last eight years, Anup Shah has led the Special Situations M&A team and successfully established our position as one of the leading M&A advisory teams on Fast Track (Accelerated) M&A (“AMA”) and non-standard M&A transactions (such as complex corporate carve outs). Anup has recently decided to pursue alternative interests and will be leaving the Firm later this year. Going forward, Rob Harding, whilst remaining a Restructuring Services Partner, will take on overall leadership of the Special Situations practice with a particular focus on AMA. The Special Situations practice remains a core Corporate Finance Advisory offering with the important sector, global and broader firm links that accompany that. Rob, has a track record of working with Anup and the Special Situations team, particularly over that past two years, in developing our AMA proposition.
For further information or to get in touch with Rob or our Special Situations team visit Accelerated M&A
“This is very exciting as it provides the opportunity for even closer connectivity between our broader Financial Advisory business and the restructuring world, which is key in an increasingly transactional restructuring market. It will also enable us to fully leverage our strong links in to the alternative investment community – both in terms of distressed investment opportunities where a trade/strategic sale may not be possible and also in relation to other opportunities, such as non-core divisional carve outs for our corporate client base. This development further underpins our ability to assist our clients in maximising optionality (and therefore value) at every stage of a restructuring process.”