Once-in-a-lifetime opportunities

How has Close Brothers reacted to recent changes in the market?

First of all, we have considerably ramped up our debt advisory and restructuring business. Of a total headcount of 45 in the Frankfurt office, and with a few more hires pending, we will soon have nearly one third of the team involved with these activities. Compared to before the onset of the turbulence, we have nearly doubled our headcount in the field of debt advisory/debt restructuring. In addition, the firm has moved staff formerly working on M&A transactions into the distressed M&A segment.

Many people expected a wave of deals once the markets stabilise and people know where the economy is heading, and get visibility on forecasts. The situation seems to be improving - so where are the deals?

We haven't seen this wave of deals yet. I believe there are two factors responsible for this. One is a political factor, with the elections due in September, which makes all political parties eager to give hand-outs and assistance, so deal-doers would prefer to hold out. Another reason is that banks are fairly self-absorbed in their own problems and in many cases may not be quite as rigorous in their approach to struggling companies. Bankers tell me that their current workload in terms of payment and technical defaults is enormous. We do expect a rising tide of deals in the third and fourth quarters, however.

Some banks in the UK have recently made headlines with very aggressive refinancing terms. What is the situation like in Germany?

In my experience, banks have no interest in being too aggressive in that situation. They are not keen to arrange 5% headroom and charge a huge waiver fee if the workout still hits their desk a few months later. Banks are happy if they can keep companies in the good book and do not have to do a hardcore workout.

How has the process for debt restructuring changed?

The negotiation process is dragging on for much longer, with people under more stress in these uncertain times. Sometimes, CEOs that come to us have encountered these difficulties for the very first time in their lives, and working under these stressful circumstances requires a lot of psychology, negotiating talent and stamina for pool meetings with banks, when many entrepreneurs are faced with inconvenient truths. We usually receive our mandates from the companies or their shareholders, but recently there has been a trend for lenders to hire us to do an outsourced workout. Increasingly, our role becomes that of coordinators and mediators, as the situation is complex with many lenders and hedge funds involved.

In terms of debt restructuring, it is a tall order to get fresh money into the company and you need a very strong business case. Ideally, we are looking to solve a company's debt issues as long as it's still a refinancing rather than a restructuring case. German law requires us to act fast, too, to adhere to insolvency regulations if worst comes to worst.

Are there any differences if the company in question is owned by private equity?

The situation is pretty much the same with private equity owners - if anything, private equity owners react faster than the average SME CEO, due to their very sophisticated reporting mechanisms. On the downside, private equity investors can be hard-nosed at times, demanding steep haircut with the remainder termed out over long periods of time. Sometimes, this can lead to stand-offs with the banks, which at this point in time may not be the most constructive approach.

What do you expect for the immediate future?

Looking at the macroeconomic data, I believe the market has bottomed out somewhat, but this appears to be the false recovery and the real impact should make itself felt in the third and fourth quarters of the year, due to the usual time lag in transmitting into the real economy. I expect tactical strategic buyers to bolster their activities with select M&A deals; I expect more distressed M&A transactions; and I also expect hedge funds to become more prominent again, with cases like TMD Friction or now Monier Group coming to mind, where the control over the company can be achieved via the company's debt. For anybody who has dry firepower to survive the shake-out, this will be a time of once-in-a-lifetime opportunity.

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