north american distressed debt outlook 2013

january 2013

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contents
Methodology Foreword Survey Findings Cross-Border Bankruptcies Government, Pensions and Compromise Bingham McCutchen LLP Contacts Boom or Bust: Can Restructuring Markets Stay Soft Much Longer? Macquarie Capital Contacts 2 3 4 22 27 28 35

Methodology
Bingham McCutchen LLP and Macquarie Capital commissioned Debtwire to interview 100 distressed debt investors, including hedge fund managers, sell-side trading desks and other asset managers on their expectations for the North American distressed debt market in 2013. Interviews were conducted over the telephone in November and December of 2012. Responses were collated by Debtwire and presented to the commissioning firms in aggregate.

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foreword
Yes, there has been a daily barrage of headlines going over the fiscal cliff and the debt ceiling. And yes, that all underscores an instability threatening to corrode market conditions this year. But as we leave 2012 behind, investors are not only accustomed to operating in a low default rate environment, they expect this to be the status quo for the foreseeable future, according to our 2013 outlook survey.
For distressed-focused funds and those styled to take on event-driven, high risk/ high reward positions, the lack of opportunity over the recent past presents a crossroads upon which money managers have been forced to reassess strategy and expectation. On the one hand, analysts can easily argue that the highoctane primary market of 2012 is a house of cards that teeters on the brink of a market correction. After all, instances of sluggish corporate earnings and negative macro data points are plentiful. US unemployment sits at 7.5% and Europe’s GDP contracted 0.5% last year. But on the bull side, improving home prices, stock market growth and tightening high-yield spreads point to a resilient leverage finance industry further distancing itself from the 2009-2010 restructuring bonanza. In our 2013 survey, these conflicting perceptions are elemental. Several responses represent flip-flops from what were consensus answers in 2012. Case in point, respondents citing distressed investing as a core strategy tumbled to 15% this year from 27% in 2012 and 36% in 2011. However, our results also showed that more capital has actually been devoted to distressed investing. A majority 62% of participants said they have allocated between 21%-60% of assets under management to the distressed playing field, up big from just 30% of participants who fell in the 21%-60% AUM camp last year. By the same contradictory token, while 100% of respondents said they expect the default rate to linger below 4% in 2013 – 46% say it will decrease to under 3% – expectations for distressed returns in 2013 are elevated. Participants targeting a return from their distressed fund north of 15.1% is up for 2013 at 36%, compared to the 25% of respondents who aimed higher than 15.1% returns in 2012. In many respects, a fragmented view of the distressed market in 2013 is expected given the recent underperformance of hedge funds and the scant opportunity that 2012 had in store. While few workout situations came along, market consensus in a number of high-profile restructurings wrongly supported trading levels that overshot recoveries. For example, in the restructuring of coated paper producer NewPage, eager vultures were buying and selling the first and second lien bonds at 90 and 60 at the outset of Chapter 11 proceedings. At emergence, the first liens only recovered 56.6% of their principal claim, and the seconds got back just 6%. In the bankruptcy of ATP Oil & Gas, the second liens changed hands at 32 at the time of the Chapter 11 filing in August, but at yearend the notes were quoted around 10 as debtors' liquidity problems persisted. Although these situations seem to support assumptions that the need to chase returns may have led to rosy valuation work on the part of yield-starved funds, we saw many situations in 2012 where conservative valuations were tossed aside in favor of fast primary money. For investors on the long side of formerly beaten-down situations such as Cenveo, Momentive Performance Materials and Allen Systems where restructuring appeared a certainty, along came new refinancing deals to incite rallies. In terms of what will drive decision-making in 2013, our outlook again reflects a flip-flopping constituency. Although the 59% majority says recent bailout measures in Europe have not gone far enough to alleviate the risk of a global economic meltdown, survey results also show that investors are de-emphasizing Europe as they plan for 2013. Respondents flagged the continent as ranking third on their decision-making influences this year. Europe came in behind the top two priorities of regulatory reform and the US economy. Indeed, a willingness to change course is the kind of intellectual honesty that can be advantageous to investors when executed on time. So we wonder if, 12 months from now, these unanimous expectations for a benign year in distressed are so ingrained they prove detrimental in the event of a market shift.

foreword

Andrew Ragsly Debtwire

Mick Solimene Macquarie Capital

Michael Reilly Bingham McCutchen LLP

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choosing not to focus on one particular strategy in a given year. For the year.89% return and the 15. Bingham McCutchen LLP The term “Total Return” truly defines today’s investment climate. While dominating the survey in past years. 2012 saw some of the weaker performing funds shut down. Mick Solimene. more than doubling the 7% of respondents in last year’s outlook. UBS is getting out of the fixed-income game altogether. down from 27% last year and 36% in 2011. coming in at 16%. Today’s investors are not afraid to mix things up. Fed intervention requires asset managers to maintain flexible mandates and the ability to shift between asset classes to find above-average returns and/or yields. Partner. Mark Deveno. raising the question: how can professional investors be so unspectacular in a growth environment? Meanwhile. Senior Managing Director.58% return from the BofA Merrill Lynch High-Yield Master II Index. the number of investors citing distressed investing as a core strategy tumbled. according to Hedge Fund Research. 424 hedge funds were liquidated. During the first half of 2012. The prohibition of prop trading has cut into revenue. Macquarie Capital NA Distressed Debt Report 2013_V37_JP. a 14% yearover-year spike. more respondents this year listed long-short equity as their core strategy. declining from a high of 50% of the respondents for the 2010 survey to a low of 15% for the 2013 survey. no longer are the hedgies the only player in the distressed market.survey findings Which of the following best describes your firm? What best describes your core investment strategy? 6% 15% Hedge fund 33% 11% Multi-strategy Long-short equity Distressed debt Event driven Capital structure arbitrage High yield/leveraged loan Sell-side trading desk (formerly prop desks) Private equity 11% 41% 20% Institutional investor 15% 32% 16% Both hedge funds and sell-side trading desks have had difficult years plagued by regulatory drama and difficult operating conditions. Just 15% of our survey pool listed distressed as a core strategy. prompting banks such as Credit Suisse and Deutsche Bank to scale back operations. but going after results on numerous fronts. for the third year in a row. Of Counsel. Bingham McCutchen LLP While assets under management have grown for the largest of hedge fund managers. Bill Govier. grossly lagging the S&P 500’s 15. the industry returned around 6. The days of the pure distressed player appear to be over. Conversely.indd 4 24/01/2013 16:32:22 .2%. bank sell-side operations continued to get smaller this year under the fallout from the Volcker rule. Perhaps due to the strong year in stocks.

while only 15% of respondents listed distressed as a core strategy in the previous slide. however it seems all forecasters expect a calm year which rarely happens when forecast as such. and 42% planning to increase their allocation to the asset class. Macquarie Capital 5 NA Distressed Debt Report 2013_V37_JP. 44% of participants said they’ve allocated a 21%-40% chunk of assets to distressed debt. this rise in distressed allocation could be the result of yield desperation. according to the Merrill Lynch Master Index. Partner. By the start of January 2013. Scott Falk. it will be interesting to see where the extra inventory will come from. Only a 14% chunk plans to decrease its percentage of overall assets in distressed debt. Backing this up. Managing Director.indd 5 24/01/2013 16:32:22 . Our respondents expect to remain entrenched in distressed investing for 2013 with 44% expecting to dedicate the same. To speculate. this year only 36% said they allocated less than 20% of assets to the distressed playing field. Moreover. Bingham McCutchen LLP Investors have little opportunity in today's low-rate environment to find yield. This is notable considering that in the 2012 Outlook the most popular faction was a 54% block of respondents who put less than 20% of assets into distressed investing. because. only 30% of respondents in last year’s survey said they put between 21%-60% of assets into distressed. composite spreads in high-yield debt tightened 92bps to 617bps. Martin Nachimson. the lowest since June 2011 and down from around 800bps a year ago.survey findings What percentage of your firm's overall assets is dedicated to distressed debt? 2% 18% 8% Less than 5% 5% to 20% 21% to 40% 28% 41% to 60% 61% to 80% 81% to 100% 44% Coming in as the most popular answer. for the first nine months of 2012. heavily discounted and at-risk debt was virtually the only place to shoot for a robust return in fixed-income this year. whereas this year a robust 62% of respondents fell in the 21%-60% camp. For comparison. high-yield secondary spreads were at 516bps. pushing investors down the capital stack. While the survey results show that investors increased their distressed allocations in 2012 (and expect to either ramp up or stay the same in 2013). The high-end 41%-61% option roped in 18% of respondents. especially with the very low default rates we have seen over the past few years. Distressed investing remains en vogue out of necessity rather than opportunity.

1%-4%. Bingham McCutchen LLP NA Distressed Debt Report 2013_V37_JP. with eight taking place in 4Q12. the Fed is helping to ensure the capital markets are open to even some of the more challenging credits. Still. As you can see. Bingham McCutchen LLP By targeting a 6. Vikram Chitkara. With the ability to borrow or refinance cheaply.1% to 6% Greater than 6% 22% The lack of respondent expectation for volatility next year is remarkable when considering that in the 2012 Outlook 16% said the default rate in the coming year would shoot north of 4. retail and energy. we still have a large chunk of participants at 48% who expect there will be an uptick in filings.1%. Where will that figure trend in 2013? Less than 2% 2.survey findings In what range do you expect the default rate to be over the next year? In 2012. Senior Vice President. Back in 4Q11. there is nowhere to go but up. that 16% slug has completely evaporated this year. financial services. there will always be a few large corporate filings each year to keep the distressed world (and their professionals) buzzing. it is no surprise that default rates are expected to remain low in 2013. keeping default rates relatively low. 2012 marked the second year in the row the number of filings surged in the fourth quarter. the low default rates should continue to hold steady in 2013. Interestingly. Michael Reilly. there were 17 bankruptcy filings by companies carrying at least US$150m in debt. While “amend and extend” continues to be the norm. As we look to 2013. Macquarie Capital After a dearth of large corporate filings in 2011 and 2012. With the Fed keeping interest rates at historical lows.5% unemployment rate before scaling back QE. The number of bankruptcy filings by companies carrying at least US$150m in debt trended down in 2012 to 17 from 27 in 2011. Last year’s outlook had only 17% predicting less than 20 bankruptcies in 2013. The downturn of Chapter 11 cases in 2012 proved last year’s survey pool wrong. Scott Seamon. Partner. with 54% pinning the rate at 3. in light of the primary market strength. Meanwhile. A closer look at our respondents’ feedback shows the split here favors the status quo for 2013.indd 6 24/01/2013 16:32:22 . a very respectable 46% of participants are steadfast that defaults will continue to decrease next year.1% to 5% 54% 5. Counsel. Particular industries to watch in 2013 are real estate. the 52% majority projects the pace will either decline (22%) or stay flat (30%).1% to 4% 46% 30% Increase Decrease Remain the same 48% 4. there were 10 bankruptcies that took place just within the November to December two-month period.1% to 3% 3.

which is expected to enter a new era of regulatory changes. Many are expecting the market to continue to recover in 2013 and will allocate capital accordingly. healthcare. Somewhat surprisingly. and as the banks become more realistic about market pricing often after a foreclosure or a negotiation with the owner. Concurrently. Bingham McCutchen LLP After four years of declines. and telecom Government/municipalities 0% 8% 10% 17% 22% 29% 26% 27% 27% 41% 39% 45% 54% 56% 61% 14% 17% 18% 11% 20% 20% 23% 20% 30% 40% 50% 60% 70% Percentage of respondents 2012 2013 Respondents expect real estate to surge ahead of financial services in terms of distressed capital allocation in 2013. the space surged in terms of attractiveness with 61% flagging the space as a target for investment. the real estate market finally started showing signs of life in 2012. Financial services is still expected to be attractive for distressed investment this year.indd 7 24/01/2013 16:32:22 . media. jumping to 56% from 54%. as families and businesses unable to obtain credit (as lending standards constrict) are willing to become renters. also came in low. While only 45% of respondents expected real estate to be among their top three sectors by dollar volume of investment last year. with only 14% listing the sector as their preferred sector for distressed investing in 2013. An interesting interplay is developing between the distressed real estate market and the financial services industry. generating reasonable returns. distressed real estate investors may consider purchasing and improving real estate to then be rented. Vice President. The banks holding enormous amounts of loans backed by distressed residential and commercial properties are loathe to be sellers at discounted prices that will require recognition of losses and the raising of additional capital. Macquarie Capital 7 NA Distressed Debt Report 2013_V37_JP. the energy/chemicals sector. Last year’s exuberance for distressed investing in financial services was well founded in light of the MF Global. By the same token. ranked low on these results.survey findings Which three sectors did you prefer to allocate your distressed debt investments in 2012 and will you prefer in 2013? Financial Services Real estate Consumer/retail Construction Industrials/manufacturing Automotive/transportation Energy/chemicals Healthcare Technology. Partner. Jeff Sabin. Jared Doskow. down from 20% in 2012. PMI and Peregrine bankruptcies providing liquid trading opportunities. ResCap. which has been fraught with volatility this year due mainly to low natural gas prices.

including the European debt crisis. That is even more the case this year. etc. will derail the economy. The US economy remained resilient in 2012 despite a number of headwinds. If 2013 follows suit. European leaders certainly seem to have quelled the fears of Eurozone break-up for the moment.indd 8 24/01/2013 16:32:23 . Seth Waschitz. other than perhaps unexpected Fed actions. Although it remains to be seen whether the world is as disconnected as this trend tends to indicate.survey findings Which of the following will have the most impact on your decision-making over the next 12 months? US economic outlook 75% Financial reform/ regulatory changes European financial crisis 25% 35% US election outcome 24% Slowing growth in emerging markets Corporate default rates 18% 10% 20% 24% 0% 30% 40% 50% 60% 70% 80% Percentage of respondents Amid a constant barrage of headlines stoking fears about Europe’s economy. James Roome. Partner. resulting in a reduced level of concern about Europe among North American investors. Senior Associate. with 75% of participants listing US economic outlook as their primary motivator. the US election. In broad terms. US government gridlock and regulatory reforms. no single event. Bingham McCutchen LLP NA Distressed Debt Report 2013_V37_JP. whereas this year only 25% flagged Europe as being the main driver in their decision-making as we move into 2013. Macquarie Capital To judge by the headlines. the fiscal cliff. the intensity of the European crisis has abated since the summer of 2012. it’s still the domestic economy that’s dictating the minds of most respondents. the investing environment ultimately depends on economic growth. For comparison. last year the European crisis was most widely cited by respondents as bearing the biggest influence on their decision-making.

Countries such as Greece. all “fixes” will be seen as a stop gap.indd 9 24/01/2013 16:32:23 . the majority is still convinced the continent is in great danger. In a string of stop-gap measures. The European Union continues to illustrate the impossibility of managing monetary policy without fiscal authority. Though this connection creates the greatest risk for an out-of-control spiral in Europe and beyond.survey findings Have recent bailout measures taken to curb the European debt crisis gone far enough to alleviate the risk of a global economic meltdown? Yes No 41% 59% While the previous graph showed a declining number of respondents have the fate of Europe weighing heaviest on their minds.like many parts of the world . smart money knows that Europe . but the dilemma remains. can cultures and societies with thousands of years of sometimes uncomfortable history bind themselves together in the necessary form. European leaders have not addressed it at all. Bingham McCutchen LLP 9 NA Distressed Debt Report 2013_V37_JP. Spain and Portugal continue to debate austerity measures over the protests of voters.5% of GDP. David Miller. Managing Director. Partner. The Herculean efforts by global monetary agencies and European governments have so far done little to quell fears of a European economic collapse and global contagion. falling short of the country’s 11% of GDP goal. other than by expanding and deepening the connection. Tim DeSieno.has done little to address its most core issue: the deep interconnectedness between its system of sovereign finance and its financial institutions' balance sheets. Absent some type of Federal fiscal power and a true Europeanwide bank supervisor. Macquarie Capital Even as Europe has moved away from investors' central focus. The political will to solve the crisis appears to exist among EU members. Greece executed a bond buyback plan in December that cut its overall debt by 9.

Meanwhile. Partner. Jared Clark.1%-15% return target group still holding the top spot but losing popularity.1% to 15% 15. as our results show a shift with the majority 10.1% is up for 2013 at 36% from 25% in 2012. the amount of participants targeting a return north of 15. Return expectations on the distressed side are amplified for 2013. In the pre-recession days when this survey started. Bingham McCutchen LLP NA Distressed Debt Report 2013_V37_JP. Although. While 2012 may have been underwhelming for a lot of distressed investors.1% to 10% 10. The vast majority of investors are targeting more manageable 8%-15% returns. Mick Solimene. perhaps attempting to temper expectations a bit. Macquarie Capital Boy have times changed. Today. Senior Managing Director. the pressure will be on in 2013. and most survey participants say they are aiming high.1% to 20% Greater than 20% 7% 10% 20% 30% 40% 50% 60% 0% Percentage of respondents 2012 2013 In light of hedge fund performance taking a beating this year. that number is down to only 7%.indd 10 24/01/2013 16:32:23 . coming in at 45% in 2013 from 48% in 2012. it's hard to imagine returns in 2013 outpacing 2012. almost one-third of all investors were targeting returns of over 20% annually.survey findings What percentage return did you target for your primary distressed fund in 2012 and what is the return you are targeting in 2013? Less than 5% 7% 5% 20% 14% 48% 45% 25% 29% 5% to 8% 8. asset managers moving into riskier credits may be rewarded with outsized returns if default rates stay at historic lows.

and uncertainties in the future of tax policies. with only 20% of respondents from the asset class having raised new money.indd 11 24/01/2013 16:32:23 . taking the focus away from adding more. around a 50% drop from 2011. likely due to the resolution of pressing fiscal and tax issues and the belief that favorable interest rates will stick around for a while longer. do you plan to raise new funds for investment. Data provider Preqin lists 1. stay constant. Martin Nachimson. or give money back? Hedge fund 15% 36% 49% Hedge fund 13% 45% 42% Institutional investor 6% 47% 47% Institutional investor 33% 67% Private equity 25% 20% 55% Private equity 15% 55% 30% Sell-side trading desk (formerly prop desks) 22% 38% 40% Sell-side trading desk (formerly prop desks) 13% 53% 34% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Gave money back Raised new funds Stayed constant Give money back Raise new funds Percentage of respondents Stay constant Private equity fundraising took a backseat this year. It wasn’t for lack of trying that has limited PE fundraising. This year. Additionally. Partner. did you raise new funds for investment. all collectively led to a lackluster year for private equity raising. stay constant. Bingham McCutchen LLP The European Debt Crisis and the US Downgrade made 2012 a soft year for fundraising given the substantial uncertainty they produced. the smallest of its peers. Managing Director. Bingham McCutchen LLP 11 NA Distressed Debt Report 2013_V37_JP. Partner. according to Eurekahedge. hedge funds are planning to hit the road with hat in hand in 2013. up from 1.survey findings In 2012.918 private equity funds that are currently in market. The current yield starved environment should give way to a large appetite for alternative asset management in 2013. fiscal cliff. many firms are straddled with considerable overhang (having more capital on hand than they could reasonably invest). Similar to their PE brethren. Data suggests that private equity fundraising is likely to pick up in 2013.892 funds in June. or give money back? In 2013. up from the 36% of respondents who raised new funds in 2012. 45% of hedge fund outlook respondents plan to raise money. Net flows to the US hedge fund industry came in at US$19bn in 2012. Andrew Gallo. Julia Frost-Davies. Macquarie Capital The struggling economy. hoping to make up for what transpired in 2012.

1bn in 1H12 and US$15bn in 2H11. up from US$24. For instance.indd 12 24/01/2013 16:32:24 . With the expectation of continued economic growth and the Fed effectively dictating easy money in the US. And while only the institutional investor group seems committed to ramping up participation in 2013.2bn in 2H12. Debtwire data shows that deals allowing for PIK coupons amounted to US$5. what percentage of assets under management do you plan to invest in the primary leveraged loan and high yield bond markets? Hedge fund 21% 30% 46% 3% Hedge fund 21% 30% 40% 9% Institutional investor 33% 20% 40% 7% Institutional investor 33% 7% 47% 13% Private equity 20% 50% 30% Private equity 20% 45% 35% Sell-side trading desk (formerly prop desks) 9% 41% 34% 16% Sell-side trading desk (formerly prop desks) 6% 35% 50% 9% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Less than 15% 15% to 25% 25% to 50% More than 50% Less than 15% 15% to 25% Percentage of respondents 25% to 50% More than 50% The strength of the primary market in 2012 was backed fairly equally across the board by all four groups.9bn. it is not unreasonable to expect investors will allocate a greater portion of their assets to the primary markets. The latter part of 2012 gave life to certain trends that indicate we’re living in an overheated credit bubble. Covenant-lite loan issuance in 2H12 totaled US$64. supporting the notion that the appetite for new issuance is a long way from abating. Senior Vice President.survey findings In 2012.3bn seen in all of 2010 and 2011 combined. Vikram Chitkara. none of the groups have plans to substantially pull back. what percentage of assets under management did you invest in the primary leveraged loan and high yield bond markets? In 2013. more than double the US$2. Macquarie Capital NA Distressed Debt Report 2013_V37_JP.

Jonathan Alter. Partner. respondents overwhelming anticipate the abundance of liquid distressed investment opportunities to come from North America. the historically low natural gas prices took a competitive toll on borrowers such as coal-based utility AES Eastern. In 2012. Until then. South Korea PIIGS South Africa Middle East. When do you expect natural gas prices to recover to pre-2006 levels? 6% North America Latin America Western Europe (non-PIIGS) BRIC Eastern Europe Japan. North Africa 0% 1% 10% 20% 30% 40% 50% 4% 16% 15% 14% 23% 27% 41% 59% 2013 2014 2015 or later 39% 55% 60% 70% Percentage of respondents Despite the ever-present risk of a European economic collapse. we should anticipate a hearty restructuring market in the energy sector. Deep stresses have appeared and played out in large economies like Brazil and Mexico. Meanwhile. it probably will not lead to an uptick of attention from investors. Vice President. specifically the US.survey findings Which countries/regions do you expect to offer the most distressed opportunities in 2013? Through September 2012. we should see a steady rise in pricing. Managing Director. Confidence is returning to distressed investors in the Americas. all of whom sought Chapter 11 protection. The issues in Belize and Argentina may be just a prelude to a larger movement. has debtor-friendly courts with established precedents that investors understand. While Europe's economy may lag North America's. Despite most respondents planning to shun the energy sector next year. Edison Misson and coal producer Patriot Coal. a majority thinks the sector will continue to present opportunities revolving around depressed natural gas prices. Partner. Macquarie Capital Unlike other energy sources. Unfortunately. Bingham McCutchen LLP North America. Macquarie Capital 13 NA Distressed Debt Report 2013_V37_JP. We also see a renewed focus on potential US situations fueled by some of the recent larger Chapter 11 filings. conversion of infrastructure to utilize cheap natural gas will continue to take time and demand looks like it will lag supply for years. David Miller. Latin America took the second spot as restructurings of sovereign debt backing both Belize and Argentina heated up.indd 13 24/01/2013 16:32:24 . Jared Doskow. the demand side of the equation for natural gas has a lot of inherent friction. Bingham McCutchen LLP The betting money seems to be that energy pricing is probably staying low for another 18 months to three years. Lisa Valentovish. Once supply and demand factors start working their magic. according to Debtwire. the energy sector accounted for 16% of all in-court restructurings.

Macquarie Capital In an environment where low interest and tepid default-rates are the norm. respectively. Mick Solimene. That's in stark contrast from the survey results a year ago when second liens were the No. credit default swaps are only attractive to distressed investors when default rates are on the rise. at 1% during 2012 compared to 3% during 2011. 3 most attractive asset. up from less than half of survey participants in the previous two Outlook surveys. up from just 8. However.7% only three years ago.indd 14 24/01/2013 16:32:24 . Glaringly. Macquarie Capital NA Distressed Debt Report 2013_V37_JP. according to Standard & Poor’s research. Bust cycles remind us that leverage has both positive and negative characteristics. The biggest year-over-year jump is in those investors levering up 2. on the high end. Senior secured bonds are also likely to keep investors busy. Fund raising has yielded lower amounts of capital over the past few years so some managers have had to utilize leverage out of necessity. Seth Waschitz.1-4x 47% >4x 27% 33% 41% 10% 20% 30% 40% 50% 60% 70% Percentage of respondents Most attractive Least attractive Asset-backed securities and convertible bonds will provide lucrative opportunities for distressed investors this year. The percentage of respondents employing the use of leverage increased significantly during 2012 to 89%.survey findings Which three instruments do you think will offer the most and least attractive opportunities for investors in 2013? 59% 51% 43% 31% 20% 20% 19% 19% 20% 17% 20% 16% 8% 7% 5% 2% 26% 23% 41% 32% 24% How much leverage did you use in managing your fund in 2012? Asset backed securities Convertible bonds Senior secured bonds First lien secured bank loans Preferred/mezzanine Distressed MBS/CMBS or whole loans Private placement bonds Municipal bonds Common shares Senior unsecured bonds Debtor-in-Possession (DIP) loans Second lien loans Credit default swaps FRNs 0% 9% 7% 7% 9% 1% 11% None 1-2x 2. second lien loans are perceived as the least opportunistic debt instrument this year by 41% of respondents. Access to cheap capital has almost every asset manager employing some level of leverage within fund guidelines. receiving a 43% vote this year compared to just 24% in the 2012 Outlook. structured product and convertible notes are off the beaten path securities where investors feel they can take advantage of inefficiencies. which increased to 47% in 2012 from 14% in 2011. This falls in line with the senior secured bond class having increased as a total of distressed debt to 40%.1x-4x. those using more than 4x leverage in their portfolios remained de minimis. according to 59% and 51% of survey respondents. Senior Associate. but record low interest rates can be intoxicating. Senior Managing Director. Meanwhile.

do you anticipate using more. In August. Of the 89% of respondents that used leverage in 2012.survey findings If you did use leverage in 2012. eliminating pitfalls that make current market practices clunky and expensive. a full 87% expect to use the same or more leverage over the next year. LSTA standard documentation may add liquidity to the market but may also negatively impact market clearing prices if transactions cannot be customized. Macquarie Capital 15 NA Distressed Debt Report 2013_V37_JP. The current system. which allows for many of the trade terms to be negotiated on an individual basis. Rather. but its resulting change of control implications limit the universe of opportunities. Debtwire reported the LSTA is exploring ways to standardize documentation of claims trading. if survey responses are any indication. Martin Nachimson. suggesting that risk appetite is for the most part on the increase. Only 13% of those who juiced returns via leverage in 2012 will back off from the strategy in 2013.indd 15 24/01/2013 16:32:25 . Claims trading continues to grow in popularity. more purchase events received 33% of the vote while LSTA standard documentation came in second at 26%. As the secondary claims trading market moves more toward the mainstream. critics of standardization note that a uniform documentation system could move more risk to the buy-side because the LSTA would attempt to frame transfer documents in a way that evenly divides risk between both the original buyer and hedge funds that typically play the role of secondary buyer. only 3% of respondents expect online auctions to have the greatest impact on the market this year. However. Managing Director. allows hedge funds the leeway to insert buyer-friendly language into the trading documents. less or the same amount in your portfolio in 2013? Which do you expect to have the greatest impact on the secondary claims trading market in 2013? 3% More 31% 15% 33% More purchase events LSTA standard documentation More defaults Lack of other opportunities Less Same amount 56% 23% Online auctions 13% 26% The amount of leverage employed by distressed investors is set to increase slightly in 2013.

Bingham McCutchen LLP With the passage of Dodd Frank. Partner. To explain the trend. The Act has had a wide impact. The data is interesting in light of last year's survey asking participants to predict which of the same aspects would have the greatest effect. The fact that respondents viewed the impact of the Dodd-Frank Act so proportionally over various categories appears to suggest that the market has responded to the transformations required under the Act. the SEC hoped to make the process of trading CDS instruments more transparent and less systemically-dangerous. Ed Smith. Macquarie Capital NA Distressed Debt Report 2013_V37_JP. with swap execution facilities and margin requirements tallying 19% and 18%. with ISDA recently reporting that notional outstanding for the CDS market was US$24. our respondents were solidly divided on what aspect of the regulatory changes is having the most far-reaching impact. This year that choice netted only 18% of respondents. Over the first half of 2012. Last year’s outlook showed 62% of respondents chose margin and collateral requirements. Vice President. respectively. but trade reporting came in a close second at 22%. a 6. Mandatory clearing topped the list with 27% of survey participants viewing it as the most transformative part of the Act. In order to avoid AIG-like concentrations of risk. numerous firms have spent considerable resources to clear eligible CDS contracts through central counterparties.2% drop from levels at the end of 2011. moving CDS contracts to clearinghouses is the most important element of reform as it takes care of margin posting and transparency problems. Jared Doskow. which of the following parts of the Dodd-Frank Act have transformed and will transform the CDS market the most? 1% 13% 27% Mandatory clearing for standardized trades Trade reporting 18% Swap execution facilities Margin and collateral requirements Pre-trade price transparency Post-trade price transparency 22% 19% The Dodd-Frank Act's effect on the CDS market continues to be hotly debated even as much of the reforms have been implemented. to trade CDS on swap execution facilities and to implement technology to satisfy compulsory reporting requirements.3 trillion at 30 June.indd 16 24/01/2013 16:32:25 . the market continued to dial back its activity.survey findings With further implementation.

foreclosures. state and federal budgets. Partner. Bingham McCutchen LLP 17 NA Distressed Debt Report 2013_V37_JP. Hal Horwich. high costs and other recessionary pressures all placed extraordinary burdens on public finance borrowers. Bill Goddard. Investors surveyed have expressed concerns about municipal debt. we don’t see the needle moving much with regard to survey participants’ focus on municipal investing. In 2011. investors seem to be picking their counterparties a lot more carefully and increasingly doing their own research rather than relying on the rating agencies or financial guarantors. The distressed community has started to look at the dicier credits including those in proceedings. A 30% chunk of respondents allocated between 3%-6%. according to Debtwire data. Bingham McCutchen LLP On the muni front. But for 2013. decreased federal aid. While hardly epidemic. such as aging infrastructures. Beyond market issues. there were 263 Chapter 9 bankruptcies filed nationwide. Partner. but that should come as no surprise. we saw an increased resort to Chapter 9 to address complicated problems. how much of your assets under management did you allocate to municipal debt? What percentage of assets under management do you intend to allocate in the coming year to municipal debt? Less than 3% 24% 22% Less than 3% 3% to 6% More than 6% 48% 3% to 6% More than 6% 46% 30% 30% Investor appetite for municipal debt among our respondents was low in 2012. fundamental factors. Given the rise in restructuring activities and the stress being endured across local. with 46% of survey participants allocating less than 3% of assets under management to the debt issued by state and local governments and other authorities. From 1986-2011. while only 24% of those surveyed committed more than 6% of assets to the US$3.survey findings In 2012. the collapse of some old financial guarantors (most notably the rehabilitations of Ambac and FGIC) and the rise of new financial guarantors (such as Build America). Quality municipal offerings have been fully subscribed and in some cases over-subscribed. Through the first nine months in 2012.indd 17 24/01/2013 16:32:25 .7 trillion municipal debt market. state budget crises. there were nine filings. underfunded pensions and retiree benefits. resulting in average of 11 filings per year. the municipal asset class has been garnering more headlines of late. tax uncertainty. there were 13 filed. reductions of tax bases from unemployment.

although the survey also shows a decided lean toward President Obama. They may be resigned to continued global economic weakness regardless of who is sitting in the Oval Office. Change of control transactions that bring in fresh capital and know-how may be favored. While the mainstream narrative has long been that Wall Street favors republicans and detests President Barack Obama. Deal fatigue can be a powerful motivator.survey findings What do you expect to be the primary source of liquidity for long-term exits from distressed debt positions? Did you personally make a contribution to the campaign of either presidential candidate? Sale of company to private equity Sale of claim to other distressed player Refinancing of balance sheet Sale of company to strategic Sale of claim to existing shareholder Exits will be limited 29% 49% 57% 26% Obama Romney 48% Neither 47% 8% 66% 27% 0% 10% 20% 30% 40% 50% 60% Percentage of respondents This year’s outlook unveiled lowered expectations for strategics to be on the prowl for M&A. Bingham McCutchen LLP NA Distressed Debt Report 2013_V37_JP. the M&A world this year is expected to be driven by private equity. Macquarie Capital The fact that 66% of respondents did not contribute to the most expensive political race in history suggests significant apathy. On the flip side.indd 18 24/01/2013 16:32:25 . just 48% of survey participants selected the category this year. at least among the politically committed. 26% made financial contributions for President Obama’s campaign. or perhaps cynicism. In comparison to the 2012 outlook report in which refinancing garnered the top spot at 60%. A 66% majority monetarily helped neither in their quest for the White House. especially as valuation levels move sideways for a prolonged period. Vikram Chitkara. as more participants this year said they expect private equity buyouts to fuel their exits. The cost of the presidential election exceeded US$2bn in 2012. our survey shows that is not the case. Partner. While in the 2012 survey a robust 60% of participants expected exits to come from strategic buyouts. Senior Vice President. up from 53% in the 2012 outlook. Ron Silverman. balance sheet refinancing is not expected to be as popular of an exit tool this year. Of the participants polled. while 8% aided republican nominee Romney. among investors. Instead. coming in at 57%. the category garnered just a 47% response this year.

Partner. the rule change should make the practice more expensive for creditors and debtors in the aggregate. Certainly Obama’s healthcare reform package will reshape the trajectory of levered borrowers in that sector. This split in opinion is consistent with our conversations with clients.indd 19 24/01/2013 16:32:26 . that tells you all you need to know about why the election came out the way it did. Senior Managing Director. The responses to this question moderate to some degree the view.survey findings Which political outcome would have been more beneficial to the US economy as a whole and US distressed debt investors? With interest rates continuing to be very low. Bingham McCutchen LLP It’s fascinating to see how little traction Mitt Romney made with distressed investors. Mick Solimene. Amy Kyle. In the coming year. In examining the administration’s impact on the distressed investing world. the meaning of “beneficial” is up to interpretation. Steve Wilamowsky. Capital structure refinancings and amend-and-extend transactions were aplenty in 2012. which would indicate we are in a part of the cycle that is difficult to predict. With regards to having an impact on US distressed investors specifically. while 9% responded that an election of Governor Romney would have been more beneficial and an overwhelming 68% majority say neither outcome would make a difference. Partner. Macquarie Capital 19 NA Distressed Debt Report 2013_V37_JP. issuers have been able to refinance and amendand-extend quite cheaply. considering that Romney’s greatest career accomplishments were achieved in the distressed investment arena. just as the ultimate outcome of the fiscal cliff will impact companies exposed to the defense industry. a 66% majority of respondents project the window will remain open for corporate issuers to continue to extend their maturity walls. but in the longer term. 10% of those polled hold the belief a newly elected administration would have been more beneficial. Bingham McCutchen LLP It is unclear whether the new changes to the CODI rule will dampen the significant momentum amend-to-extends have generated over the past few years. Meanwhile. allowing many borrowers to push out near-term debt obligations without much hassle. expressed in other questions. according to 57% of the survey respondents. Do you anticipate this trend to continue? Yes The US economy as a whole 57% 10% 33% 34% No US distressed debt investors 23% 9% 68% 66% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage of respondents Re-election of President Obama Election of Mitt Romney Neither The re-election of President Obama will benefit the US economy. 23% believe the re-election of the incumbent is a positive. To me. that distressed investors will have greater opportunities than in recent years.

indd 20 24/01/2013 16:32:26 . A slim 3% of participants forecast the debt walls will be delayed to 2017 and beyond. according to Debtwire data. a majority of participants anticipate maturity walls will not be pushed out much further. Of those polled. Just 6% say that the US$55bn of 2012 CLO issuance – up from US$12. In light of the easy flow of credit to levered borrowers.8bn in high-yield debt priced. Managing Director. Partner. Sabin Willett. in 2011 there was US$192. the liquidity should run its course. Bingham McCutchen LLP The CLO revival in 2012 has probably not had enough time to affect credit markets. As the newly minted funds age and capital is deployed from the vehicles.survey findings If yes. For comparison.3bn of new leveraged loans allocated and US$300. US$263. Two to three year extensions are what almost everybody expects will be possible in these deals. while an equal 21% each project maturities will be extended either in the first half of 2015 or the latter half of 2015. The opacity and complexity of traditional financial institutions has made CLOs more attractive to asset managers because of their function as synthetic banks with traditional equity returns and leverage profiles. David Miller. 43% of respondents expect debt due dates will be pushed back to the first half of 2016. as credit providers remain uncertain about longer-term horizons. In 2012. when do you estimate the maturity dates will be extended to? What best describes the impact of CLO issuance in 2012. which hit US$55bn in 2012? 3% 12% 21% First half of 2015 Second half of 2015 First half of 2016 Second half of 2016 First half of 2017 21% 53% 41% Positive impact on new issuance Negative impact on new issuance No impact Second half of 2017 2018 and beyond 6% 43% Even with debt issuers expected to successfully execute refinancing and amendand-extend deals amid robust market conditions. 41% of respondents believe the uptick in funding from newly created CLOs played a positive role in shaping the primary market in 2012. A 53% majority believe that the rise of CLO issuance in 2012 influenced the primary in neither a positive or negative fashion.9bn in high-yield issuance and US$220bn in leveraged loans. while 12% indicate expectations that maturities will be pushed back to the second half of 2016. Macquarie Capital NA Distressed Debt Report 2013_V37_JP.7bn in 2011 – had a negative impact on the primary.

survey findings What will be the trends for loan spreads in 2013? 17% Widen Tighten Remain the same 56% 27% First lien loan spread pricing on new issuance averaged 427bps in 4Q12. the JP Morgan Leverage Loan index of secondary trading carried a spread of 536bps.indd 21 24/01/2013 16:32:26 . Reinforcing the bullish credit bubble sentiment. 27% of those polled anticipate spreads will tighten and just 17% project loan prices will increase. the average spread across all primary loans in 4Q12 was 464bps. By the start of January 2013. with a 56% majority forecasting loan spreads will stay constant in the coming year. tight to the 485bps spread averaged in 2Q12. Meanwhile. Likewise. according to Debtwire data. survey participants expect much of the same in 2013. tight to the 522bps average spread in 2Q12. 21 NA Distressed Debt Report 2013_V37_JP.

the sale transaction was consensually consummated. It’s protecting U. it’s support from the federal government and from various states for the development of two different lines of business. just in the number of things they’re looking at. in the normalcy of 363 bidding. negotiations are holder private.Cross-border bankruptcies: Government.indd 22 24/01/2013 16:32:27 . You have to look carefully at what type of transaction and what type of technology you’re talking about. Ron SilveRman The government is an important and powerful player. It’s not just that there’s a foreign buyer involved. a Chinese entity won the bid and is now stuck in the world of CFIUS and stuck in the world of competing interests where lobbyists are lobbying to and fro to see if they can get approval. I think to the extent that technology lends itself to military applications versus other applications. So it could affect valuations. there were some restrictions placed on those patents as to the purchase and the use. which we are not involved in but we’re knowledgeable of since we pitched to represent the committee. we were able to work out an agreed structure and a compromise with the government. One of the most current examples. what it can be used for. what are some of the main challenges working through the conflicts of interest and what has upset the course of future workouts? Jeff Sabin The essence of the answer to your question is that the group of regulators which fits under the acronym CFIUS has to approve various investments that could affect national security and other issues. and so it’s very tough if you are sitting at your desk trying to handicap as a trader. to know what’s really going on and what compromises may or may not be otherwise acceptable to government regulators. muddying the restructuring process. Jeff Sabin Another thing to remember is that you don’t know what the timing is when you have to do that. and some issues about whether or not rights remained with the government were reserved. Speaking about the Evergreen deal you worked on. that would raise the concern level. which often isn’t the monetary interest. In concise form. The case has now gotten to the point where. As a result. is A123 Systems. In the Evergreen case.S. and an agreement was made to permit resolution of those issues later. I think you’re going to see more of it in the future. technology and security concerns. From your perspective. etc. Amy Kyle and Ron Silverman of Bingham McCutchen There has been an influx of investments from overseas and an emergence of cross-border dynamics. environmental. Pensions and Compromise Q&A with Jeff Sabin. in large part. Where I have seen people be most successful in undertaking transactions that have raised issues with respect to government approval or concern. CFIUS’ volume of work has gone up a lot over the past year. the scope. how big it is. interests and safety. NA Distressed Debt Report 2013_V37_JP. do you think the same compromise today would be tougher? Has the government gotten tighter about these things? Ron SilveRman I think that there’s more of a focus today depending on the type of technology. so that with respect to certain patents that the government had a concern about. That’s because. is by being proactive and trying to create a compromise that lets the government protect the interest that it cares about.

indd 23 24/01/2013 16:32:27 . but there were also a number of other smaller committees that also owned bank debt and had their own thing going on? amy Kyle There were actually five silos of different creditor groups. Could what you had negotiated been negotiated during a Chapter 11 process? Jeff Sabin You would have had a fair amount of litigation over the use of cash collateral and the new money that was being put in. The ability to prime the secured creditors without consent would have been a very difficult hurdle. And that’s where it becomes really interesting in a case that touches around the globe. Now let me try to put it in context. but to unsecured creditors and/ or vendors who might have had special rights in other jurisdictions embraced much of the globe. the possibility that the government may be taking a hard line on overseas bids can play into their minds. obviously. and different perceptions as to what was an appropriate way to work through this problem. different perceptions of value. and we chose—fortunately because we had legal venue in New York—we chose to file in New York.Shifting to the buy side. how to treat various other creditors.” was very helpful. but the bank group started to look different over the course of time. What we had. amy Kyle One of the keys to accomplishing the successful pre-pack in this case was really involving those disparate constituents within the bank group. and we had to do exactly what you just hypothesized. accomplish a plan that provided an equity recovery for creditors. The international aspects of that and the motivations of the different groups were quite different in that case. we had some of that in TBS. So we organized around the remaining portion of the company. funds or Asian funds and U. because of this fairly typical structure where they finance in these silos associated with particular ships. means that the cash flows of the company are coming from the collateral of various creditor groups. but we also had corresponding proceedings in Ireland and Bermuda to complete the restructuring. where restructuring vultures have been waiting.S. and there is no way to bind them all together if they don’t want to be bound. they had a pre-pack and they got out within a matter of weeks. And so we did need to look at the lower levels of the complex corporate structure as a mechanism to allow us to accomplish the debt restructuring and. was an Irish public company with five different silos of secured creditors with their own groups of ships. as much as a year.S. because the different lenders each had different collateral pools. Our group that was led by Bank of America and the DVB-led group joined forces to essentially allow the company to do the pre-packaged Chapter 11.S. how concerned would you be that one of the parties would just sell out in a block trade to perhaps an activist hedge fund or somebody new to the situation? Jeff Sabin The answer is that it’s a big concern and. at some levels. I don’t want to be restricted. It really was a big challenge in terms of trying to work out a restructuring. and not say. Long means. you know. But in order to do the plan. amy Kyle That’s absolutely right. We had the agent representation. And having distressed buyers coming in who were willing to participate actively in the process. where you were advising the agent to the pre-petition bank. in effect. With the shipping industry. Jeff Sabin So we effected the plan a level down on the corporate structure and liquidated the parent. We also had to understand under relevant laws outside the U. when there’s these crossborder issues. It was a creative solution by all. Irish law doesn’t allow it. Can you speak about TBS. because it allowed us to have that dialogue about what we needed to accomplish to satisfy the different interests. and that made it much easier. NA Distressed Debt Report 2013_V37_JP. without consent. especially since there were public shareholders. amy Kyle One of the significant issues in terms of the technical aspects of how we accomplished the reorganization was the recognition that we couldn’t cram shareholders in the Irish company. funds. People may look at that case and say: “Well. “Oh. it would have filed before you had finished your negotiations for the eventual plan.” How long were the negotiations beforehand that were behind the curtain? Jeff Sabin They were long. but that’s how we came about it. pre-bankruptcy. Ultimately. I think the complexity of this case and of many shipping cases. So that’s what they did. not only did we need some kind of sanctuary if there were going to be recalcitrants here. Some of them were cross-guaranteed and the jurisdictions that were relevant to not just the secured debt. What is your main proceeding? What is the effect on creditors throughout the globe in terms of the business as you’ve sought to reorganize it? If this had played out in court. We fortunately had packaged so much of this so that the relative secured creditor rights were all in play. in reality. one of the other large groups that was led by RBS decided that they were better off taking their collateral and going. as you could in Chapter 11. but also you were seeing strange bedfellows with European and U.

S. This communication is being circulated to Bingham McCutchen LLP’s clients and friends.com (privacy policy available at www. investor in distress versus what you’ve experienced in Europe or any other country? Jeff Sabin Increasingly we see funds that may have started in the U. Bingham McCutchen LLP. And so we had a worldwide operation. international conglomerate doing many things. Bingham McCutchen LLP operates in Hong Kong in formal association with Roome Puhar. what really is the right rate here? So U.com/privacy. Since we have offices.S. and there is an increasing globalization.S. It is not intended to provide legal advice addressed to a particular situation. that might file. The first one is that since you’ve got operations and equities in different countries.4626 (international).S. Bingham McCutchen (London) LLP. Bingham McCutchen LLP is registered with the Hong Kong Law Society as a Foreign Law Firm and does not advise on Hong Kong law. do pension claims reach affiliates either automatically by statute or by affirmative determination of the pension authority? That can vary by jurisdiction. Another issue is valuing the amount of the pension claim. notify our privacy administrator at privacyUS@bingham. open up offices around the world and. a Massachusetts limited liability partnership. Now you can’t assume. investors’ comfort with the restructuring process in overseas credits and in foreign jurisdictions has increased over the past. They’ll invest in stocks. “Hey. significant offices and significant practices. Prior results do not guarantee a similar outcome. people can litigate over the right interest rate that you should assume. Hong Kong and Tokyo. Beijing.K. Do pension claims have priority? Do they claim a first call on assets? Are they just a general unsecured creditor or is it a mix of the two? In addition. in the U. MA 02110-1726 or at 41 Lothbury. MA 02110-1726 ATTORNEY ADVERTISING To communicate with us regarding protection of your personal information or to subscribe or unsubscribe to some or all of our electronic and mail communications. NA Distressed Debt Report 2013_V37_JP. you are allowed to value your pension claim if there’s an underfunding amount using a discount rate relatively favorable to the company. When a company is operating when they are still a going concern. if that’s the right word. The non-bankruptcy laws in many countries. A list of the names of its partners in the Hong Kong office and their qualifications is open for inspection at the address above. is the legal entity which operates in the UK as Bingham. is very evident.aspx). operates in Beijing as Bingham McCutchen LLP Beijing Representative Office.S. a Hong Kong partnership which does advise on Hong Kong law.S. If the companies enter into Chapter 11. Boston. senior people from funds here are now physically based in London or Frankfurt. Are there any certain characteristics or agendas that you would assign to a typical U. entities. We are now seeing different claims by different pension agencies against different affiliates. I’m going to be investing in stocks for such a long period of time. those sort of big railroad trailer cars that you see on trains and stacked up on ships. and they’ll be enough to pay off the liabilities when the pension obligations have to be met. is jointly and severally liable for the claim. or at 866. The theory is.749. I would say that in the last six months. including shipping container boxes.bingham. There are a fair number of funds that we represent that play in the space in Asia and make their homes in Singapore or Hong Kong.3064 (US) or +08 (08) 234. London EC2R 7HF. would you say. as the amount of product here continues to be relatively low. don’t allow you to use such a favorable interest rate when the music stops. the increasing number of U. including in the U. You have different pensions. Jeff Sabin The laws of PBGC. Ron SilveRman We’re probably one of the leading authorities in this area. is the legal entity which operates in Hong Kong as Bingham McCutchen LLP in association with Roome Puhar. in this space in London. That’s also the case in the U. They’ll make a good investment rate of return on the asset protection plan. a Massachusetts limited liability partnership authorised and regulated by the Solicitors Regulation Authority (registered number: 00328388). We can be reached by mail (ATT: Privacy Administrator) in the US at One Federal Street. or in some people’s minds very low. you’ve got different pension schemes. well. a Massachusetts limited liability partnership. Frankfurt. Then you end up in a litigation about. A list of the names of its partners and their qualification is open for inspection at the address above. you’re going to see issues on pensions. particularly perceiving that there’s more opportunity in the EU.Let’s talk about getting funds from different parts of the world to come together. The underfunding delta grows exponentially. Boston.. we see an awful lot of it. We had a large case called Sea Containers. You can assume that those assets will grow. three years? Is that fair? Jeff Sabin I would say the globalization certainly has become much more evident in the last three years. of an attitude and credit. perhaps the underfunding of the pension plan can grow by orders of magnitude. the company will continue operating for years and years. All partners of Bingham McCutchen (London) LLP are either solicitors or registered foreign lawyers. if those entities are U. they’ll invest in bonds.indd 24 24/01/2013 16:32:27 . UK.S.com or privacyUK@bingham. government pension regulators and authorities. Bingham McCutchen LLP. in fact.” You’re really going to be investing in bonds or buying annuities at a much lower rate of return. and in that case and in the Nortel case and also coming up in Kodak. which was an Bingham McCutchen® © 2013 Bingham McCutchen LLP One Federal Street. Another issue is dealing with pensions in a company that is global.-based funds sending people out. The PB has clearly stated in its laws and its statutes under ERISA that every entity that is owned 80 percent or more within a consolidated group.

’ — Chambers USA The Financial and Restructuring practice has been ranked as a Tier 1 practice in the following jurisdictions: National.’ — Legal 500 USA …and foR ouR RestRuctuRing paRtneRs Michael Reilly is known for his expertise in cross-border restructurings and is seen among sources as a ‘bright strategist’ and ‘excellent around the negotiating table. — Chambers USA This group maintains a global outlook and is involved in various cross-border and international bankruptcies. notify our privacy administrator at privacyUS@bingham.’ Known for a client list that is mainly comprised of investors..000 lawyers in 14 locations in the U.” and the Legal 500 acknowledges that he has established a niche in sovereign debt issues. MA 02110-1726 or at 41 Lothbury. The team has amassed a wealth of high-end transactional expertise. a Massachusetts limited liability partnership authorised and regulated by the Solicitors Regulation Authority (registered number: 00328388).indd 25 24/01/2013 16:32:27 1/13 . a Hong Kong partnership which does advise on Hong Kong law. All partners of Bingham McCutchen (London) LLP are either solicitors or registered foreign lawyers.bingham. or at 866. Europe and Asia. the ‘highly experienced’ and ‘user-friendly’ team also has considerable experience in acting for developers and governments. New York and San Francisco. is the legal entity which operates in Hong Kong as Bingham McCutchen LLP in association with Roome Puhar. a Massachusetts limited liability partnership. a Massachusetts limited liability partnership.. It is not intended to provide legal advice addressed to a particular situation.Recognition foR ouR global financial RestRuctuRing pRactice… Bingham McCutchen LLP has a global penetration that few firms can match.’ while another says the New York lawyer is ‘able to synthesize a lot of complex detailed information and to explain it to the client.com/privacy.. — US News / Best Lawyers The ‘experienced and highly capable’ Edwin Smith has an excellent pedigree in the market…and ‘probably knows more than anyone in the country what matters at the interface between the UCC and bankruptcy. Bingham McCutchen LLP. operates in Beijing as Bingham McCutchen LLP Beijing Representative Office.’ — Legal 500 USA Peers continue to view this firm as a major player in the market.’ — Chambers USA Jeff Sabin is described by sources as ‘an immensely bright and intelligent attorney’ with a talent for forming solid lines of strategy. — Chambers Europe This group has built up a strong creditor practice through its ‘deep involvement’ in both new and distressed investments… Clients praise the team’s related corporate and securities strengths.S. — Chambers USA Amy Kyle ‘is able to focus on what really matters without getting caught up in the minutiae’ and has the capacity ‘to think through complex issues and come up with a practical response. Boston.’ — IFLR Insolvency and Restructuring Lawyers For the sixth consecutive year. — Practical Law Company IFLR Expert Guides recognizes Tim DeSieno as a “leading expert in the United States. Bingham McCutchen LLP is registered with the Hong Kong Law Society as a Foreign Law Firm and does not advise on Hong Kong law. Hartford. We have approximately 1. UK.749. Boston.com (privacy policy available at www. creditors’ committees. Bingham McCutchen LLP. insurance companies.com or privacyUK@bingham.S.3064 (US) or +08 (08) 234. is the legal entity which operates in the UK as Bingham. Bingham was the only U.aspx). MA 02110-1726 ATTORNEY ADVERTISING To communicate with us regarding protection of your personal information or to subscribe or unsubscribe to some or all of our electronic and mail communications. calm adviser. firm to achieve this top-tier ranking. A list of the names of its partners and their qualification is open for inspection at the address above. particularly in relation to bondholder issues.4626 (international). he has good businessman’s judgment and is a practical. and appreciate its ability to deal with ‘the most heated and ugly litigation. A list of the names of its partners in the Hong Kong office and their qualifications is open for inspection at the address above. — IFLR Expert Guides/Legal 500 USA Sabin Willett is an ‘extremely talented litigator’ with considerable experience in the representation of lenders and institutional creditors in complex Chapter 11 disputes — Chambers USA about bingHaM Bingham offers a broad range of market-leading practices focused on global financial services firms and Fortune 100 companies. Bingham McCutchen® © 2013 Bingham McCutchen LLP One Federal Street. This communication is being circulated to Bingham McCutchen LLP’s clients and friends. Bingham McCutchen (London) LLP. Bingham McCutchen LLP operates in Hong Kong in formal association with Roome Puhar. NA Distressed Debt Report 2013_V37_JP. Silverman as ‘exceptionally knowledgeable on cross-border insolvency. London EC2R 7HF. especially on behalf of committees of bondholders. 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NA Distressed Debt Report 2013_V37_JP. 6 1 7 . bingham. B o s t o n M A 0 21 10 T . 80 00 P ri o r re s u l ts d o n ot g ua r an t e e a s imilar outcome. Bin g ham M cCutchen ® . 9 5 1.indd 26 Navigate the titanic challenges of today’s global financial markets.com 24/01/2013 16:32:28 A t t o rn e y A d ve rt i si n g © 2 0 13 B i n g h a m M c C u t c h e n L L P On e F e de r al S t r e e t .

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and then increased to 6.3x and 5.0x 3. media and telecom deals were excluded. more robust capitalization of new LBO targets and improved ability for current and prospective issuers to “kick the can.2x 6. if not the most important.” Figure 1: Average Debt Multiples of Large Corporate LBO Loans 7.0% and 37. factor contributing to the most recent wave of defaults.indd 28 24/01/2013 16:32:28 .5x FLD/EBITDA SLD/EBITDA Other Sr Debt/EBITDA Sub Debt/EBITDA Defined as issuers with EBITDA > $50mm.9x 4.3x respectively. However.5% 20. the global financial crisis was a significant.5% 35.7x 5. Opportunities are still at a significant low. currently at 1. For example. More interestingly.3x 5. Given current fundamentals. Though restructuring saw a small uptick in activity last year. Average equity contributions for LBO transactions (Figure 2) were 29. the number of companies on Moody’s B3 Negative and Lower Corporate Ratings List fell to 152.8% and 31. Comparing the debt markets of today to 2005-2007. and the pronounced default wave that followed during 2008-2010.0x 4.0x 6.0x 5. as of December. it would be naïve to believe that comparing debt markets in isolation between the mid-2000’s and the last two years could lead to the most comprehensive interpolation for future default trends. and new LBO transactions in 2013 could possibly approach or surpass leverage levels witnessed for deals at the prior peak in 2007.5x respectively from the rest of 2012 points to the possibility that some catalyst has already sparked the leveraged finance markets. taking into consideration several key differentiating factors: the amplified impact of the global financial crisis on the prior default wave. Prior to 2011.0x and 5.0x 2004 2005 2006 2007 2008 2009 2010 2011 2012 3Q12 4Q12 4. despite similarities between the two periods on a Debt-to-EBITDA multiple basis.8x 5.0x 1. regardless of industry are excluded Source: 4Q12 LCD Leveraged Buyout Review 1 12/20/2012. reaching its lowest level in 2012.4x in 2005 and 2006 respectively. isolating 3Q2012 and 4Q2012 leverage multiples of 6.1% for 2005 and 2006 respectively.boom or bust: can restructuring markets stay soft much longer? by: david Miller. Figure 2: LBO Equity Contribution 50. the average debt multiples for large corporate LBO loans (Figure 1) were 5.2x 5.0% 42.7% for 2011 and 2012. EBITDA adjusted for prospective cost savings or synergies Source: 3Q12 and 4Q12 LCD Leverage Lending Review IMPLICATIONS OF THE GLOBAL FINANCIAL CRISIS Though the underlying purpose of this discussion is not to focus on the impact of the global financial crisis on prior restructuring opportunities. provides insight on potential implications for activity in the restructuring market in the near-to-medium-term. the default rate continues to hover near historical lows. comparative leverage for similar transactions in 2011 and 2012 was 5.0x 5. Seth WaSchitz and cooper Warner Macquarie capital INTRODUCTION Yet another year goes by and again we have witnessed the unorthodox coupling of slow economic growth and soft restructuring markets. but are currently at meaningfully higher proportions of 38.3%1.4x 4.0% 27. the next default wave appears likely to begin after 2013 and will be more modest than what was experienced in 2008-2010. and it is unclear in which direction the future will trend.0x 2.2x and 5. LCD Default Forecast If this new standard of larger proportional equity contributions continues to be accepted by issuers and lenders as the “norm” in the near-to-medium- NA Distressed Debt Report 2013_V37_JP.0x 4. current trends insinuate 2013 to be the peak for the current leveraged finance cycle.0x 0. LEVERAGE STRUCTURES OF NEW ISSUANCES – THE NEW NORMAL? When comparing lenders’ and issuers’ appetites for leverage during the mid2000’s to market conditions today. further examining the higher proportion of equity contributions in LBO transactions reveals how banks and lenders actually have less appetite for risk in today’s markets.3x 6.2x in 2007.0% 2004 2005 2006 2007 2008 2009 2010 2011 2012 4Q12 All outliers.

0% Jan 05 Jul 05 Jan 06 Jul 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Loans Source: LCD High-Yield Weekly Review High-Yield All outliers.boom or bust: can restructuring markets stay soft much longer? term. Figure 4: Covenant-Lite Loan Share of Total S&P/LSTA Index Outstandings 30. today’s conditions provide greater capability for issuers to refinance relative to the existing conditions in the prior “hot” debt market cycle and its ensuing default wave. Although debt multiples have yet to reach 2007 levels. With leveraged loans. such as amendments or.3%) in loans and $346bn (42.indd 29 24/01/2013 16:32:29 . average debt multiples for large corporate LBO transactions should not precipitously decline until sometime after 2013 as they did between 2007 and 2008. Omitted data is due to limited number of transactions in given time period Source: LCD High-Yield Weekly Review Moreover. avoiding a rapid shift in market sentiment because they are forced to pursue other options. such as covenant relief or amend & extend transactions. LCD Covenant-Lite With high-yield bonds. regardless of industry are excluded.0% 10. closely examining leveraged loans and high-yield bonds in isolation further indicates greater refinancing ability today compared to the mid-2000’s for both debt securities. Despite the potential belief that higher absolute levels of issuance would lead to higher levels of bankruptcy by loan default volume.0% 0% 2005 2006 2007 2008 2009 2010 2011 2012 Source: 1/17/2013. more leveraged loans are now covenant-lite in nature. because LBO targets have greater underlying equity support today than during the mid-2000’s. these companies should have a greater ability to refinance outstanding debt. the interest rate environment is generally lower due to action by the Federal Reserve and the maturity wall has “spread out. the proportion of covenant-lite 29 NA Distressed Debt Report 2013_V37_JP. covenant-lite loans are easier to refinance because they increase the flexibility permitted to issuers and reduce the negotiating power of lenders. leveraged finance issuance volume (Figure 3) has already significantly surpassed the former record level of $679bn in 2007 by 19% in 2012.0% $500bn 398 389 240 8.0% 10. By nature. Current investor appetite for returns has pushed high-yield rates so low that distressed companies have had less difficulty refinancing and have not been forced to pursue other alternatives.0% ABILITY TO “KICK THE CAN” Further exacerbating the subdued tone of current restructuring markets. Figure 3: Total US Leveraged Finance Volume ($bn) $1. 20. bankruptcy.7%) in high-yield bonds. the composition of new issuance between today and the mid2000’s is very distinct. the interest rate environment is lower today than in the mid-2000’s (Figure 5): for most of 2012 the yields of new-issue senior unsecured bonds have been in the high 6% to mid 7% range while comparable yields in 2006 were in the 8% to low 9% range. In 2007. in some cases.” making debt burdens more manageable.0% 222 $250bn $0bn 2004 2005 2006 2007 2008 2009 2010 2011 2012 6. out of the $679bn of total US leveraged finance volume.0% 811 $750bn 624 679 592 522 12. Furthermore.2%) were high-yield bonds. In contrast. $535bn (78. in 2012 total volume was $811bn with $465bn (57.000bn Figure 5: Yields of New-Issue Senior Unsecured Bonds – Rolling 30-day Average 14. loans out of the total loans outstanding in the S&P/LSTA Index (Figure 4) has consistently increased since 2005. There are several key distinctions today that bolster this case: new issuance volume currently has a larger proportion of high-yield bonds.8%) were loans and $144bn (21. high-yield bonds in general have a greater capability to refinance due to incurrence covenants compared to leveraged loans that have maintenance covenants. However.

THE NEXT CATALYST FOR RESTRUCTURINGS? According to LCD.1% 0. the fact that interest rates are expected to stay low provides further evidence that the next default wave may likely not be for several years into the future. at 63. the direction of rate movement is in stark contrast today compared to the mid-2000’s. For example.5% 2005 2006 0. and we believe the next default wave will most likely begin after 2013 (at the earliest) and be of a smaller magnitude than what was experienced in prior cycles. The current debt cycle does not have such massive levels of new issuance in a given narrow time frame all maturing in the same year. high-yield spreads were a leading indicator for the 2008-2010 default cycle.2% 2011 2012 2013E 2014E 2.3% 0. events that could pull the United States back into recession. Portfolio managers were asked to exclude TXU from their projections Source: 12/20/2012. at year end 2006 there was a mere $14bn of loans due in 2014. comparison of the maturity wall from the mid-2000’s and today (Figure 6) displays a glaring discrepancy amongst their compositions. it is also worth considering potential “black swan” events that could affect the timing and magnitude of the next default wave. so there is a significant likelihood that defaults will not increase until high-yield spreads begin to rise. but at year end 2007 this value spiked to $205bn (a $191bn increase).0% 4. loan portfolio managers do not expect default rates to return to moderate levels until reaching 3. versus 64.9% 1. and they attribute several drivers for this medium-term trend: the recent increase in leverage for new deals (Figure 1). reducing the distance of the next wave.2% 2007 2008 2009 2010 0. The most important of these conditions to further consider is the potential impact of Federal Budget concerns. However. Observing that at year end 2012 there was only $88bn in loans maturing in 2019 leads to the notion that a new wave of leverage financing volume seems to have only just begun and should likely accelerate in 2013 and beyond. Yields of newissue senior unsecured bonds rose during 2006 and 2007.indd 30 24/01/2013 16:32:29 . while conversely declined since the second half of 2011.7% 3.0% 1. In addition. Data excludes defaulted facilities and is based on par amount outstanding Source: LCD S&P/LSTA Leveraged Loan Index Maturity Breakdown 2 4Q12 LCD Quarterly Review NA Distressed Debt Report 2013_V37_JP. the spike in the amount of loans maturing from 2013 to 2014 (Figure 6) and the eroding new-issuance quality. With the current low interest rate policy implemented by the Federal Reserve. such as a breakup of the Eurozone or a spike in oil prices among other unforeseen events. because markets are fickle.9%.0% 3.0% 3. such that the share of new-issue volume to issuers rated B+/B1 by Standard & Poor’s and Moody’s reached the secondhighest level on record during the second half of 2012. investors will continue to hunt for higher returns causing yields to remain subdued.1% in 2014 (Figure 7). The current maturity wall’s “spread out” structure between near-term and more distant maturities indicates that leveraged finance over the last few years has been more focused on refinancing and addressing near-term maturities from vintage 2007 LBO transactions than on new LBOs or larger new issuances. Figure 7: Default Rate (Forecasts for 2013 and 2014) 12. In fact. Furthermore. which could cause the Federal Reserve to reverse its policy of holding interest rates at such low levels through 2015. could also indirectly lead to a more prompt default wave. This type of action would force interest rates on high-yield bonds to increase.0% 9.In addition to the absolute levels of interest rates. LCD Default Forecast Figure 6: Maturity Wall Comparison between Debt Cycles: S&P/LSTA Leveraged Loan Index $250bn $250bn $200bn $200bn $150bn $150bn $100bn $100bn $50bn $50bn $0bn 2008 2009 2010 2011 2012 2013 2014 2015 2016 $0bn 2013 2014 2015 2016 2017 2018 2019 2020 2021 YE 2007 YE 2006 YE 2005 YE 2012 YE 2011 Nevertheless. these events are less likely to affect nearto-medium-term restructuring opportunities relative to the current state of the leveraged finance markets.6% in 20072. Because there is a correlation between default rates and high-yield spreads.0% 2004 Survey sent to portfolio managers by LCD during the first half of December 2012.6% 8.0% 1.

LCD currently predicts a 2.indd 31 24/01/2013 16:32:29 . As the leveraged finance market continues to demonstrate greater resilience in “kicking the can. June 2012 and December 2011 respectively3. has consistently lowered its 2013 default rate projections during the course of the last 12 months: estimates were 2. and the next default wave will recede further into the distance. and more interestingly. the larger proportion of equity contributions in large corporate LBOs and the strength of the refinancing environment in today’s leveraged finance markets also suggest that the next default wave is likely still several years into the future. Likewise.9% in September 2012. 3 3Q12 and 4Q12 LCD Quarterly Review 31 NA Distressed Debt Report 2013_V37_JP.8% and 2. the leverage structuring of new issuances and the strengthened ability for issuers to refinance.boom or bust: can restructuring markets stay soft much longer? CONCLUSION – IMPACT FOR FUTURE RESTRUCTURING OPPORTUNITIES As discussed.” such as TXU’s recently announced three-year maturity extension to its $645mm revolving credit facility.04% default rate for 2013. 2. the likely near-term default rate continues to decline. the next default wave will most likely be less potent than seen in 2008-2010 due to the effects of the global financial crisis.6%.

providing deep sector expertise combined with active asset management experience. Macquarie acts on behalf of institutional. Founded in 1969 in Sydney. Macquarie continues to grow its business in the region. out-of-court restructurings and formal bankruptcy proceedings. advisory. flexibility and specialization of a boutique restructuring business with the strength and resources of a global platform. establishing its first office in New York in 1994. Our restructuring advisory team is aligned with global industry groups. Macquarie works with a diverse range of clients and stakeholders including: –Public and private companies –Secured and unsecured creditors –Official and ad-hoc committees –Boards of Directors –Bondholders –Purchasers of distressed assets –Private equity sponsors –Hedge funds Macquarie Group (Macquarie) is a diversified global provider of banking. providing a solid foundation for its diverse businesses in the Americas and around the world. Macquarie’s global assets under management total more than US$353 billion. we are able to deliver broader and more innovative solution sets to our clients. financial. investment and funds management services.indd 32 SPECIALIZED RESTRUCTURING EXPERTISE POWERFUL GLOBAL PLATFORM Macquarie’s Restructuring and Special Situations Group combines the focus. By drawing on Macquarie’s diverse range of capabilities. Macquarie now operates in more than 70 office locations in 28 countries and employs more than 13. funds and advisory businesses.com/us/restructuring 24/01/2013 16:32:30 . Macquarie has been active in the Americas for well over a decade. with 28 offices across the USA.MACQUARIE RESTRUCTURING AND SPECIAL SITUATIONS GROUP Macquarie and Restructuring The Macquarie Group NA Distressed Debt Report 2013_V37_JP. with a uniquely integrated combination of special situations expertise. corporate and retail clients and counterparties around the world. and hybrids and convertible bonds. Australia. including listed and unlisted equity. wellcapitalized and conservatively geared. Macquarie provides a full range of advisory services for both debtors and creditors. Macquarie remains profitable.400 people worldwide. Macquarie’s broad range of capabilities in North America includes: –M&A Advisory –Capital Solutions –Restructuring and Special Situations –Principal Investments / Funds –Securities and Distribution Macquarie’s restructuring and special situations services are provided in the context of early interventions. including: Our Services and Capabilities Balance Sheet Restructurings –Recapitalizations –Exchange Offers –Debt Modifications –Forbearance Agreements –Out-of-court Restructurings – Chapter 9 & 11 Restructurings including Pre-packaged and Pre-arranged Restructurings Special Situations Capital –Debtor-in-Possession Financing –Exit Financing –Rescue Financing –Refinancing –Private Financings –Bespoke Financings M&A –363 Auctions –Complex Divestitures –Stalking Horse Transactions –Credit Bid Acquisitions –Cross-Border Sales Strategic Alternatives Assessment –Transaction Optimality Determination –Business Plan Assessment –Liquidity Forecasting –Managerial Metrics macquarie. debt. informal workouts. Macquarie’s proven capital raising capabilities and strong global institutional relationships provide our clients with solutions across the capital structure. Canada and Mexico.

MACQUARIE CAPITAL Selected recent Macquarie Capital transactions Confidential Public Broker-Dealer Currently acting as financial advisor to the Special Committee of the Board of Directors of Ambac Assurance Corporation Currently acting as financial advisor to the Convertible Note Holders of a Confidential Public Broker-Dealer Confidential Mixed-Use Real Estate Development Project Currently acting as financial advisor to the capital raise effort and loan amendment negotiation for a Confidential Mixed-Use Development Project Financial Advisor Financial Advisor Financial Advisor Ongoing Ongoing Ongoing Great River Entertainment Unsecured Term Loan Facility $50 million Acquisition of Advantage Rent-A-Car from Hertz Undisclosed Financial Advisor Equity Provider Modification and Extension of Existing Mortgage Loan $87.indd 33 24/01/2013 16:32:30 .4 million Financial Advisor Financial Advisor January 2013 December 2012 December 2012 Confidential Education Services Company Acquisition of Swank Audio Visual Revolving Credit Facility First and Second Lien Term Loans Financial Advisor Joint Bookrunner Joint Lead Arranger Principal Acted as financial advisor to the First Lien Lender Group of Fosbel Ceramic Technologies Acted as financial advisor to the Senior Lenders of a Confidential Education Services Company Financial Advisor Financial Advisor November 2012 October 2012 August 2012 NA Distressed Debt Report 2013_V37_JP.

NA Distressed Debt Report 2013_V37_JP. With dedicated industry groups providing deep sector expertise. Macquarie has been helping clients reach their goals for more than 30 years.indd 34 24/01/2013 16:32:31 . capital raising transactions and innovative strategic solutions. MBL does not guarantee or otherwise provide assurance in respect of the obligations of Macquarie Capital (USA) Inc. Macquarie has the resources. taking action today is critical to ensuring success and stability tomorrow. From balance sheet restructurings and recapitalizations to distressed M&A.com/us/restructuring Macquarie Capital (USA) Inc. macquarie. and more than 70 offices across 28 countries. Macquarie can help.Still think “wait and see” is the best approach? Macquarie: Helping our restructuring clients for more than 30 years Through booms and busts. and its obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL). With market conditions steadily improving. That’s why Macquarie’s Restructuring and Special Situations Group goes beyond the traditional restructuring model to offer our clients a broad and flexible array of products and solutions. specialist expertise and global reach to help your business meet today’s challenges head on. is not an authorized deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia).

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