Disruption is shaping restructuring trends

Transcription

1 A rticl e Disruption is shaping restructuring trends A u t h o r s L uk e C harl eton P artner, R estructuring, H ead of Transaction Advisory S ervices, EY I reland Dam ien M urran Director, R estructuring, Transaction Advisory S ervices, EY I reland The restructuring m ark et in on the island of I reland saw a continuation of the previous year with financial institutions continuing to deleverage nonperf orm ing loans through f urther loan portf olio sales and subsequent settlem ent or enf orcem ent m easures. I n addition, NAM A and international banks moved to final stages of disposal of distressed loans and exiting the I rish m ark et respectively. I n Decem ber, EY released its Econom ic Eye W inter F orecast report, which predicted all island growth of 3.7 % G DP f or and com m ented on the outlook f or the econom y in and beyond to The report look s positively toward steady growth in , however it is through the lens of continued uncertainty following the significant geo- political events which took place in nam ely B rexit and the success of the Trum p adm inistration in the U S electoral cam paign. These f undam entals will shape the growth of the all island econom y, theref ore any resultant changes to the trading environm ent will be hugely in uential for the future of the economy in

2 I n O ctober , EY released its 1 5 th Edition of the G lobal Capital Confidence Barometer which surveyed e ecutives across 4 5 countries globally. L ook ing at , the report provided a positive outlook f or M & A activity, however the underlying m acro environm ent and corporate strategy assessm ent still present continued uncertainty and challenges. W h a t d o y o u b e l i e v e t o b e t h e g r e a t e s t e c o n o m i c r i s k t o y o u r c o r e b u s i n e s s o v e r t h e n e x t m o n t h s? ( s e l e c t i n g a l l t h a t a p p l y ) Economic and political stability in the EU (including BREXIT) An unexpected rapid slowing of growth in China 1. W ork ing through l egacy deb t L oan b ook sal es The period of saw approxim ately 9 5 bn of residential, com m ercial and developm ent loan book sales, with approxim ately a f urther 5 bn - 6 bn in progress at end of or expected in ; 45,000 Par value of debt ( 'm) Slowdown in global trade flows (including economic nationalism, protectionism, industrial policy) Global geopolitical instability (including terrorism, border and territorial disputes) Political stability in your home country/region (including the rise of populist parties) High volatility in currencies, commodities and other capital markets 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0% 10% 20% 30% 40% Due to rem aining legacy debt, global uncertainty, and the continued traction of technology and am bition to innovate across all sectors, we believe that the restructuring m ark et is in a period of change. I n this respect, in we expect com panies to: C ontinue to work through rem aining legacy debt issues; P lan f or and adapt to a new trading environm ent; and R estructure to innovate C urrent developm ents are changing the way in which businesses analyse risk and how they are applying them selves to deal with disruption. S o what does this m ean f or business on the island of I reland? Year inevitably saw the continued shif t f or m any borrowers f rom dealing with traditional bank ing relationships to one of dealing with international f unds who acquired their debts. The work out strategies f or the individual loans within the loan portf olios acquired by the f unds are well underway, and in the case of som e early loan portf olio acquisitions, they are practically com plete. Typically, these work out strategies result in one of two possible outcom es: Refinancing/consensual disposal of security/ settlem ent of existing f acilities; or Failed refinancing/settlement resulting in f orm al enf orcem ent proceedings. W e also saw a continuation of receivership appointm ents across the island of I reland in which we expect will continue in O n the positive side, the underlying statistics f rom the C entral B ank of I reland ( C B I ) showed that there was.2 2bn of new lending in the first three uarters of 201 in the R epublic of I reland. This is a positive indicator that there is credit in the m ark et f or good quality bank able propositions, and it dem onstrates that there are options to deal with legacy debt other than f orm al enf orcem ent. This has helped the position f or a significant number of co operating borrowers, but not all by any e tent, to refinance and normalise debt levels in reaching a settlem ent with their existing or new lenders. 2 Disruption is shaping restructuring trends

3 W W What has also helped in the distressed financing space is the increased level of Alternative C redit P roviders ( AC P s ) in the m ark et. AC P s are of f ering com petition to traditional lending and assisting in providing optionality on refinancing that may not have previously been available. e expect to see continued activity in f or distressed refinance and restructuring of legacy debts ac uired by funds. R esidential property deb t hile at an overall level there are declining trends in distressed residential property debt in R O I, this sector rem ains extrem ely challenging. At the end of Q uarter , the C B I advised the position to be as f ollows; A total of 7 5,5 6 2 P rinciple Dwelling H ouses ( P DH ) were in arrears 5 6,3 5 0 accounts were in arrears of over 9 0 days % m The number of PDH accounts classified as restructured was,1, with deem ed to be eeting the current restructuring arrangem ent 1 4,5 1 8 B uy- to- let ( B TL ) properties were in arrears of over days with an outstanding balance of 4.3 bn, which is the equivalent of 1 8 % of the total outstanding balance on all buy- to- let m ortgages. There was notably a 5.4 % increase in the appointm ent of rent receivers on previous quarter. Non- bank entities now hold 4 5,6 7 8 m ortgage accounts f or P DH and B TL com bined. O f this num ber, alm ost 7 0 % are held by regulated retail credit firms, with the remainder held by unregulated loan owners. 3 8 % of P DH accounts held by unregulated loan owners are in arrears of over days, compared to 19 of accounts held by retail credit firms. With the above statistics, Ireland finds itself in a difficult position. A significant portion of current residential debt is distressed, while at the sam e tim e we have an absence of appropriate housing supply, and rents are increasing in the m aj or urban and com m uter belts. Addressing this problem rem ains a priority area f or G overnm ent. 2. P l anning and adapting to a new trading env ironm ent Taking a broader view than specific debt issues and looking to the trading environm ent, events of have thrown up new ( or revisited older) business challenges f or I reland as an island econom y in and beyond, particularly in the area of exports. The below table provides a break down of I rish exports based on most recently available Central Statistics ffice ( CS ) data f or I n this table, it is clear that the U K and the U S are significant e port markets, however, this is just over a third of our total e ports. This is notable due to the significant shif t in their local politics which we witnessed in the second half of and were not f orecast by the m ark ets. W hile m ark ets reacted in the short term to the B rexit vote and the election of the new U S P resident, M r Donald Trum p, the longer term outcom e of these changes as well as the public outlook rem ain unk nown. These political shif ts and associated uncertainty create new challenges which will im pact the trading environm ent in I n look ing at these potential disrupters we see the f ollowing business challenges in : Switzerland Irish exports by country Germany UK Belgium 5%; 6.1 7%; %; %; 14.5 In addition, we believe that financial institutions will continue to work to satisf y European C entral B ank ( EC B ) requirem ents of 5.5 % capital ratios. W e expect that this will require a com bination of restructuring initiatives to achieve this target in United States Rest of the world 24%; %; Total exports ( billions) Disruption is shaping restructuring trends 3

4 W I U K ( B rex it) T r a d i n g R epub l ic of I rel and The U K is the second largest individual export m ark et f or I reland, with 1 3 % of all exports U K - bound in An analysis of C S O statistics by sector shows the f ollowing: F ood and live anim als am ounted to 3.9 bn or 2 8 % of all U K exports; C hem icals and related products am ounted to 3.9 bn or 2 8 % of all U K exports; M achinery and Transport Equipm ent am ounted to 2.5 bn or 1 8 % of all U K exports; Total e ports classified as ther amounted to 3.4 bn or 2 5 % of all U K exports. W ith P rim e M inister Theresa M ay set to trigger Article 5 0 bef ore the end of M arch, this developm ent m ay have a significant impact on Irish E ports to the UK, with the above sectors m ost exposed. Notwithstanding any longer term structural trading issues as a result of exit negotiations, the im m ediate trading challenges post- vote centre on exposure to f oreign exchange ( F X ) m ovem ents and the level of dependency on a U K custom er base. I n m anaging F X exposure, businesses should seek to ensure they have appropriate structures and m echanism s in place to hedge m aterial m ovem ent. B usinesses involved in export activity with the U K should assess in detail the im pact that the introduction of custom s and duties could have on their supply chain and sales channels. Assessing com petitiveness as a result of any changes and ultim ately any negative impact on profitability should be the primary objective. I U K m e believe that rish exporters to the will need to be continually vigilant in to onitor any sustained im pact on trade and supply chains. C o r p o r a t e s t r a t e g y F U K m m C O f M I ( C O M I ) U K f U K C O M I m f U K f m m U K m j rom a strategic perspective, in the longer term, we believe that com panies will continue to consider whether the is the ost appropriate place to aintain their entre ain nterest. Am ongst other things, post the potential withdrawal of the rom the EU, international com panies with a ay ace a challenged restructuring environm ent as any insolvency proceedings tak en in the or pan European operations ay not be recognised across rem aining EU em ber states, depending on the withdrawal agreem ent reached. This could result in a requirem ent that com panies requiring to be restructured tak e ulti- urisdictional proceedings at unnecessary cost and tim e. I reland as a corporate j urisdiction provides optionality f or com panies with international corporate structures, as in its sim plest f orm I reland will provide a base f or C O M I with EU recognition should a pending restructuring event m aterialise. I reland has tried and tested corporate insolvency regim es and processes to support it as a location of choice f or C O M including receivership, exam inership, schem e of arrangem ents and m em bers voluntary liquidations. I reland also has well established debt listing m ark ets f or large organisations. A potential trigger f or such f uture restructuring events, and a requirem ent to consider a com panies C O M I, could include refinancing of high yield bonds. The Western Europe m aturity wall f or high yield bonds peak s at approxim ately 7 0 bn in Thereaf ter approxim ately 6 0 bn per annum will m ature over the period While refinancing activity in this area remains strong, any im pact on liquidity in Europe could have a detrim ental im pact on the ability to refinance. The ECB continues uantitative Easing ( Q E ) m easures across Europe and recently adj usted asset acquisition strategies. Q E has bolstered m ark et liquidity however it is uncertain how long this can continue. Theref ore, we will m onitor m ark et liquidity closely in as a negative im pact in this area will have a f ar reaching im pact on the restructuring m ark et across Europe. orthern rel and A large proportion of NI exports are to. NI com panies ay ace trading challenges with if custom controls are im posed as a result of rexit. They too will ace uncertainty regarding the ovem ents. owever, som e view the act that NI will be the only part of the with a land border to the EU as a positive. The NI C orporation Tax rate will be reduced to % in ( f rom 2 0 % ). The intention was to encourage F oreign Direct I nvestm ent, however, f ollowing NI s exit f rom the EU and the proposed reduction in C orporation Tax in England and W ales, the im pact m ay not be as positive. 4 Disruption is shaping restructuring trends

5 m W U S ( T rum T r a d i n g p agenda) F U S I m 2 4 % I U S - U S I U S rom a trading perspective, the is reland s single largest individual export ark et, with of all rish exports bound. As the Trum p adm inistration sets its policies and explores options to drive internal production and stim ulate growth, there is a real risk that this could negatively im pact reland s trade with the. I n addition, the presence of U S com panies in I reland is significant, therefore any policy changes to draw American com panies back to the U S would have a huge im pact on I reland s econom y. F m f rom a restructuring perspective, we will be onitoring the ollowing agenda item s in as the Trum p adm inistration sets policies; Trading incentives in the U S to drive down U S im ports, Ta e emptions for repatriation of profits to the US, C hanges to the U S corporate tax rate. C oncl usion I n conclusion, f or we expect to see f urther f orm al receivership appointments and distressed refinancing as financial institutions, funds and borrowers alike seek to address nonperf orm ing legacy debt. W e believe those seek ing to m anage trading challenges will drive an increase in the num ber of exam inerships in R O I and adm inistrations in NI in as com panies seek to restructure. e f urther expect that there will be an increase in the level of liquidations within certain sectors, and f or businesses that cannot appropriately m onitor, plan and adapt to these challenges. Technological change and data efficiency continues to challenge businesses. W e believe will see an increase in operational reviews in order to restructure to innovate and f uture proof businesses. W hile is awash with uncertainty and challenges, m ost can be managed through an identification process and early engagem ent to appropriately navigate. 3. R estructuring to innov ate I nnovation is driving change in how businesses operate and the sectors in which they operate. I n order to adapt, com panies ust drive substantial change in their businesses to address these challenges which include sector convergence, product innovation, industry regulation and increased globalisation as documented in EY s most recent Global Capital Confidence B arom eter report. F or , we believe that this is bringing a new dim ension to restructuring in the f orm of operational review and restructuring. Technological advances whether it be robotics, artificial intelligence or the increasing use of data analytics tools are changing how business is carried out and the efficiencies that can be generated with technology are driving com petitive advantage. W hile there is a perceived substantial investm ent to this, it has nonetheless in m any cases becom e the com petitive edge and will push those unwilling or unable to adapt out of business. R eviewing and im plem enting a restructuring plan can assist in m itigating these risk s. S ource I nf orm ation; C entral B ank of I reland - Residential Mortgage Arrears and Repossessions Statistics September 2016 C entral B ank of I reland - Credit, Money and Banking Statistics Table A.14 Credit Advanced to Irish resident Private-Sector Enterprises Central Statistics ffice export data EY - Global Capital Confidence Barometer October 2016 EY Economic Eye Winter Forecast 2016 EY Global loan portfolio statistics, December 2016 Disruption is shaping restructuring trends 5

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