In a bid to avoid the perceived uncertainty, operational impact, and stigma that can be associated with restructuring, a number of companies this year have chosen to raise often expensive debt to deal with maturities, or tender bonds unilaterally.
This trend of loading up on debt has been underpinned by the availability of liquidity from funds amid a relative lack of attractive distressed investment opportunities. This abundant liquidity is breeding creative and sometimes aggressive strategies from issuers, and in some cases (for example, in high-profile litigations such as Galapagos, below) these alternative solutions are occasionally leading investors to push back, with the potential for litigation.
In this article, we explain the opportunities and challenges investors will face in 2024 as issuers continue to explore strategic alternatives to restructuring.
Incurring High-Cost Debt to Rejig Capital Structures
Employing strategies to sidestep the need for restructurings by adding more debt to the balance sheet may come with a hefty price tag. Nevertheless, as long as funds with sufficient capital are prepared to lend, companies will continue to borrow.
For investors, the price to be paid for lucrative debt opportunities is the inherent risk that is attached to these opportunities. This is why involvement from funds will often be dependent on the debt being sufficiently collateralized. We expect this trend of increasing availability of capital from funds – under the right terms – will continue in 2024.
Two examples of this that we can point to in 2023 are Vedanta and Tullow Oil.
Vedanta Resources, a subsidiary of the multinational mining company, announced in December that it had raised $1.25bn from financial institutions for refinancing, including a new credit facility1. The company started talks with bondholders to help address its bond maturities of about $3bn, including $1bn coming due in January 2024 – a transaction which was recently assessed as “distressed” by S&P Global2.
Meanwhile, multinational oil and gas company Tullow Oil’s noteholders had anticipated a restructuring this year. It did not materialize because the company incurred debt as a means to tender for its underlying instruments. The company bought back an estimated 17% of the $2.4bn outstanding in bond debt this year at below par, according to S&P Global3. In June, it also bought back a portion of its 7% senior unsecured notes due in 2025 at a weighted average price of 60 cents on the dollar.
More recently, in November, Tullow Oil announced it would buy approximately $114.8mn of its $1.6bn of senior secured notes due in 2026 for $102.5mn, which represents a weighted average purchase price of 89.3 cents on the dollar4. The company announced a $400mn five-year notes facility agreement with commodity trader Glencore (with a Term Secured Overnight Financing Rate, plus 10% on drawn amounts). The facility was incurred explicitly for liability management of Tullow’s senior notes maturing in March 20255.
Unilateral Distressed Tenders
We have also seen an increasing number of companies attempting to tender for bonds on a unilateral basis. In doing this, issuers tender bonds at a certain price (often well below par, and at a premium to market value), while avoiding drawn out negotiations. This helps save both time and costs in terms of adviser fees.
The potential outcomes of this strategy are, in some cases, what is drawing companies to this approach. Either firms are successful (or they tweak the initial terms of the purchase to be successful), or they fail. However, in the case of failure, companies are still often no further behind than they were at the start of the proposed transaction.
Issuers are becoming more proactive in terms of pursuing aggressive strategies. One interesting example of this was seen in maneuvers by DTEK Energy, a Ukrainian energy firm. The issuer tendered for a small amount of its bonds and simultaneously issued a consent solicitation (to make changes to the bond terms, which allowed for significant dividends to be paid). The $50mn tender6 out of a $1.3bn issuance was small – however, bondholders who tendered were still understood to have consented to the changes even if their bonds were not actually purchased by the company. DTEK allowed itself to reduce the tender amount from $50mn to zero. In this case, even if the bonds were not repurchased, the holders that agreed to the tender would have consented to changes that would have greatly diluted the value of their instruments.
This is just one example in a wider trend of issuers that are increasingly asserting their own agendas and is something we do not anticipate will slow down in 2024.
Unilateral Distressed Tenders
We have also seen an increasing number of companies attempting to tender for bonds on a unilateral basis. In doing this, issuers tender bonds at a certain price (often well below par, and at a premium to market value), while avoiding drawn out negotiations. This helps save both time and costs in terms of adviser fees.
The potential outcomes of this strategy are, in some cases, what is drawing companies to this approach. Either firms are successful (or they tweak the initial terms of the purchase to be successful), or they fail. However, in the case of failure, companies are still often no further behind than they were at the start of the proposed transaction.
Issuers are becoming more proactive in terms of pursuing aggressive strategies. One interesting example of this was seen in maneuvers by DTEK Energy, a Ukrainian energy firm. The issuer tendered for a small amount of its bonds and simultaneously issued a consent solicitation (to make changes to the bond terms, which allowed for significant dividends to be paid). The $50mn tender6 out of a $1.3bn issuance was small – however, bondholders who tendered were still understood to have consented to the changes even if their bonds were not actually purchased by the company. DTEK allowed itself to reduce the tender amount from $50mn to zero. In this case, even if the bonds were not repurchased, the holders that agreed to the tender would have consented to changes that would have greatly diluted the value of their instruments.
This is just one example in a wider trend of issuers that are increasingly asserting their own agendas and is something we do not anticipate will slow down in 2024.
Fighting Back: The Rise of Litigation
At the same time, bondholders have started looking for creative ways of pushing back against these aggressive strategies from issuers. Restructurings are becoming more and more contentious and challenging, and litigation is increasingly playing an ever present role.
This year we have seen large restructurings that have been heavily litigated. One example is Galapagos. A lengthy trial was held in London to consider the validity of the German industrial equipment maker’s heavily contested 2019 restructuring7, under which private equity firm Triton retained control of the group’s equity – a move which was opposed by a group of senior noteholders.
The pace of contentious situations is accelerating, and we expect litigation to feature even more heavily in 2024 as stakeholders look for ways to apply pressure on issuers and borrowers. While it is not something that investors will race towards, litigation – or the threat of it – can ride alongside consensual and harmonious transactions.
Investor Trends
Distressed funds are becoming more and more active in restructurings. However, while there remains a lot of capital to be deployed, there has been somewhat of a paucity of funds being able to successfully emerge from restructurings. In the absence of choice, investors have increasingly been lending into higher-risk situations, including those discussed above.
At the same time, we have also seen pension funds getting dragged into restructurings after a sudden macroeconomic shock. The sheer speed with which distress can arise means that some pension funds have not been able to trade out of the situation in time, becoming involved in scenarios that they would never have envisaged being in.
However, in 2024 we may see fewer of these sudden macroeconomic shocks in Europe. In the UK, for example, the economy has not gone into recession and the jobs market has remained fairly robust8. Despite stagnant growth, the tight labor market means we may see lower-than-expected levels of restructuring activity, while the anticipated tidal wave of financial shock has not emerged on the European continent either.
Nevertheless, while macroeconomic pressures including inflation may be easing, debt service and supply chain issues remain priorities for management and boards across industries9. The next few years will also see a number of maturities coming due.
With the availability of liquidity (including with banks that are in good shape and providing revolving credit facilities, for example) and economies that are muddling through, the scenarios in 2023 and 2024 are vastly different from 2008, for example, where companies struggled in a low-liquidity environment. Together, these facts will mean businesses will continue to seek creative solutions outside of insolvency and restructuring in 2024.