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Pragmatism rules post-Covid debt restructuring

9 May 2022

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A wave of Covid-induced defaults has yet to materialise, but the number of restructuring deals is likely to increase over the coming months, says Ian Hancock, Head of Trustee Services, Yannis Erifillidis, Secondee Senior Consultant and Dennis Stone, Business Development Director at Intertrust Group.

The pandemic rocked the global economy but has yet to result in a significant wave of debt defaults.

That has come as a surprise to many. The impact of Covid-19 was an unprecedented economic blow, while many businesses were already considered overleveraged before the pandemic.

It seemed inevitable that vulnerable companies in diverse industries would topple like dominoes with the suspension of economic activity. Debt default would be an early indicator.

Instead, defaults have remained at a relatively low level, which is certainly testament to the success of government support schemes across Europe.

It also speaks of a pragmatism among the lending and investing communities in response to extraordinary circumstances. Debt restructuring, when it has happened, has often been with a light touch.

But we are not out of the woods yet. The pandemic’s effects will continue to be felt for several years. The short-term impact is likely to see the number of restructuring deals gradually rise over the next six months or so.

Debt restructuring enforcement is not an option

Aviation has been especially hard hit by the pandemic response. For long periods, borders were closed to tourists and business travellers. Airlines were forced to fly empty planes just to retain airport landing slots.

In normal circumstances, a wave of defaults would have been the obvious outcome.

It didn’t happen, in part because lenders and investors realised it would be counterproductive to enforce onerous repayment schedules on such a hard hit industry.

What is true for aviation is also true to some extent for the wider economy.

Lenders and investors have shown restraint. There has been a focus on collaboration and negotiation, as well as reluctance to move towards enforcement scenarios that may presage a wave of bankruptcies.

A pragmatic approach to debt restructuring

This has been in everyone’s interest. Investors and lenders understand that the post-pandemic landscape is uncharted territory; and the current crisis in Ukraine is adding further uncertainty to the global economy. They know that bankruptcy or liquidation would be the worst outcome of all.

Instead, there is a willingness to negotiate deals in a way that acknowledges the uncertainty of the times.

That’s because businesses that appear unsustainable today might come back to life in a few months’ time. When nobody really knows what the next 12 months have in store, major surgery seems premature.

Uncertainty has driven a cautious approach. In terms of debt restructuring, that has often meant a simple extension of the duration of the loan or note, usually in return for a higher interest rate.

This pragmatism has allowed businesses to put post-Covid recovery plans into action without the added pressure of implementing complex debt restructuring strategies.

The role of the trustee in defaults and debt restructuring

As economies continue to emerge from the Covid emergency and the Ukraine situation causes uncertainty among investors, it’s likely that we will see a rise in defaults and debt restructuring deals in the short- to medium-term.

As government support ends, investors and lenders will want to see greater evidence that businesses are viable in the post-pandemic landscape.

Expectations on borrowers could rise. For example, businesses looking at debt restructuring may be expected to have done more in terms of cost cutting and corporate streamlining.

Covenant waivers and debt rescheduling will likely form the first phase of many financial restructuring packages. But creditors may also show an increasing interest in debt-for-equity swaps.

Whatever form the restructure takes, the implementation process is largely the same. The borrower’s initial proposal will be followed by negotiation with creditors and eventually a vote.

Trustees will oversee the process and act under instruction on any amendments to the basic terms of the deal.

An experienced independent trustee is an invaluable partner in this process, ensuring any debt restructuring remains compliant with regulatory requirements and tax and accounting standards.

The trustee can smooth and speed the path of debt restructuring, helping companies reset themselves for life in the post-pandemic world.

Why Intertrust Group

  • Intertrust Group is an independent trustee active in the public sphere and on niche private deals involving alternative finance providers.
  • We act in a number of trustee roles including data, note, security and noteholder representative and have significant experience in dealing with all types of asset-backed transactions (ABS/CMBS/RMBS), collateralised loan obligations, project finance and aviation finance transactions.
  • We’re truly independent and operate with the highest degree of transparency and integrity.
  • Intertrust Group is a publicly listed company with 70 years’ experience in providing world-class trust and corporate services to clients around the world.