The restructuring of middle market companies is increasingly more global for a number of reasons.
Faced with slowing growth in their
domestic markets, companies look
abroad to meet more aggressive
growth forecasts. In addition, as their
customers expand their geographies,
so must suppliers. With improvements
in technology, more receptive
business environments abroad,
and the development of low-cost
joint ventures, even lower middle
market companies are regularly
expanding into additional markets.
With this global expansion, companies
are finding local financing is now
readily available in many jurisdictions,
enabling them to expand international
operations without lending limitations.
This additional leverage is frequently at
the level of the local operating company,
creating complex multilevel balance
sheets that were once the province
of large multinational businesses.
These structures are increasingly
common, even for smaller companies
with an eye toward growth rather than
a restructuring. A borrower’s balance
sheet may be laden with bank debt,
second lien debt, mezzanine debt,
and high yield bonds held by a variety
of institutions, including traditional
banks, distressed debt funds, credit
funds, collateralized loan obligation
(CLO) managers, and private-equity
funds, each with a different agenda.
In general, corporate financing
has become increasingly complex
as banks continue to experience
disintermediation by a variety of
lending sources. These sources may
have conflicting approaches when
confronted with a troubled company,
however. Varied risk appetites, abilities
to add additional capital, and regulatory
structures may complicate motivations.
The credit-default swap (CDS) market
has made it possible for some lenders to
hedge their exposure, thereby changing
their incentives and creating scenarios
in which even lenders in the same
securities have misaligned interests.
Despite increasing globalization of
credit markets, the world’s insolvency
processes remain stubbornly territorial.
Even the European Union, which has
managed a common currency, has
widely varying insolvency rules among
its member nations. Despite the ability
of EU companies to issue bonds in
a common currency, the underlying
credit risk in an insolvency differs
considerably across otherwise similar
companies, depending on the relevant
regime controlling the processes
across each company’s operations.
It is frequently impossible to accurately
predict how an insolvency will play
out; therefore, the credit investor
must assess risk based on limited
information and a general feel for
how a variety of factors, including
management actions, the perspective of
regulators, and the preferences of other
creditors, might affect the outcome.
For a company with multinational
operations that is beginning to see
difficulties on the balance sheet, there
may be steps it can take to avail itself of
the most advantageous jurisdiction in
which to seek relief. Selecting the proper
jurisdiction may increase the likelihood
of achieving an effective restructuring
and avoiding liquidation. While the
United States—with its established law
favoring rehabilitation over liquidation—
is often favored when it is an option,
the United Kingdom and Germany also
offer benefits to troubled companies.
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