Syndicated lending is down 90% on last year, thanks to recent financial shocks and the general economic slowdown. Likewise, M&A activity is flat on its back, with the value of European takeovers in the first quarter of 2002 less than half the figure for January to March last year. There isn’t much joy on the flotation front, either. The number of new issues on the London Stock Exchange fell from 22 to 12 in the same period, and all but two of those were on Aim, the junior alternative investment market.
Overall, the amount of capital raised in new share issues collapsed from £693m in the first quarter of last year to £79m in this year’s first quarter.
All this is particularly bad news for investment banks. Nevertheless, they are still finding ways to make money. If companies aren’t looking for potential takeover targets, raising debt in the capital markets or seeking a stock market listing, it might be time for them to follow the poor beleaguered telecoms companies and look at restructuring to improve shareholder returns.
Bankers estimate that restructuring could involve fees of 0.5% to 1%, a sum not to be sneezed at in a securities deal worth, say, £1bn. But the business is not limited to the bulge bracket banks which play at the top level of the game. Small investment bank Close Brothers, for instance, has been in the corporate restructuring market for some time, as has Rothschild.
Both have specialist teams. Close Brothers has even carved out a lucrative niche in partnership with US restructuring specialist Houlihan Lokey.
It tends to look at the bond-holder sector and is specialised in high-yield restructuring.
Some of the large European investment banks have come at this idea from a different angle. ABN Amro and West LB are prepared to take an equity position and put up cash for distressed companies. The Wall Street clique, on the other hand, are generally involved in situations where they already have an exposure. For example, Goldman Sachs is running the auction process for Energis, which is already in talks with a potential buyer.
The competition for restructuring mandates is tough, with a number of players, including the big accountancy firms, looking for work. “We provide transaction support, including due diligence, tax structuring and all the other services required in a big de-merger,” says Colin Cook, head of UK transaction services at KPMG. “The number of FTSE-350 companies doing this has accelerated over the past year. There is more pressure to improve capital structure and put debt in different vehicles.”
De-merger currently seems to be the most common method of restructuring. The past few months have thrown up major examples, such as BT de-merging mm02 and Kingfisher, its Woolworth subsidiary. The process became popular in the mid-1990s, when one of the biggest deals was the ICI-Zeneca de-merger. It remains so because it allows investors to choose what vehicle they wish to be in and allows capital and debt to be properly allocated.
The mm02 de-merger, for example, gave BT a completely new debt profile. The classic situation that triggers a de-merger would be when a finance director looks at his company’s share price and sees that it is below market expectations and believes this is because potential investors are unable to invest in the part of the business they think has profit potential.
“The de-merger can clarify a company’s strategy and market position,” says Cook.
For the banks and accountancy firms, restructuring provides an opportunity to bring together the skills of its debt and equity people, who normally work independently. “Typically, people with a client relationship will get the first scent of a company needing a deal and they pass it on to specialists,” says an investment banker. “The result is that you might get someone from Goldman Sachs calling on Tuesday to talk about equity and someone else calling on Friday to talk about debt. In the case of a restructuring it’s not pure equity or debt. The FD will say he’s got a problem and ask the bank for help. The bank has got to produce people with skills to issue new equity or cancel debt.”
One of the problems banks face is that this is not a full-blown recession like that in the early 1990s, when corporate activity was halted for several years. Deals are being done, M&A teams are handling some business and it is not easy to target them on one side of the spectrum or another.
But restructuring can fill the gap nicely.
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