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Outlook, Opportunities and Pitfalls

of Distressed Investing in Europe

Neville Kahn, UK National Head of Restructuring, Deloitte LLP

Corinne Ball, Head of Business Restructuring and Reorganisation Practice, Jones Day

James P Shinehouse, Partner, Atlantic Financial Advisory Partners, LLC

Paul McGowan, Chief Executive, Hilco UK

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Ireland returns to the

international bond

market

25 Jan

5 Apr

25 Jun

21 Jun 29 Jun

Jumpstart Our

Business

Startups (JOBS)

Act eases IPO

regulations

29 Feb 26 Jul 9 Jun

15 Sep

6 Sep

8 Oct

LIBOR

scandal

breaks;

Madrid asks

for aid for its

financial

sector

Coalition

government

formed in

Greece

European

Council

Agreement to

infuse capital

directly into

troubled banks

Fed announces Quantitative Easing 3 (QE3)

The European Central

Bank (ECB) offers

another unlimited three-

year LTRO

Mario Draghi announces

the ECB “will do whatever

it takes” to save the euro

Spain accepts bailout for

its banks

ECB launched an

unlimited bond-

buying program

IMF cuts its

global growth

forecasts

31 Dec

US ‘fiscal cliff’

compromise deal

reached

6 Nov

Barack Obama wins the

U.S. Presidential Election

BoE/HMT launch Funding for Lending

Scheme (expires Jan 2014)

Source: Deloitte

Turbulent capital markets context Significant events that impacted European capital markets in 2012

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US, UK, China and Eurozone equity markets (rebased to January 2008)

30

40

50

60

70

80

90

100

110

120

2008 2009 2010 2011 2012 2013

United States

EMU

China

UK

3

Source: Deloitte

Equity markets don’t rate European growth prospects…

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0

10

20

30

40

50

60

70

80

90

100

2006 2007 2008 2009 2010 2011 2012 2013

VStoxx volatility index

4

Source: S&P

As measured by volatility for the EURO STOXX 50, the Eurozone’s index of top corporates

… but stress in European financial markets is finally easing…

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… the perceived risk of euro secession continues to ease …

Probability of any of the existing eurozone members not being in the single currency area in the next 12 months (based on extensive survey of CFOs)

Source: Deloitte

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… and yields on riskier debt are falling Investors’ hunt for yield is pushing their appetite towards riskier assets

Average Yield: European and US High Yield Bond Flow Names 2012 ended with:

• Low yields

• Increased risk

appetite

• Resilience to macro

concerns

• European companies

are grabbing these

opportunities to raise

cheap finance

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The shape of the European leveraged market is changing…

As Euro banks retreat from the market, non-bank and US bond investors are stepping in

• Since 2010, Euro issuance including US bond

investor participation has remained broadly

stable at c.€90m - €100bn p.a.

• However, this masks two significant factors:

– A 33% fall in domestic leveraged loan

issuance in 2012

– A dramatic fall in CLO and bank

participation

• The shortfall has been made up by alternative

bond investors & growth in Yankee bonds

European leveraged loan and bond issuance, 2010-12

Source: S&P, Bloomberg

Leveraged loans: domestic European issuance falls -33% in 2012 (vs 2011)

High yield bonds: domestic European issuance rises -F1% in 2012 (vs 2011)

Yankee bonds: European companies raise €22bn from US HY investors - more than 2010 and 2011 put together

€billions

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… and default rates are rising ELLI default rates are back above 6% – levels last seen in July 2010

European vs. US lagging 12m speculative grade loan default rates based on par

amount outstanding

Source: S&P

• Default rates are rising

above 6% – despite

massive policy support

and widespread bank

forbearance

• As banks’ own capital

positions are slowly

restored, we anticipate

less appetite to forbear

• S&P predict y/e 2013

European default rates

will be 6.8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Jun-

07

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep

-11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep

-12

Nov

-12

US (S&P/LSTA Loan Index) Europe (S&P European Loan Index)

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The picture varies by industry… Retail insolvencies are high profile at present, but there are other active sectors

Trailing 12-month 2012 European corporate default rates by industry

Source: S&P

0

2

4

6

8

10

12

14

%

Key drivers include:

• Rising raw materials prices

• Weak consumer

discretionary spend

• Cyclical sensitivity

• Survivorship bias (e.g. auto

industry restructured years

ago)

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… and country Eurozone vs non-Eurozone; North vs South polarities; “Emerging Europe” in the east

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What’s the best way in? Implications for distressed investors

Previously amended rather than properly restructured

Fundamentally over-leveraged

Structural challenges (market, technological, consumer behaviour)

Businesses who can’t refinance are likely to

reflect the following characteristics:

Solutions for these poorer credits will depend

on stakeholders’ appetites:

Interim solution / amend & extend

Stakeholder capital injections

Lenders and funds drive full restructuring or recapitalisation