The leveraged loan market in Europe has escalated from 35bn euros (£23.77bn)
in 1998 to 500bn euros in 2005. The substantial increase in leveraged finance
has been driven by the entrance of non-bank lenders such as hedge funds and
collaterised loan obligations (CLOs).
Andrew Merret, director in European special situations at Close Brothers,
said that with so much debt available from hedge funds and CLOs, borrowers of
weaker credit quality were able to raise debt. This meant that more defaults on
debt repayments were a certainty.
‘Many of these loans…have been made to borrowers of poorer credit quality.
This in itself will cause default rates to rise whatever happens in the wider
economy. But, with the upward pressure on interest rates, these structures will
be severely tested. And there’s going to be fallout,’ Merret said.
Perhaps even more importantly, Merret warned, was that these hedge funds and
CLOs were becoming more active in lending money than the banks themselves, which
meant that when companies found themselves in difficulty, they had to cope with
a completely new way of working through a restructuring.
‘People are just waking up to the fact that hedge funds are here to stay.
This shows they are going to be the dominant force in restructuring. Now, in
leveraged or distressed situations, it’s hedge funds calling the shots from the
creditors’ camp,’ Merret said.
FDs will thus have to adjust to the new trends in the market. The increase of
non-bank lenders, who are far more willing to sell or buy distressed loans,
means that FDs can no longer rely on relationships with their bankers to see
them through difficult times.
Merret said that hedge funds were less likely to enter a formal insolvency
process, as they preferred to do a deal or sell the debt on in the secondary
The proliferation of non-bank lenders has also meant that the types of debt
available to FDs have become more exotic and complex. Lenders are now offering
debt/equity hybrids, which count as equity for credit rating purposes but are
still regarded as debt for practical purposes.
These instruments provide additional flexibility for companies, but are more
fragile than traditional bank debt in tougher economic conditions.
Evans’s Misys earner
Howard Evans, the finance director of FTSE 250 IT group Misys, saw his annual
pay package for the year ended 31 May 2006 fall to £574,596, from £735,000 in
2005.Evans did manage to oversee an increase in revenues from£855m to
£953m, but operating profit fell from£72mto £56m.
The FD picked up a salary of £332,800, a bonus of £219,648, benefits of
£7,648 and a £14,500 car allowance. Misys is currently a takeover target, with a
management team led by former FD Ross Graham among the bidders.
Arriva takes trains off balance sheet
Arriva has removed the investment in 43 new trains for its Netherlands
business from its balance sheet. Arriva has entered into a 138m euros (£94m)
refinancing, which will see the trains replaced by an operating lease from
Arriva’s funding organisations.
The deal includes the refinancing of g69m (£47m)worth of trains included in
the balance sheet at the end of June 2006.Arriva revealed the change as it
reported an operating profit from continuing operations of £56.8m for the six
months to the end of June 2006,a5% increase on the 2005 interims.
Hiscox heads for Bermuda
The board of Lloyd’s insurer Hiscox has approved the group’s plans to move
its country of domicile from the UK to Bermuda. In an interview with
Accountancy Age earlier this year, Hiscox finance director Stuart
Bridges said the insurer had eyed the market in Bermuda because of the
favourable regulatory regime and business opportunities in the United States.
Hiscox stressed that the move would not have an effect on its dividend policy
and would be tax neutral for UK-based shareholders. Hiscox made the announcement
as it reported a dip in interim earnings for the six months to the end of June.
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