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Sunday, 19 November 2017

Restructuring Adviser: Lazard

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Talkin’ about a resolution

The largest debt restructuring over the last year was Ukraine’s. The country faced a stand-off with creditors, including a single US investor reluctant to accept any haircut. For resolving this and numerous other tricky situations, particularly in the energy sector, Lazard is IFR’s Restructuring Adviser of the Year.

A condition of war-torn Ukraine’s US$17.5bn bailout from the International Monetary Fund this year was that the sovereign restructure its US$18bn debt. That this was achieved by consensus in nine months was little short of a miracle.

Moreover, creditors ultimately agreed to take a 20% discount – even though the bulk of the debt was owned by Franklin Templeton, which had repeatedly vowed not to accept any haircut on its bonds.

Creditors were given extremely generous 20-year “value recovery instruments” payable on certain GDP conditions to cover that shortfall, together with enhanced coupons – part of a tricky solution that underscored Lazard’s swift, deft and meticulous work on the restructuring.

As per the IMF’s own parameters, the international body itself could not directly be involved in the restructuring itself, leaving Lazard to act for Ukraine.

“This was a pretty quick process door-to-door,” said Eric Lalo, managing director, sovereign advisory for Lazard.

Lazard managed to achieve the main aim of extending the maturities of the debt by four years – as the IMF had demanded – giving Ukraine vital cashflow benefits to enable it to combat the conflict with Russia in the east of the country.

But Ukraine Finance Minister Natalie Jaresko also told investors she would be “more than happy” if the country’s economy was growing at the level at which the instruments might eventually pay out.

As part of its work, Lazard also advised other Ukraine creditors such as Ukreximbank and Oschadbank – both of which extended their debt.

The result is that Ukraine is now in a far better position than the dire one it faced at the start of the year. And if a second round of restructuring is needed to meet further IMF demands, that will now be far easier to achieve.

Creative energy

Beyond sovereign territory, a long-expected wave of restructurings in the energy sector finally arrived in 2015 as oil prices hit multi-year lows, forcing high-margin producers and servicers to seek radical cures for their ailing debt-laden businesses.

Over and over, Lazard helped companies battle their way to a solid and durable solution, rebuilding a balance sheet that could weather an ongoing industry downturn while not asking creditors to give up too much.

One great example of Lazard’s handiwork was for Hercules Offshore, a Texas-based oil rig operator that slid off the Nasdaq and into bankruptcy as crude prices fell through the floor.

Lazard found that optimising the Hercules balance sheet meant clearing away the company’s existing debt entirely – and helped devise a pre-packaged plan to convert more than US$1.2bn of senior notes into 96.9% of the equity.

The plan won the support of 99% of bondholders, many of whom ponied up to fund US$450m in new debt financing to get Hercules out of bankruptcy.

Hercules CEO John Rynd said restructuring the balance sheet early in the cycle generated significant benefits.

“With our new capital structure, we are much better positioned to compete successfully in the offshore drilling market,” he said.

David Kurtz, global head of restructuring at Lazard, told IFR that the conservative approach – including an infusion of new financing – would be used again in the sector.

“People made the most conservative assumptions at Hercules and built the balance sheet from there,” Kurtz said.

But Lazard also knows that, when it comes to energy restructuring, one size definitely does not fit all.

It was hired as adviser to offshore drillers Vantage Drilling, Paragon Offshore and SandRidge Energy, as well as Goodrich Petroleum.

The operational structures of these companies are vastly different, and the solutions to their woes will be as well.

At SandRidge, for example, Lazard is helping reduce the debt load with a novel convertible bond exchange that swapped secured debt for a convertible.

Creditors are generally reluctant to convert debt to equity, especially if there will still be debt on the books and they cannot quickly sell the equity without impacting the price.

But the SandRidge convertible, which gives the company some breathing room, has been described as a delayed debt-for-equity exchange. In the short term it allows the creditor to maintain the full amount of their debt claims in case of a bankruptcy.

Longer term, if the company is able to rationalise its balance sheet and the price of oil rebounds, the share price is likely to rise and trigger the conversion – thus niftily erasing debt from the balance sheet.

Corporate activity

Lazard, of course, does more than just energy. Over the last year in Europe it repeatedly devised some cutting-edge solutions for creditors at UK steel producer Stemcor, care home chain General Healthcare Group and Danish shipping operator Torm.

“Lazard played a leading role in this year’s largest and most complex restructurings … despite an active credit market that continued to allow aggressive refinancing,” said Richard Stables, EMEA head of restructuring at Lazard.

Lazard advised Apollo Global Management on the takeover of the Stemcor – owned by the Oppenheimer family – in one of the few classic debt-for-equity restructuring deals seen in Europe in 2015.

The struggling company, whose problems originated with the purchase of an iron ore asset in India, entered 2015 facing a December maturity on a US$1.15bn trade finance loan signed as part of a previous restructuring. That had left it still significantly over-leveraged.

Lazard advised Apollo, which had built up a significant stake in Stemcor’s debt in the secondary market, on its creditor-led solution following a failed M&A process.

At Torm, Lazard worked for the par lenders in a deal that was difficult to negotiate due to a range of different lender groups – including a significant number of hedge funds – each with debt secured against different assets.

Torm eventually merged its fleet with Oaktree’s vessel-owning vehicle, which resulted in Oaktree taking a 64% stake in the business and Torm reducing its debt from US$1.4bn to US$561m.

At GHG, Lazard advised the master servicer acting on behalf of the senior lenders. and was instrumental in restructuring the complex £2.1bn propco financing.

The main obstacle was the interest rate swap agreement on this debt, which at one stage had become a £700m liability. Several complex transactions were needed to unpick this agreement and refinance the group’s debts.

Restoring health

In the US, Lazard created an innovative solution for Millennium Health, one of the largest urine drug-testing labs in the country. The company, accused of billing Medicare for unnecessary tests, was nearly put out of business when it was assessed for a US$250m fine.

Millennium didn’t have the cash to pay the fine, which would have ended its ability to do business with US social insurance programme Medicare, its largest client.

“It was a race to get the deal done before the government exercised its rights to pull the company’s Medicare licence,” Kurtz said – something that would have effectively put Millennium out of business.

The company restructured its balance sheet, cutting outstanding term loans by two-thirds to US$600m and handing the equity to creditors. The new owners agreed to pump US$325m into the company, which went to pay the fine. The remainder was left for operating expenses.

The restructuring was the result of a tough four-way negotiation between the Millennium, its creditors, its shareholders and the government, including Department of Justice attorneys and Medicare officials. It was a complicated and delicate deal – and a successful one, which showed again why Lazard has earned its kudos as Restructuring Adviser of the Year.

To see the digital version of the IFR Review of the Year, please click here .

To purchase printed copies or a PDF of this report, please email gloria.balbastro@tr.com .

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