Restructuring Adviser of the Year: Houlihan Lokey
Houlihan Lokey was involved in most major corporate reorganisations in 2017. The firm dominated by driving the kind of outcomes possible only when a team of advisers is focused on unlocking value for its clients. Houlihan Lokey is IFR’s Restructuring Adviser of the Year.
Houlihan Lokey returned to its classic position in the restructuring realm in 2017, as the firm ramped up its creditor-side practice advising investors holding the fulcrum security across a variety of industries from oil and gas to retail.
In recent years, Houlihan has made a point of winning debtor-side assignments, advising companies as they seek to restructure their debt and redefine their businesses.
And the firm has continued to make progress on that front. But Houlihan has long been known as a creditor-side shop seeking to advise the groups of creditors likely to have the biggest say in how companies operate after they recover from the problems that meant Houlihan was involved in the first place. That allows it to have the broadest reach among its peers and the league tables tell that tale.
For the 12 months to November 15, Houlihan was the most active adviser on closed restructuring deals, by both number and total debt restructured, completing 56 deals comprising nearly US$93bn of debt.
In the US, Houlihan was number one working on 32 deals. In EMEA it was third behind Lazard and Rothschild and it was second in Asia.
“We have been incredibly dominant on the creditor side,” said Jonathan Cleveland, managing director at Houlihan. “Our market share has increased everywhere around the globe.”
Despite the fact that liquidity is still easy and the default rate is hovering near historic lows, Houlihan had its second-best year ever “eclipsed only by the peak of the financial crisis”, according to Cleveland.
“This is a challenging environment to run a restructuring group, but we were incredibly prolific in the last 12 to 18 months,” he said, noting that Houlihan has been dominant in every micro-niche in restructuring.
Among the major assignments on the debtor side in 2017 Houlihan managed what it dubbed was a “home-run” transaction for Affinion Group, a provider of customer loyalty programmes and related insurance products.
Houlihan helped Affinion refinance its US$1.8bn debt stack, pushing back its maturity wall to 2022 from 2018. The refi bought the company time but increased its interest burden. This was part of the plan, giving the company three years to expand its loyalty business, and possibly exit other businesses and use the proceeds to pay down the debt.
“Normally, you would have seen a freefall bankruptcy in a case like this,” Cleveland said. Instead, equity holders were able to maintain a 70% stake, while company insiders were able to invest money to back a plan and avoid a valuation fight between unsecured and secured creditors.
Houlihan continues to build its company-side practice despite the fact that working for debtors sometimes means tending to lame-duck managers and boards who have already checked out because they are about to lose control of the company.
Of course, the plum assignments are usually on the creditor side – working for investors who want to own a company. For Houlihan, such deals in 2017 included Energy XXI, Ultra Petroleum, CHC Group and Sequa Corp.
“A restructuring is not successful because it has a beginning, middle and end,” said Saul Burian, another managing director at the firm. “It’s successful because the company was rehabilitated, is profitable, and the new investors and creditors make money.”
PRIMING THE PUMP
Coming off a strong year for oil and gas restructuring, Houlihan continued to close transactions in the space.
One was for Samson Resources, where the firm served as exclusive financial adviser to the second-lien creditors, as the exploration and production company restructured US$4.2bn of secured and unsecured debt in bankruptcy. There was about US$925m of first-lien debt in front of the US$1bn second-lien noteholders and US$2.25bn of unsecured debt behind them.
The initial agreement to pull the company out of bankruptcy was built around a US$300m new money rights issue supported by the second-lien holders. Initial support for the issue was so strong it was upsized to US$450m only for natural gas prices to crumble again and the rights offering to be cancelled.
This also changed the dynamic of the whole scenario. Instead of second-lien noteholders keeping unsecured creditors at bay, they were now locked in a battle with the first liens, who argued that second liens should be out of the money.
Houlihan prevailed on behalf of its client in the end. The company agreed to sell some assets to repay the secured debt and the second lien then supported a US$70m rights offering. But Houlihan’s work wasn’t finished.
It was then engaged to sell Samson’s East Texas and North Louisiana assets, which collected US$525m, way above the US$365m at which they were valued in bankruptcy. The proceeds helped pay down debt and fund development of other assets.
“Oil and gas is a very unique animal and if you don’t understand the right way to finance the assets, you will come to the wrong conclusions from a valuation perspective,” said JP Hanson, head of the oil and gas exploration and production group at the firm.
With the oil price recovering, Houlihan is putting the experience gleaned from the restructuring boom of the recent past to good use, advising on 16 live assignments. Only three are restructurings, with the rest a mix of M&A, asset sales or capital markets fundraisings.
Outside the US, restructurings in the past year have often been highly charged, complex and political situations in the emerging markets. Houlihan has thrived here, advising on deals from Russia and Ukraine to Croatia and the Middle East.
“Much of the [EMEA] loan market is EM-focused now,” said Peter Marshall, co-head of European restructuring.
“The EM market is not as sophisticated [as Western Europe] and deals can sometimes take years and suck up many man hours, so some of our competitors don’t chase these situations. We can do them because of the sheer size of our teams and resources.”
In Russia, Houlihan advised rail rolling stock lessor Brunswick on restructuring US$765m of debt. Also on the company side it advised Russian food company Roust Corp in a Chapter 11 plan that eliminated US$462m of debt through a debt-for-equity exchange.
The firm’s emerging markets charge looks likely to continue over the next year, with its key mandate advising Croatian supermarket chain Agrokor on its politically-charged €6bn debt restructuring.
In the Middle East, Houlihan opened an office in Dubai in September led by managing directors Arun Reddy and Joseph Julian. “There have been a lot of restructuring deals in the Middle East in the last five years and we wanted to be closer to the client to consolidate relationships,” said Reddy.
The firm is currently advising a committee of international claimants of Saudi Arabian industrial services business Ahmed Al-Gosaibi & Bros around the company’s US$6bn debt. It is also advising UAE-based Dana Gas on its controversial US$860m sukuk restructuring talks.
Elsewhere, the firm closed off the major US$13bn restructuring of renewable energy group Abengoa in Spain, where it advised an ad hoc group of the company’s bondholders on the capital reorganisation carried out through novel Spanish and international legal processes.
As part of that deal Houlihan advised a sub group of the bondholders who provided interim financing facilities to support the business ahead of the finalisation of the deal.
“This has been our best year ever in Spain. Abengoa is one of the largest restructurings in the world outside of the FI [financial institutions] space and our creditor deal brought in the money to make it happen,” said Manuel Martinez Fidalgo, a managing director based in Madrid.
The team is also advising creditors on the €3.55bn liquidation of Spanish toll roads.
In the financial institutions area, the firm was called in by the Co-operative Bank in the UK, to assist the lender on negotiations with bondholders about its recapitalisation when it became clear that a simple sales process would not be enough to solve the institution’s problems.
And further afield, Houlihan has continued to build up its Asian prowess, winning the mandate to advise state vehicle China Investment Corp on its holdings of convertible bonds in Australian uranium miner Paladin Energy, which is being restructured.
This was believed to be the first time the sovereign wealth fund has used external advisers in this way, showing the regard with which Houlihan is held.