Wait and See for Now
“Many sponsors are currently sitting on cash, waiting and seeing, but this can only go on for so long as there are time constraints,” Ms Myners said. “We have clients who are using this period to set up investment platforms so that they are ready to go as soon as opportunities arise,” she added. She sees the healthcare and the technology, media and telecom sectors as being particularly resilient, with also some lucrative real estate options available to alert investors. This is also a good time for working with existing portfolio companies to explore ways to add value.
There’s clearly a gap between sellers and buyers in terms of valuations, yet the wider private capital ecosystem is still active and cautiously optimistic.
“We are seeing transactions which were agreed earlier this year going through, even if there were some adjustments on pricing,” added Stefanie Ferring, partner in the Global Financial Markets practice in Luxembourg. Overall, she notes signs that people are waiting out 2022 with a view to restarting investments again in the New Year.
Corporates seeking to sell non-core assets or non-performing assets, creating spin-offs or moving to business consolidation may come to the fore,” Ms Myners said.
In particular, some are watching out for undervalued and distressed assets. Ms Myners also saw increased likelihood of add-on acquisitions, and public-to-private transaction activity, given the discounted nature of many share prices.
As for smaller to mid-market deals, bank finance may still be available. Debt funds are also likely to be an attractive funding option, as well as equity-only financing according to Ms Myners.
Interest Rate and Restructuring
Restructuring might be needed for companies unable to secure sufficient funding. There is also the likelihood of more enforcement being required, with Luxembourg’s creditor friendly financial collateral law of 5 August 2005 being central to considerations.
It remains to be seen to what extent this will be a factor. After the global financial crisis of 2007/8, interest rates were on the floor, but now companies have tougher decisions to make if they look to borrow for the first time or to refinance. “The question will be what happens if there is a default under the existing covenants or when loans reach maturity,” Ms Ferring said. These are also new times for lenders. During the pandemic many were willing to grant grace periods and reschedule as borrowers got over the temporary disruption. However, with inflation likely to be sticky, such leniency might be less prevalent. The overall relationship between the borrower and the lender will also play a role.
The Enforcement Option
Much will depend on lenders’ appetite to move to enforcement of the collateral. “In the past, enforcement was always a last resort measure, but nowadays players might have a much higher appetite to take legal steps to take the keys of the business,” she noted. Then the lender would have a choice in case of an enforcement by appropriation: seek to sell the assets soon afterwards (as has been general standard practice) or to keep the assets, hoping that they mature under new ownership.
The question will be what happens if there is a default under the existing covenants or when loans reach maturity.
“For Luxembourg, we know that enforcement has been tested, with a substantial amount of case law, and is particularly straightforward and quick, especially in comparison with other European jurisdictions,” Ms Ferring added. She believes that having the so-called Double Luxco structures featuring two Sàrls continue to offer robust security to lenders. She said this is unlikely to change, even when the Grand Duchy transposes the European Restructuring Directive.
Yet overall, the regime in Luxembourg tends to favour avoiding driving firms into insolvency. “Traditionally the best option in Luxembourg is to restructure by enforcing, because the financial collateral law is so creditor-friendly and the bankruptcy proceedings are not fit for a restructuring of this kind,” she said.