Credit Markets & Distressed Acquisition Opportunities Buenos Aires

Financial Restructuring, Creditors’ Rights & Bankruptcy

Carmen H. Lonstein, Principal (Chicago Office)

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International Bar Association ConferenceBuenos Aires, ArgentinaOct. 12 -17, 2008

Credit Markets & Distressed AcquisitionOpportunities in the U.S.

©2008 Baker & McKenzie 2

Distressed Acquisition Opportunities in the U.S.


“WHAT BEGAN AS A FAIRLY CONTAINED DETERIORATION IN PORTIONS OF THE US SUBPRIME MARKET HAS METASTASIZED INTO SEVERE DISLOCATIONS IN THE BROADER CREDIT AND FUNDING MARKETS THAT POSE RISKS TO THE MACROECONOMIC OUTLOOK IN THE US AND GLOBALLY.” IMF Global Financial Stability Report 4/‘08

A Perfect Storm: Opportunities for Foreign Buyers of Distressed U.S. Assets




Why Increased Opportunities For Acquiring Distressed U.S.

Deteriorating Economic ConditionsSteep Discounts on Distressed AssetsCurrency Rates –Relative U.S. Dollar

WeaknessProcess Is Much More Favorable than

Previously for Buyers of Distressed AssetsE.g. Lehman U.S. Operations Sold in 7 days

in 363 Sale




Economic Conditions-Contributing Key Factors

• Unprecedented deleveraging : in the form of write downs in asset values and fire sales by financial institutions. ….

• Lender’s NEED FOR CAPITAL has led to reduction in lending and sale of loans and assets–

– Global syndicated loan issuance fell 40% from 2007, reflecting the tighter credit environment.

• Business need for capital raising leading to more distressed asset sales by businesses…

• IN THE US, there has also been a slowdown in economic activity:

• Contraction of corporate profits by 1.9% in 2007 after steady growth 2002-2006 (projected flat 2008);

• increasing unemployment –STILL HOLDING at 6.1% SINCE AUGUST OF 2008 BUT LIKELY TO INCREASE;

• decreasing consumer demand, eroding housing values.

• Rush to Market For Distressed Assets is DEFLATIONARY:

– Downward Pressure on business and asset valuations due to:

» reduced earnings and cash flows; and

» Increased supply of distressed assets




• EXPECTED RISE IN CORPORATE DEFAULTS – WILL CREATE BUYING OPPORTUNITIES

• FACTORS CONTRIBUTING TO RISE IN CORPORATE DEFAULTS– LOOSE CREDIT STANDARDS CONTRIBUTED TO A

DELAY IN THE RISE IN CORPORTE DEFAULT RATES IN 2008

• UNPRECEDENTED ISSUANCE OF LOW RATED DEBT – CCC

• HIGHER CORPORATE LEVERAGE COMBINED WITH deterioration in debt quality

• PREVALENCE OF COVENANT LITE LOANS – WHERE BORROWER WERE NOT REQUIRED TO MEET QUARTERLY FINANCIAL RATIOS MASKED AND DELAYED DEFAULTS




PENDULUM HAS BEGUN TO SWING…..EXPECTED RISE IN CORPORATE DEFAULTS – WILL CREATE BUYING OPPORTUNITIES

Default Rates S&P MOODY’S 1990-1991 Recession

IMF Projections Apr. ‘08

1932

U.S. Non-financial speculative grade 3 YR

23.2% by 2010, the worst on record since 1981.

U.S. Speculative (Junk) Grade

<3% in 2007

7.9% by 12/09 9.43% 1990

5.4% in’00

WORSE CASE 12.3% WITH A BASELINE OF 10.4%

U.S. Investment Grade0% in 2007

4.2% in 9/08 !!

Highest since ´94

U.S. All corporate issuer

4.1% July of 1991

9.2% in July of 1932

GLOBAL CORPORATE DEFAULT RATE

8/7/08 estimate of 6.3% by mid ’09; up to 10% in

protracted recession




If Recession, How Long Is The Road to Recovery ?

IMF View (4/9/08) FED View (4/12/08)

Longer Road:

2008: .5% Growth

2009: .6% Growth

• Fed View 1st Qtr ‘08: “Short & Shallow Downturn……”

• 2009 2.5% Growth GDP (Real GDP Trend Rate)

Recession Drivers Official End Job Growth Real Length

Aug. ‘90 S&L Crisis (1) Mar. ’91 (8 mo’s) Nov. ‘92 2 yrs. 3 mo’s

Dec. 00 Dot Com Bubble Aug. ’01 (8 mo.’s) Jul. ’03 2 yrs. 6 mo’s

Dec. ’07 Subprime Crisis (2) Aug. 2010 ?

(1) Res. & commercial real estate downturn + tight credit = increased corporate default rate

(2) Subprime lending, housing bubble, consumer credit crisis spreading to commercial credit crisis, leveraged loan market freeze, and tighter credit = increasing corporate default rate

10/08

2008-2009: .0% Growth US




Process: Favorable Changes from Increased Liquidity At Every Level of the Capital Structure

• Original holders replaced by hedge, distressed investment funds and other opportunistic investors

• Creditors’ expectations are now more short term, NPV-based and less relationship-based

• Buyers can buy debt--typically at a discount--at one or more levels of the capital structure ancillary to an acquisition in order to:

– S&P LOAN INDEX AT RECORD LOW OF 75 CENTS PER DOLLAR

• Gain Leverage by obtaining a “blocking position” in classes of creditors from which approval for the acquisition may be necessary.

• Cover Costs by the arbitrage on the purchased debt, especially if another bidder wins the deal.

• Buy Indirectly by buying the “fulcrum security,” i.e., the debt security that holds the true economic equity value of the enterprise.