Private capital: Restructuring and special situations trends to expect in 2024

The last 12 months have seen a steady increase in restructuring and stressed or distressed financing transactions in the European market across a range of sectors, including tech, real estate, hospitality, manufacturing and retail.

Given the difficult macroeconomic conditions, many investors who would typically focus on performing or investment grade companies have started to review their portfolios to identify those debtors that are at a higher risk of struggling to refinance their existing debt, and as a result potentially be more likely to attempt a liability management transaction or require a more comprehensive restructuring in the near- or medium-term.

We have witnessed a particularly high level of activity from distressed investors in real estate, as rising interest rates and uncertain valuations put pressure on both commercial and residential real estate portfolios. Upcoming debt maturities will put pressure on some companies with significant real estate assets to sell outright or enter into sale-and-leasebacks to raise liquidity. 

One trend we expect to see more of in 2024, both in the real estate space and other sectors, is the “bridge-to-sale”, whereby a company transfers assets into a special purpose vehicle (which may or may not be within the restricted group for the purposes of the other group financing arrangements) and raises additional debt secured against those assets on a structurally senior basis. 

While the cost of such debt may be relatively high, this type of transaction can help a company ride out a difficult sales climate and retain valuable assets until the climate improves at a future date, while allowing it to raise liquidity in the short term for debt repayment or working capital purposes.

Another hot topic of the past year has been the use of “uptiering” or “priming” transactions, whereby a company works with a sub-set of lenders to reorganise its capital structure and raise new liquidity, often while deleveraging the business as well. While this type of transaction has been used many times in the US market, it remains rare in the European market.

Due to stronger minority creditor protections and equal treatment requirements, it is difficult to effect an uptiering transaction under English law and the laws of many European jurisdictions. However, we have been involved in such a transaction in the European market where the relevant debt instrument was governed by New York law (as is the case for many European issuers of bond debt). As more European issuers of New York bonds face maturities in 2024, we expect to see more exploration of this technique on this side of the pond.

Tech will be a key sector to watch in the coming year, as an era of high valuations and low-cost funding has come to a close, leaving many companies highly over-levered. We expect this to include many companies that listed via SPACs, as well as privately held companies, in particular in the biotech and pharmaceuticals space, as well as the battery, electric vehicle and renewable energy spaces.

We are well-placed to assist debtors and investors in these situations, leveraging Ropes & Gray’s deep expertise in technology, life sciences and intellectual property. 

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