A surge in liability management exercises (LMEs) drove defaults in the European market in 2024.
Data on distressed debt exchanges (DDE), a type of LME that is given tightly-defined terms by the ratings agencies, shows that just over two-thirds of defaults came in this form, according to Fitch Ratings.
It’s the highest level in Europe since at least 2015, according to S&P, apart from a spike in 2021 during the COVID pandemic, and the highest globally since 2009.
The US reflects what is happening in Europe, with DDEs and out-of-court restructurings now more commonplace than bankruptcies. In 2024 they made up ~68% of the 90 defaulted issuers tracked by Fitch, up from 57% of 69 issuers in 2023.
The difference between Europe and the US, however, is that more than 50% of the US DDEs/restructurings identified by Fitch in 2024 in the US were of the more aggressive type, labelled liability management transaction or LMT, compared with 33% in 2023. These LMTs involve “uptier priming, coercive elements, or change in collateral value”, Fitch writes.
In Europe, the rating agencies have not split out the LMEs that could be classed as coercive priming-type deals. But market participants agree there was only a handful of these more aggressive deals last year, including Hunkemoller and Ardagh.
European LMEs in contrast have remained a broad brush of predominately more benign deals. They have used “maturity extensions, perhaps PIK-ing a portion of the debt, or bifurcating into an opco/holdco structure”, said one restructuring advisor, adding: “We have had few exemplar uptiering J Crew type deals.”
Threat of hardball
Advisors say the threat that more coercive-style deals may flow over from the US has played a part in the growth of more mundane LMEs in Europe last year.
“I think the focus on coercive LMEs has made people more aware that sponsors can play more hardball than they may historically have done, which may have contributed to leverage on the sponsor side in the negotiations,” said a second restructuring advisor.
In some cases, this has resulted in sponsors getting better terms in an A&E than they would otherwise have done – making it an attractive option.
The focus on LMEs is certainly pushing corporates to be more proactive in addressing their capital structures more generally, agreed a third restructuring advisor.
“Companies don’t wait until they can’t repay and are really staring at the barrel,” he said. “They are more willing to entertain those ideas earlier if they are attractively priced or reasonable.”
Rates and repeats
But ultimately, advisors say, the surge of European LMEs in 2024 is a function of the rapid increase in rates mixed with looming 2026 maturities, while the expectation that rates were coming down again meant borrowers reached for a quick-fix solution.
“A lot of companies got caught out by the invasion of Ukraine – it upended things and so they found themselves somewhat upside down and staring at upcoming maturities and realised they would have to keep the plates stable,” said the first advisor.
The LME gave them breathing space to sell assets and delever or simply wait for rates to fall, increase debt capacity and solve some of the issues they were facing. Investors were willing to give this space “where a more straight-forward refinancing was not available”, he said.
These deals were just the “regular wave of restructuring-lite type deals”, he said, which have perhaps also grown in volume because the market “is bigger and more sophisticated and proactive”.
These light-touch restructurings are set to continue since rates will stay elevated even with near-term cuts, compared with where they were before the 2022 hike cycle.
But a lot of these quick-fix deals won’t solve the issue, with many of these names likely to redefault, the first advisor said. They go through the initial distressed exchange and default – then are temporarily upgraded to CCC – before sinking back into default territory around 18 months later, he adds.
The third advisor said: “It gets you through this year but what about next year?”
Sandrine Bradley
sandrine.bradley@levfininsights.com
+44 (0)20 3530 1824
