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The Role of Liquidity in Distressed Situations

Change is constant and keeps the restructuring industry ever evolving and always interesting. Midway through, 2022 has proven to be no different. A new wrinkle, inflation, is directly impacting every industry, requiring management teams to adapt to survive. The impacts of inflation will take many forms, leaving companies to determine how to manage both their income statements and balance sheets.

One direct result of inflation is rising interest rates. The Federal Reserve has embarked on a rate hiking journey, approving a 25-basis point hike on March 16, the first increase since December 2018, and a 50-basis point increase May 4. A survey of 48 economists conducted from April 22 to 27 forecast the Fed will continue to lift rates toward a target range of 2.25% to 2.5% by December, while markets are pricing in around 2.75% at year's end.

The June issue of the JCR addresses the role of lending and liquidity in distressed situations, a timely topic given inflation and rising interest rates. This month's articles provide unique perspectives on how capital providers think about lending into distressed situations and how borrowers can access liquidity when needed, both in North America and Europe.

Charlie Perer of SG Credit Partners examines the blurred lines developing among companies and their traditional roles of dealing with distressed businesses. More specifically, the article addresses the consolidation among accounting, investment banking, and turnaround firms while simultaneously expanding their suite of services, creating multiproduct platforms with a key component centered around debt raises in distressed situations.

Katherine Forbes of KPMG LLP provides an inside look at Canada’s distressed lending landscape. She summarizes why the need for distressed lenders has been muted over the past few years due to government stimulus programs and fierce competition among banks and alternative lenders to put money to work. Katherine also discusses why a period of relatively smooth sailing in the credit markets may be taking a turn and how DIP lenders and others focused on rescue capital might soon find more deals to work on.

Tayyibah Arif and Ola Majiyagbe of Dechert in London give insight on what the European credit markets have been experiencing. Buffeted by the war in Ukraine, supply chain issues, and wild commodity swings, the region has all the ingredients for restructuring and the capital associated with it to see a resurgence of activity. The article gives an in-depth look at Europe’s complexities with interim financing and what all constituents need to consider.

Alex Mazer of Big Shoulders Capital offers a detailed overview of the distressed and rescue capital landscape in the United States. Alex touches on the main drivers like PPP funds, low interest rates, and bank loan modifications/deferrals that kept companies afloat during the past few years. He also explains why rescue capital might once again become active.

Marc Sullivan and Bayard Hollingsworth of Phoenix Management Services provide an in-depth review of the current thoughts of active distressed lenders across the country. Their insights center around what lenders look for in management, appropriate leverage, underlying asset values, covenants, duration, and workout remedies when extending credit. It does a fantastic job in explaining what creditors are thinking given the current environment.

Jack O’Connor of Sugar Felsenthal Grais & Helsinger examines DIP financing in Chapter 11 cases, which is a primary source of capital in distressed lending situations. The article covers the key constituents and negotiating points each party should take into consideration when providing or accessing this capital.

Chris Lehnes of Versant Funding and Robert Wakeford of BREAL Zeta in London look at important sources of capital for companies via factoring and asset-based lending, respectively. The two address how these lenders can unlock liquidity in times of distress.

Reed Gillis

Reed Gillis

LS Capital

Reed Gillis is a partner with the special situation investment firm Three Line Capital. With over 20 years of real estate investment and lower middle market experience, Gillis has provided full-service, customized capital solutions to community, regional, and money center banks as a principal purchaser of performing, distressed, and REO assets, completing over $1 billion in transactions. He has also been involved in multiple transactions focusing on companies in need of senior debt restructuring or operational turnaround. Gillis is a past president of TMA Rocky Mountain.

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