Restructuring back to balance sheet basics

By Tessa Walsh

LONDON (Reuters) - Future restructurings are likely to focus on addressing fundamental balance sheet and business issues in troubled companies rather than providing a quick fix, a senior Deloitte restructuring expert said.

"Now there may be a tendency to fix businesses properly rather than putting a sticking plaster in place," David Stark, a director in the firm's Corporate Finance division, told the Reuters restructuring summit.

Restructurings in recent downturns, such as the telecom and cable sector slump in 2001/2002, relied on hedge funds to step in and buy debt to replace existing lenders, effectively refinancing the debt rather than sorting underlying problems.

This type of restructuring relied on credit markets to refinance the company's debt within a relatively short timeframe of a couple of years.

But the days of cheap and easy credit and fast refinancings are long gone in the battered European leveraged loan market, which has pulled the shutters down in the wake of Lehman Brothers collapse.

"The asset base is difficult to fix and will take a couple of years. You may have to address the underlying business and put a fix on," Stark said.

Restructurings have also been complicated by new layers of debt that were sandwiched into the capital structures of companies that were bought by private equity firms in leveraged buyouts in the heady bull market run up to mid 2007.

The interaction between the senior debt, second lien, mezzanine and payment-in-kind loans and high-yield bonds remain untested in a major restructuring, and is now so complex with the addition of synthetic credit default swaps that insolvency mechanisms may have to be imposed to gain control over warring camps of creditors, Stark said.

"You may need an insolvency mechanism to get control and drive through a restructuring," he added.

The way that the various debt layers will interact will depend on where value breaks and their position above or below that line, which will be different in every situation.

"The key question is where does the value break?" he said.

Investors' position above or below the line depends on exhaustive valuation that is currently complicated by the chaos in the financial markets and a plunging property market.

This is making life particularly difficult for leveraged buyouts with a property angle, such as the buyouts for U.K. homebuilder Crest Nicholson, which is currently restructuring its 1.1 billion pounds ($2.02 billion) debt pile.

(Editing by Paul Bolding)