М&A: The Sale Is Just Beginning

The М&А market is undergoing a radical transformation: The power of the seller is now in the hands of the buyer. The assets that one could only dream of a year ago, are now for sale.
One of the reasons explaining the present situation is that the previous active expansion relied mostly on borrowed funds — predominantly short- and medium-term loans. The banks that lent the money for “development,” did not notice that it was used to patch up holes, or put aside to be used for long-term investments.
It is the factor of interest rates and quality of collaterals that often pushed the borrowers to use short-term borrowing for financing long-term projects. The typical position of assets’ buyers boils down to the principle that the key priority shall be to finance the deal now, as cheap as possible, and later think about arranging a bond loan, or holding an IPO etc. in order to finance short-term debt.
This “later” played a nasty trick on rapidly growing companies. М&A consultants supported their asset buying clients by signing mandates for holding IPOs, arranging for loan bonds and syndicated facilities in the West, but, obviously, could not guarantee the success of refinancing such debt. So, when problems arose, their clients were left one on one with their creditors. The compression of public stock and finance markets, on which so much hope was placed, has made it impossible to refinance the outstanding debt that was due as of late 2008 — early 2009.
A mismatch between projects’ payback period and the asset acquisition costs, coupled with the depreciation of assets and loan collaterals, mass margin calls, as well as rising interest rates and the overall deficit of finance have led to mass defaults and bankruptcies of many borrowers that were considered to be highly attractive for investors not so long before. Bonds were presented for redemption under numerous repurchase offers, and in large volumes.
Financing М&A deals with short-term funds became a systemic approach for many companies, their short-term debt was skyrocketing, and many of them now view the sale of assets as the only possible solution under the present circumstances. It is obvious that neither the lending banks nor the bond holders are interested in mass bankruptcies of their borrowers and the loss of chances for the return of their money — everyone wants to see that the businesses function well and generate cash flow.
Our practice demonstrates that the majority of the borrowers that experience problems, but choose to enter into a candid and open dialogue with their creditors, are generally successful in solving their debt problems. Certainly, it applies, first of all, to those borrowers that did not have previous problems with debt servicing and that now still have chances to get out of the crisis situation. The terms of debt restructuring and peaceful solutions are, evidently, not always comfortable for the borrowers. But, as the saying goes, the greedy pay twice. In some cases, the borrowers have to cede a part of their business or some assets, but that is a measure of final resort, because the creditors need real money rather than assets, real estate or businesses, most of which presently have low liquidity, while it is often difficult to give a precise assessment of their value and of the time that the creditor will need to spend in order to convert those assets into cash.
Nevertheless, some debtors companies and their owners still cherish illusions hoping to sell to the creditors bad assets for inadequately high pre-crisis prices, while trying to retain good assets for themselves with a view of selling them profitably in the future. Such behavior, a desire not to sell cheap is counterproductive. Acting in bad faith, procrastinating negotiations with the creditors — all this can only aggravate the borrower’s situation. The banks increasingly act not as buyers of assets, because in most cases the next step is the sale of the asset. In any case, the creditors always demand significant value discounts while converting debts into assets.
Thus, in addition to companies selling assets, a new but increasingly active player has emerged on the market — the banks. The banks and companies that find themselves in a pre-default situation will put more and more assets on sale — this is the unanimous opinion of all М&A market analysts. The value of assets, that is already showing a steady decrease, will continue to fall further. And the buyers possessing financial resources will become increasingly ­exacting and scrupulous. The main phase of property redistribution is only beginning.