Distressed Debt and Special Situations: Succeeding in uncertain times

Creating value from capital flow 2020 - 2021

A study in conjunction with Contents

Introduction 3

Executive summary 4

Australian market update: 6 an unprecedented time

Feature Q&A: 9 Opportunities and challenges

Tax challenges and considerations 13

Competition considerations: 15 the approach to distressed assets

Sector watch: Opportunities and 16 challenges in Australian industries

Feature Q&A: and 24 turnaround best practices

MinterEllison Succeeding in uncertain times 2 Introduction

A global pandemic has made uncertainty the new normal and has impacted every aspect of our lives. While the -term impacts on global economies are apparent, the long-term impacts and permanent changes to society can only be speculated.

Against this backdrop and without discriminated, it has certainly been a marker to the finish line, Australian felt in some areas more than others. businesses are attempting to steer a course not only for survival but for The mid market, for example, may the growth needed to be a viable be more vulnerable to exposure and long-term concern. But alongside find it harder to secure financing. uncertainty comes opportunity – However, non-bank lenders may offer an alternative pathway to especially for distressed debt and Ron Forster, Partner Caitlin Murray, Partner special situations investors. secure funding.

In conjunction with Debtwire In this special report we cover a Asia-Pacific, in this report, we have range of industries from tourism, explored the opportunities in a real estate and education to distressed market. Drawing on infrastructure, financial services and Debtwire’s market intelligence and energy and resources. However, insights from our own thought it’s clear that no sector is left leaders, we discuss the possibilities untouched. for companies wondering where Australian businesses are resilient to turn to shore up their balance and in the face of challenges they sheets and for investors considering are currently facing, there are clear their next opportunity. opportunities. The choices they So where might these next make in the next few months may opportunities be found? While determine their long-term success. the economic impact has not

MinterEllison Succeeding in uncertain times 3 Executive summary

As the economic impact of COVID-19 Through temporary incentives and Unique times call for unique actions • Understand regulatory frameworks continues to affect Australian businesses regulatory changes, distressed companies and government support in key Distressed debt and special situations across all industries, a range of temporary are buying time – and it’s important that Australian industries. There are a investors are facing an unprecedented government measures may be delaying they use it wisely. The additional time range of tax considerations and time, and need to be cognisant of inevitable and insolvencies. they have been granted gives companies ASX, Corporations Act and Foreign the opportunities for them to support a window to set themselves up to be an Investment Review Board (FIRB) rules, organisations and industries that have The general consensus among industry attractive prospect for capital investment. which are critical factors in shaping long-term promise. Unique times call for insiders and analysts is that stress levels how to inject capital into distressed unique actions, however, and there are a will increase as we move through 2021 – Careful consideration should be given companies. particularly when the temporary changes to potential restructuring measures well number of considerations that funds and to laws, enabling companies to avoid before lending covenant breaches occur investors need to consider: • When buying into a syndicate, insolvency administration, expire. or repayments can’t be met. understand where the majorities sit. • Act speedily – restructurings are Coming into the process with other getting faster. All parties involved As they look towards the medium Debt funds will offer a much-needed like-minded investors gives investors aim to accelerate the process and term future, with the current high level source of capital the ability to block competing of government assistance, distressed complete the turnaround quickly to While Australia’s big four banks have proposals. companies have a window of opportunity minimise disruption to the business provided unprecedented support to to prepare for both survival and future and employees. Debt funds that are • Remember regional differences most borrowers, they will not be able to growth. Actions they take now will help able to engage in a faster process across Australia. Federal, alongside support the market on their own. This them succeed in the uncertain time both in terms of completion of due different State and Territory laws is where non-bank lenders and other ahead. diligence and clearing all approvals will often need to be factored into a alternative capital providers will play an to invest, are likely to be exposed to restructuring or turnaround process. A important role. Distressed companies need to act more opportunities. thorough understanding of the range of regulatory regimes will expedite Distressed companies should be In order to receive funding though, • Get into the restructuring and the process, avert breaches and exploring all sources of finance, including companies will need to demonstrate that turnaround process before external non-compliance and provide a better hybrids. Right now they may look to they have a viable business plan going administrators are appointed. This outcome to the whole restructuring restructure their balance sheet, convert forward, and that future growth looks ensures the best chance of success. or turnaround. debt to equity and divest non-core realistic and promising. Businesses may Competition and interloper risk can assets. They may also want to raise need to be recalibrated to achieve that. increase when external administrators equity among shareholders, or convert are appointed, because they have to shareholder loans to equity. run a formal process.

MinterEllison Succeeding in uncertain times 4 Executive summary

Sector snapshot

Tourism and leisure Energy and resources Education

While the tourism and leisure industry has Uncertainty and lower energy demand, is creating short- been hit particularly hard, the sector is challenging oil and coal prices and the term opportunities in higher education, attractive for the long term and will be held increasing focus on decarbonisation specifically among private providers of in high regard by investors and debt funds. offers potential for distressed assets, education who cater to overseas students. consolidation and restructures – Domestic tourism will pick up as state particularly for oil and gas and coal borders reopen, and over the next few companies. years, foreign tourists will eventually return.

Real Estate Infrastructure Financial services

There has been an influx of capital State governments plan to fast track Banks have ramped up their expected credit partnering in all property sectors (including infrastructure projects as a means of loss provisions in anticipation of greater traditional financiers transitioning into stimulating the COVID-19 economy. distressed companies as stimulus packages equity providers) to diversify a landowner/ expire. developer’s risk. A depressed local contracting market may offer opportunities for tier 1 contractors Smaller ADIs, credit unions and mutuals or other local participants to purchase may come under pressure due to current struggling sub-contractors and services economic conditions, which may result in businesses. consolidations.

MinterEllison Succeeding in uncertain times 5 Australian market update: an unprecedented time

Setting the scene Stress and insolvencies: Fine for now? for now, investors can take comfort that The general consensus These really are unprecedented and Towards the end of FY2020, many any directors appointed to Australian among industry challenging times for businesses in Australian companies have been able corporates will have a longer window to insiders and analysts to meet their credit obligations despite determine an appropriate response to the Australia. Months in lockdown have is that stress levels challenged even some of Australia’s a downturn in revenues. The exception current challenges. strongest corporate performers and, has been a number of retailers going will become elevated These actions, however, are relatively across industries, there is a lack of into administration, although most of towards the end of the short-term solutions to deeper confidence around how long it will these have only had debts of US$100m year and into 2021. challenges. The general consensus take to fully reboot the economy. or less. As a result, there have been few among industry insiders and analysts is Geopolitical tensions and an increased large-scale restructurings this year as that stress levels will become elevated focus on the domestic market mean companies with negative cash flows towards the end of the calendar year the outlook for the rest of 2020 and into draw down on unused portions of their and into next year, with the anticipation 2021 is uncertain. loan facilities and standby letters of credit rather than enter administration. Likewise, levels may rise. Even so, while the speed of declines banks have been exercising forbearance in the market caught most businesses for businesses that are exposed. off guard, there have been relatively few credit opportunities or distressed Temporary amendments to the country’s situations so far. That could change insolvency laws are also providing in the months ahead as companies a lifeline. Through these protective struggle to secure financial lifelines measures, companies can continue and turn around operations as they operating even though they may be face long-term prospects in a post- technically insolvent. While there remain COVID-19 world. concerns that the reforms will simply push credit risk down to suppliers and result in a further tightening of credit,

MinterEllison Succeeding in uncertain times 6 Australian market update: an unprecedented time

Private debt: Limited lending As cash flows are hit, and short-term opportunities opportunities ahead Lending from private debt funds has also been more for the private debt constrained following the pandemic. Formerly active funds have been hesitant to deploy too much capital given recent space could be found uncertainties about how deep the hole was for the Australian in refinancing deals for economy. Now, there seems to be some visibility on a bottom, mid-market companies. however, funds are still, quite understandably, taking a cautious and sensible approach.

Numerous opportunities – including refinancings, recapitalisations and those around distressed debt – could arise, and rapidly, as the dust settles. According to Debtwire intelligence and research, numerous early stage discussions between companies and funds for potential private debt deals have already commenced. However, these deals may be stalled until travel restrictions are lifted and fund managers and their teams can complete ground-level due diligence.

That being said, as cash flows are hit, opportunities ahead for the private debt space could be found in refinancing deals for mid-market companies.

Recapitalisation needs among these firms and businesses of all sizes are also expected in the coming months when there is a clearer picture on the scale of the pandemic and its impact, according to Debtwire intelligence.

MinterEllison Succeeding in uncertain times 7 Australian market update: an unprecedented time

Trade challenges The road ahead Depending on how the next few months Depending on how Trade tensions and an increased While parts of Australia have started unfold, debt funds and special situations the next few months international focus on domestic reopening, increased restrictions in others investors could find themselves with unfold, debt funds opportunities may add to the already provide an uneven economic landscape. abundant opportunities as the universe long list of challenges and complexities It is, therefore, impossible to predict when of companies requiring equity or debt and special situations Australian businesses face going forward. a true return to normality will happen. expands. Even so, competition in this investors could find For example, China attached levies on More importantly, it may be too soon space demands fast action. The ability themselves with Australian exports to China (barley, beef to start assessing the real impact. to move quickly on these opportunities, abundant opportunities and steel). as always, will be dependent on having Government measures, while effective as the universe of the right team in place and the right companies requiring While a burden for companies, this for now, are only temporary. Through the intelligence to assess sectors in distress could prove advantageous to funds remainder of the year, we will likely get a and which companies, while currently equity or debt expands. and distressed investors. With the truer picture of how much the pandemic burdened with debt, will be able to Foreign Investment Review Board (FIRB) has impacted businesses’ bottom lines. survive the downtrends. scrutinising all foreign investments, such For some companies, it may require a caution could limit the number of debt small amount of capital to breathe new players in the market. This could pave life into the balance sheet. For others, the way for other funds to get involved full restructuring will be required. and avoid the cumbersome process of a bidding war for assets.

MinterEllison Succeeding in uncertain times 8 Feature Q&A: Opportunities and challenges

Debtwire sits down with DW: Given rising financial pressures and As the need for financing grows as MinterEllison Partners Con the upcoming expiry of government government measures are scaled back, As the need for Boulougouris, Ron Forster, support measures, what are the biggest debt funds will have the advantage opportunity areas for debt funds or of being able to set their own terms financing grows Caitlin Murray, Stewart special situations investors in Australia? during the deal process. There will also “ as government Robertson and Ben Cockerill Stewart Robertson: We think there are be opportunities to purchase secured and Senior Associate Michael opportunities for debt funds at present, debt at a significant discount. This measures are Scarf to answer key questions especially the ones that have very wide ability to acquire secured debt, coupled scaled back, debt around the trends, challenges ranging and flexible mandates. While with having greater influence in any and opportunities for debt Australia’s big four banks have been subsequent restructurings of the asset, funds will have funds and special situations given additional, cheap liquidity through could provide significant opportunity to the advantage of government stimulus measures and generate enhanced returns. investors in the Australian have been initially supportive of most being able to set market. borrowers, they’re likely to become more DW: What are some of Australia’s selective in which companies they’ll key advantages that make it an ideal their own terms continue to fund and will only provide destination for debt fund and special during the deal lifelines to businesses they feel are situations investors, particularly offshore viable. This will lead to some companies investors? process.” needing to turn to non-bank lenders Ron Forster: Offshore debt funds are and alternative sources of capital for drawn to Australia given the number of financing. opportunities but also because of the market’s high-standing reputation. The Con Boulougouris, Con Boulougouris: Also, changes to legal system and courts, particularly with Partner Australia’s insolvency laws in response regard to insolvencies, are transparent to COVID-19 have given companies a and reliable, factors that create a high lifeline to avoid insolvency administration. degree of certainty and confidence The timing for this has been extended among investors. Equally, insolvency Con Boulougouris, Partner to the end of 2020. However, as we get laws in Australia are highly favourable to closer to the expiry of these amendments secured creditors. Also, while Australia there’s going to be an increase in activity may not boast the high growth levels as businesses begin to look at alternative of other emerging markets in Asia, the credit funds and longer-term debt regulatory landscape in Australia is easier solutions. to navigate than the sometimes opaque

MinterEllison Succeeding in uncertain times 9 Feature Q&A: Opportunities and challenges

enforcement regimes in higher growth success. scenarios, business owners sometimes markets. see real benefit in being able to refinance DW: Australia’s mid-market lending and offer an equity participation (or The legal system and These are all factors that haven’t opportunity – what are the trends and equity like upside) if personal guarantees changed during the COVID-19 crisis and challenges in this segment of the deal courts, particularly (and personal assets) are not part of the “ are unlikely to change anytime soon. market? financing package going forward. with regard to International debt funds, especially those Ben Cockerill: There’s a significant based in the US, are experiencing a high opportunity here because these mid- During periods such as that we are insolvencies, are level of demand on their capital. market borrowers, despite making up experiencing now with COVID-19, the bulk of Australian businesses, often there is a sense from some mid-market transparent and This means that Australian corporations find it difficult to secure financing or borrowers, particularly in sectors reliable, factors that will need to offer higher returns to be find it difficult to negotiate ongoing where there may be uncertainty about more attractive to these foreign funds support from their current financier in fundamental metrics going forward (e.g. create a high degree who already have many opportunities in the event that the business suffers from the value of residential or retail property of certainty and their home market. financial stress. Once a company is under assets), that it is helpful to have a lender confidence among Con Boulougouris: Some sectors will the AU$200m threshold, terms from that is relationship focused and who is start to show signs of recovery since the traditional lenders can start to tighten perhaps more predictable in terms of the investors.” Australian government’s low debt levels up and there may be less appetite to support it may be prepared to offer. This allowed it to run a stimulus package lend to newer market entrants with no is not limited to the major banks as there relationship history or track record. There are now a number of non-bank lenders that was more robust, allowing for the Ron Forster, economy to bounce back quicker. have been a number of new entrants – in that have become more mainstream and Couple these two factors with the low the form of both new start-up banks and take a similar approach. Partner Australian dollar and there are plenty of non-bank lenders – into the lending space looking to capitalise on this demand. Michael Scarf: Even though there’s reasons why offshore debt funds will look demand for financing, there’s still to Australia in the months ahead. Even though there’s demand for obstacles that often arise between mid- Equally, while Australia’s financial markets financing, there are still obstacles that market borrowers and non-bank lenders. may not be as mature as those in New may arise between mid-market borrowers Probably one of the greatest challenges York or London, there are abundant and non-bank lenders. For example, involves willingness among business opportunities. However, some funds may not be interested in owners to give away a controlling stake in arbitrage chasers will only benefit if they providing pure debt without the ability to their companies. For some funds, those move quickly, utilising deal structures that also obtain an equity stake down the line. providing for example, have been implemented overseas with This may be met with reluctance from this hasn’t been too much of an issue. business owners; however, in distressed Although for the much larger funds,

MinterEllison Succeeding in uncertain times 10 Australia is a much smaller market“ than the US and Europe, and while we have relatively good insolvency laws, finding bargains and companies that fit with investment strategies can be difficult, particularly for offshore funds.”

Caitlin Murray, Partner

MinterEllison Succeeding in uncertain times 11 Feature Q&A: Read our report, Opportunities and challenges in uncertain times.

however, pure debt without the ability to also DW: From a corporate perspective, what DW: When are we likely to see increases obtain a significant equity stake down the line are going to be the biggest challenges for in distressed debt investments? in the asset is going to be less attractive, and companies – and possible opportunity Caitlin Murray: Debt funds and distressed Ron Forster, Partner as a result the is going to be a areas for investors? debt investors have been largely taking bit higher. Ron Forster: Restructuring the balance sheet a wait-and-see approach until things calm is one of the biggest challenges for companies down. I think when we get to the end of 2020 DW: What are the biggest challenges for at present. Most are going to need to secure and into the first quarter of 2021, we’ll see debt funds or special situations investors in other sources of financing as government more activity as companies run out of existing Australia? measures are scaled back, so they need to financing options and begin to seek out new Caitlin Murray: Sourcing deals and finding start thinking about where those funds are funding. the best opportunities will be one area that going to come from today and what other debt funds and special situations investors restructuring steps are needed. Is this going to result in a wave of investments find challenging. Australia is a much smaller and insolvencies? That remains to be seen. Caitlin Murray, Partner market than the US and Europe, and while These restructuring measures, in turn, are Some companies are going to be able to we have relatively good insolvency laws here going to be challenging given the time and pull themselves through this crisis, using – especially with the introduction of Safe complexity of the process. Generally, it also this situation as an opportunity to resolve Harbour – finding bargains and companies requires involvement from several parties challenges within the business and restructure. that fit with investment strategies can be from within and outside the business. Others are going to find that more difficult difficult, particularly for offshore funds. and may become further distressed. Competition will also be a factor, since we’re Essentially, these businesses need to seeing growing interest from some of the start thinking about implementing these Opportunities for distressed debt funds larger international funds towards debt and restructuring measures as soon as possible will arise as a result of high demand for and given these time factors. Unfortunately, the limited sources of funding from the traditional distressed investments. Stewart Robertson, Partner concern now is that many companies are credit providers. This funding will likely be Valuations may also be a challenge in the still in survival mode – that is, they’re focused more expensive and targeted to specific current environment. Right now, it’s almost on the here and the now problems – and industries that have a lower risk profile. As impossible to come to a that is not looking further. They need to be putting Australian companies realise that they will agreeable to all parties given volatility and restructuring plans in place today to deal need to spend significant amounts of uncertainties. I think once we begin to with financial problems before they arise in to re-establish themselves and the cost of emerge from the COVID-19 crisis and have a a few months’ time. funding operations increases, they are going clearer picture of the next six to 12 months, to be looking for alternative and/or cheaper valuations will be easier and parties may be sources of debt and capital. more willing to negotiate on terms. Ben Cockerill, Partner

MinterEllison Succeeding in uncertain times 12 Tax challenges and considerations

MinterEllison’s Adrian Varrasso DW: What are some of the typical tax the terms of the debt, resulting in a debt for Australian tax law purposes. discusses tax issues and issues that investors should consider recharacterisation of the debt instrument. Australia adopts a substance over form when buying or holding distressed For example, the debtor and creditor approach to debt characterisation and implications likely to arise debt? may agree to reschedule the due date of the outcome of this test has implications during a distressed debt or Adrian Varasso: Tax is definitely an area certain payments by way of amending across a range of the tax rules, for special situations investment where issues can arise that adversely the contract and this can give rise to a example withholding tax. Another affect the economics of these types of material change to the arrangements and relevant consideration is whether an and how investors can avoid transactions. Accordingly, it’s imperative potentially a taxing event under our TOFA ongoing withholding tax cost arises pitfalls in this area. for all parties to take early advice in this rules to the investor. under the arrangement and whether any area. As an example, even a simple case changes to arrangements can trigger a of a novation of a debt can give rise to DW: Is there anything foreign investors withholding tax cost. We also regularly a tax liability. In this scenario, an initial should be particularly aware of see issues with arrangements that might consideration would be whether the regarding tax concerns in the distressed not require a payment of interest, but novation gives rise to an extinguishment investing space? can still give rise to a ‘payment’ of interest of the debt and then whether that might AV: As a foreign investor, the main for the purpose of the withholding tax give rise to assessable income as ordinary thing to keep in mind is that although rules, with the result that a withholding income. There may also be a need to Australia is a relatively small economy, tax cost arises at a point where no cash consider Division 16E and the taxation of by international standards, it has a moves between the parties. There are financial arrangement (TOFA) rules which sophisticated international and domestic many other issues worth considering and affect the timing of income recognition. tax system which may give rise to discussing with an advisor. Adrian Varrasso, Partner a significant number of material tax An analysis would also need to be issues that invariably may mean that a DW: Are there any updates to Australia’s undertaken of Australia’s commercial commercial decision can give rise to a tax regime that distressed debt investors debt forgiveness rules. These rules differ tax impost. To mitigate against this, it is should be aware of? to similar regimes in other jurisdictions critical that the post-tax treatment of any AV: Most recently, the Australia Taxation that apply to give rise to an immediate investment is understood and factored Office (ATO) released a taxpayer alert TA tax impost, whereas these rules erode into the economics of the transaction. 2020/2 which has broad application to valuable tax attributes of the debtor, arrangements connected with foreign which may indirectly increase cash tax Cross-border investment in distressed investment into Australian entities. liabilities in due course. debts raises a number of issues. A key consideration is whether the Given its breadth, it raises the question Another trap which we often see is arrangement is and continues to of whether it could have application to a action taken by an investor to change be, after any agreed amendments, a distressed debt investor.

MinterEllison Succeeding in uncertain times 13 Tax challenges and considerations

Examples of where the taxpayer alert is said to have relevance is where:

A foreign investor starts to participate in the management, control or capital as part of the investment, which may be the case with rights attached to the debt,

The investment has features not consistent with a vanilla debt investment, which is commonly the case with a structured debt investment,

The investment may provide a foreign investor with direct exposure to the economic return from a particular business or assets exploited therein, whether that’s from ongoing profit or a gain on an exit event.

Also, it is highly likely that with distressed debt cross-border deals, approval will need to be sought from Australia’s Foreign Investment Review Board (FIRB). All applications to the FIRB involve the FIRB liaising with the ATO, which at the least will involve investors being required to answer a series of questions from the ATO and providing necessary documentation that may result in further scrutiny by the ATO post completion of the investment.

MinterEllison Succeeding in uncertain times 14 Competition considerations: the approach to distressed assets

Australia’s merger control regime An increase in distressed businesses financial statements, forecasts, board prohibits the acquisition of shares as a result of the global pandemic papers and evidence of a thorough or assets where that would have the means that it is more likely that merger failed search for buyers. In the past, The ACCC has effect or the likely effect of substantially parties will seek to rely on failing firm the ACCC has appointed a forensic made it clear that lessening competition in a market in arguments when engaging with the accountant to test assertions about “ Australia. ACCC. The ACCC has poured cold continued viability. parties should not water on suggestions it may take a light The Australian Competition and touch approach to failing firm type • Comprehensive efforts to restructure expect a lenient Consumer Commission (ACCC) arguments. It will carefully scrutinise the business: The ACCC will expect approach to regulates the regime. Similar to tax issues, these submissions and assess each deal to see evidence that performance is applications lodged with Australia’s on a case-by-case basis. unlikely to be improved by the current merger clearance Foreign Investment Review Board (FIRB) owner or other potential shareholders involve the FIRB liaising with the ACCC. Even if the parties can show the target if the proposed acquisition does because of the is a failing firm, clearance is not assured. not proceed. This was, for example, global pandemic.” An increase in distressed businesses as a The ACCC’s scepticism of failing firm an influential factor in the ACCC’s result of the global pandemic means that arguments is well known and it will consideration of Virgin Australia’s it is more likely that merger parties will consider a range of factors. For example, acquisition of 60% of Tiger Airways seek to rely on ‘failing firm’ arguments it will assess whether the market would Australia in 2013. Miranda Noble, when engaging with the ACCC. be substantially more competitive if the • A thorough (failed) search for Partner How are ‘failing firm’ scenarios remaining firms competed for the failed firm’s customers (against a scenario alternate investors that may raise assessed? fewer concerns: Even when a So-called ‘failing firm’ arguments involve where a single competitor acquires the customer base and assets). business is failing, a deal can be the suggestion that, without the merger, derailed by another investor. For one of the parties is likely to exit the Be prepared with evidence example, the ACCC opposed the market in the near future. This involves The ACCC’s attitude to ‘failing firm’ acquisition of Jewel Fine Foods submitting to the ACCC that, without the arguments mean that investors need to (in administration) by its major merger, one of the parties is likely to exit come prepared: competitor. Its view was that if the the market in the near future. deal did not proceed then another • Compelling evidence of imminent buyer was likely to acquire Jewel and failure: The ACCC will expect to continue to compete. see extensive supporting material about the firm’s financial position, including administrator reports,

MinterEllison Succeeding in uncertain times 15 Sector watch: Opportunities and challenges in Australian industries

Debtwire’s Asia-Pacific Tourism editorial team highlights and leisure sectors where new challenges and financing Australia’s tourism industry has had As the economy starts to reopen in parts There are plenty of good pressures could result a difficult run, facing the nationwide of Australia, restrictions on international assets in the tourism space in rising distressed debt bushfires followed by the global tourists could put further strains on the for debt funds to look at. and special situation pandemic. Mid-market companies in industry. Such measures could be in “ While the industry has been opportunities. this space have been hit hardest as they place well into 2021. struggle to secure short-term sources hit particularly hard, taking a Few industries have been spared of financing. For these mid-cap firms, Over the short term, tourism and leisure long-term view, the market the economic impact of COVID-19 while smaller than the large-cap deals companies would be forced to rely will ultimately bounce back as geopolitical issues such as trade debt funds typically seek out, a lifeline largely on the domestic population. domestic tourism picks up and, tensions and a global recession. may be all that’s needed to stabilise the However, many Australians are already Debtwire analysis and intelligence levered to the max, with household once borders are reopened, balance sheet until conditions improve foreign tourists return, sensing highlights several sectors where and the business becomes profitable debt in Australia among the highest in opportunities – both in sizeable, once again. the world. How much growth domestic that Australia is a safe place to tradable debt and assets, as well demand is able to drive in the industry travel and with a low dollar to as the mid-market lending space – Larger financing needs, however, may is uncertain. In that vein, restaurants, the country’s advantage.” could be found in 2020 and beyond. be found among major hotel operators. movie theatres and other entertainment As demand for accommodation has venues are also facing immediate dwindled over the past six months, challenges as consumers reconsider hotels are also feeling the pinch of their spending. Michael Hughes, declining tourism numbers and could Partner provide opportunities for investors looking at distressed debt and property acquisitions.

MinterEllison Succeeding in uncertain times 16 The“ Australian tourism space is highly fragmented and there are only a few companies that have consolidated to achieve the kind of size that many offshore debt funds might gravitate towards. However, there will be substantial opportunities in this space to provide capital solutions for companies in need – both to help those companies deal with short- to mid-term disruption to revenue, and to take advantage of good buying opportunities.”

Glen Sauer, Partner

MinterEllison Succeeding in uncertain times 17 Sector watch: Opportunities and challenges in Australian industries

Energy and resources While globally energy The most significant initial impact on Looking forward, the uncertainty and the energy and resources sector of lower energy demand, and challenging “investment is expected COVID-19 has been the fall in energy oil and coal prices combined with the to reduce in the short to demand, impacting electricity demand ever increasing focus on decarbonisation and pricing for energy commodities across economies, certainly presents medium term, domestically around the world, particularly oil and a challenging environment particularly coal. In some countries, COVID-19 for oil and gas and coal companies. In Australia’s renewable energy outbreaks have forced mine closures. these sub-sectors there is the potential investment continues, for distressed assets, consolidation and In Australia, as an essential service, restructures. albeit with infrastructure the energy and resources sector has been generally able to continue to While globally energy investment is investment required and operate, but there have been impacts expected to reduce in the short to on operations including some cutbacks medium term, domestically Australia’s energy challenges.” in production (particularly in coal) renewable energy investment continues, and impacts on work rosters and albeit with infrastructure investment staff movements arising from social required and energy security challenges, distancing and border closures. which individual state governments Simon Scott, are looking to alleviate by investing in Partner However, broadly the sector has the development of Renewable Energy responded well to the challenge and has Zones. weathered the initial impacts well. Longer-term demand for ‘future minerals’ is high, but there may be some distressed owners of quality assets which nonetheless have challenging investment and cash-flow positions.

MinterEllison Succeeding in uncertain times 18 Sector watch: Opportunities and challenges in Australian industries

Retail

For retail, COVID-19 has accelerated administration. As retail continues to Airlines, tourism and the structural shift away from bricks and face challenges, further insolvencies “retail have all been mortar and towards online. Now, with and restructuring may be expected, supply chains disrupted, lockdowns creating opportunities for distressed debt clearly hit hard in recent and closures of public spaces keeping investors. months. However, customers away and the looming spectre of recession, many retailers There are segments which will still thrive distressed debt investors are searching for a lifeline. going forward if they are able to secure stable sources of financing. Businesses should also look at other Distress in the industry has been an offering or accelerating the move to strong sectors where ongoing theme, with several Australian e-commerce, home delivery and Click retailers going into administration or and Collect may emerge as winners as companies have faltered collapsing in recent years. That list buying behaviours continue to shift. because of the general includes Bardot (women’s fashion), Topshop (fast fashion), Ed Harry economic downturn, (menswear brand) and Napoleon Perdis but they still have strong (cosmetics) in 2019 and into early 2020. In March 2020, Jeanswest joined the balance sheets.” list of companies entering voluntary

Ron Forster, Partner

MinterEllison Succeeding in uncertain times 19 Sector watch: Opportunities and challenges in Australian industries

Education

Australia’s tertiary education There is also the possibility of large Financial distress is creating Much depends on a institutions are finding the current private providers in China seeking a short-term opportunities successful pilot for the climate challenging. Providers are foothold in Australia (a trend that had in“ the education sector – “return of international having difficulty holding enrolments commenced pre-COVID-19, with some particularly higher education students, and creating a of existing overseas students, and significant transactions in recent years) there is significant uncertainty about to vertically integrate their offering – specifically among private COVID-safe corridor for whether the major intake for the first by creating ‘finishing schools’ in key providers of education the large-scale return of teaching period in the 2021 academic markets in which their students are likely who cater to overseas students to key markets.” calendar will proceed. Much depends to show interest. students. This sector has on a successful pilot for the return of High barriers to entry and limited many advantages that may international students, and creating a be appealing to investors, Tom Fletcher, COVID-safe corridor for the large-scale approvals to operate (and lengthy return of students to key markets. processes to obtain approvals) provides mainly that it has a high Partner the incentive for private higher barrier to entry which limits Private tertiary education institutions education providers to weather the competition. We’re likely to that primarily or wholly target and enrol storm. Refinancing, changing their see a range of opportunities overseas students are most impacted. As operations and rethinking staff and arise as mid-market firms the largest source of international offerings, has so far staved off the students, China’s deteriorating potential advances of to and larger institutions require relationship with the US, Canada, UK and acquire higher education assets to add financing to weather the Australia in particular adds a further layer to their portfolio. Time will tell if these months and years ahead.” of complexity in projecting the impact defensive actions will be sufficient to on the market. sustain their existence or if, ultimately, this part of the sector succumbs to Caitlin Murray, advances to sell their business before Partner they lose value.

MinterEllison Succeeding in uncertain times 20 Sector watch: Opportunities and challenges in Australian industries

Real estate

In the face of significant challenges There has been an influx of capital that are set to alter the trajectory of the partnering in all property sectors Some property sectors sector going forward, the real estate (including traditional financiers “such as logistics and industry overall is holding up. transitioning into equity providers) to diversify a landowner/developer’s risk. parts of residential are Industrial real estate is performing Organisations are moving away from performing or holding well as it supports the Australian the traditional model of buy, sell and community’s need for products and own. Many are looking at selling and up well, however, large- services manufactured locally and secure leaseback as a way of reducing risk. domestic supply chains and logistics. scale retail and CBD The status of retail property is diverse. office assets are facing Commercial property, however – Many sellers are disposing of their particularly office buildings in the central large shopping centre assets, though challenges. There are business districts of Australia’s major they are not necessarily disposing opportunities in all cities – has faced a hit as organisations of them for a bargain. Some are manage social distancing and the selling their ‘low hanging fruit’ but are sectors to deal, invest, increased need and desire to work reinvesting into other retail assets and develop, finance or refit remotely. Longer term, the sector is repositioning themselves. For example, exploring new ways to bring people neighbourhood centres are an attractive these assets.” safely back to the office, with many proposition for retail, commercial and looking at redesigning and redeveloping residential real estate to merge. workplaces to reflect a post-COVID Carla Deluca, future. Partner

MinterEllison Succeeding in uncertain times 21 Sector watch: Opportunities and challenges in Australian industries

A depressed local “contracting market, with Infrastructure some international parties prospectively shut out due to FIRB regulations, may State governments have been Just as the European infrastructure announcing the fast tracking of investment market has seen a rise in see opportunities for tier infrastructure projects as a means of core+ investment (such as renewable stimulating the COVID-19 economy. energy assets, data centres, smart 1 contractors (Australian The announcements haven’t had a metering), we may see Australian funds and others) or other local material impact on the activity levels increasingly doing the same in their own in the infrastructure sector and we are domestic market. participants to purchase lagging well behind the levels seen in 2019 and previous years. A depressed local contracting market, struggling sub-contractors with some international parties and services businesses.” Prior to COVID-19, we had a number prospectively shut out due to FIRB of unresolved structural issues that regulations, may see opportunities were impacting investor and contractor for tier 1 contractors (Australian and confidence. Obviously we are now in a others) or other local participants to recessionary environment and the key purchase struggling sub-contractors Nicole Green, considerations around how projects will and services businesses. We may also be funded and the level of risk parties expect contractors with financing arms Partner are willing to take on are now more and other holders of PPP assets to be acutely in focus. looking to offload their current holdings.

Australian superfunds, traditionally Whatever transpires, we do know that strong investors in infrastructure there is a wall of capital looking for a projects (directly and indirectly), had safe home in viable infrastructure assets. struggled to deploy funds in a saturated domestic market. They had increasingly looked offshore but COVID-19 may force a shift in strategy.

Succeeding in uncertain times 22 Sector watch: Opportunities and challenges in Australian industries

Financial services

The green shoots of economic recovery losses. Not surprisingly, banks have The sector, still in a post-Royal Smaller ADIs, credit following the easing of COVID-19 ramped up their expected credit loss Commission period, is likely to see unions and mutuals may restrictions across Australia in June provisions in anticipation. mergers in order to remain sustainable. “come under pressure were severely set back following the Super funds and health are due to the current second wave of cases in Victoria. The Superannuation funds are facing two examples of where we may see economic conditions, and re-introduction of a lockdown and the financial loss due to lower member mergers occur. In addition, as banks contributions, lower returns on accordingly, we are likely closure of state borders has negatively continue to divest their life insurance to see consolidation in impacted confidence and economic investments, the two waves of early and wealth businesses, there will be recovery. withdrawal of super, reduced business restructuring, recapitalisation and this part of the financial cash flow and employer insolvencies acquisition opportunities, particularly for services sector. In APRA has extended the loan deferral and defaults. This is particularly the case insurance companies looking to expand addition, fintech or other program for an additional four for funds that cater for members who and private equity firms looking for niche lenders that have months on an individual basis, and the are employed in industries most affected opportunities. government has recently announced by COVID-19 and social distancing specialised in industries a second phase of the JobKeeper and restrictions. affected by COVID-19 may JobSeeker stimulus programs with new face difficult times ahead.” tiers and eligibility. This will be in place In response, most affected super funds until March 2021. are reconsidering how, and how often, they value their unlisted assets, with Significant numbers of customers some redeeming major holdings in Rahoul Chowdry, Victoria Allen, have elected to take up the repayment unlisted assets. Less affected funds Partner Partner pause. With rising unemployment, a with available liquidity, are finding decline in property prices and the now opportunities to invest in quality delayed economic recovery, there is assets that may not otherwise have an increasingly strongly held view that become available but for the crisis. the extension of the stimulus packages Superannuation funds may also have a will ‘kick the can temporarily down the role to play in investing in infrastructure road’ and that the hardship reflected in as a way of helping to kickstart the the repayment pause will lead to credit Australian economy.

MinterEllison Succeeding in uncertain times 23 Feature Q&A: Restructuring and turnaround best practices

Debtwire sits down with DW: How will restructurings and their position as a secured creditor gives Another potential risk is that when funds MinterEllison Partners Michael turnarounds in the current environment them the right to veto any competing are buying into a syndicate, they need to be different than completing such proposal, which they cannot be bound understand where the majorities sit. As is Hughes and Glen Sauer actions in the past? into. Then once creditors vote to accept common around the world, a lot can be to discuss best practices Michael Hughes: There’s going to the proposal, there’s a separate process done by agreement between company in managing a successful be a greater emphasis on speed with where these funds can apply to the and two-thirds of lenders, so if you buy most upcoming restructurings as all court to have the shares in the company into the debt and are part of the other restructuring or turnaround parties involved aim to accelerate the vested on them on the basis that the only third, you have to watch out you don’t amid market volatilities process. The rationale behind this will alternative to the proposal is liquidation, get dragged along. This raises several and uncertainty. be to complete the turnaround and and in that scenario the shares have economic questions, such as “What transact quickly so that employees can no value. are you buying into?” and “How much continue to work. Assets are going to are you buying?” Are you able to come be exposed to the market over much into the process with other like-minded shorter timeframes, as will the process DW: What are the key risks debt funds investors so you at least have the ability of identifying preferred bidders and then face when participating in these kinds to block competing proposals? closing the process and transacting with of financings? How can they mitigate the most likely buyer. Glen Sauer: If possible, debt funds like to these risks? get into the restructuring and turnaround Another trend we’re likely to see is proper Michael Hughes: Having an unsecured process before external administrators use of loan-to-own – and I think this position is a major risk these funds need are appointed. Competition and is where the distressed debt funds will to be mindful of since, ideally, they want interloper risk can increase when external come in. If these funds can take out a to be in a position where they can move administrators are appointed, because trading bank facility that is fully secured into restructuring with a secured debt they have to run a formal process. We against the assets of the company at position. This will allow them to have saw this happen when CBS unexpectedly less than par, they can then have a very greater influence in the process and beat other bidders, including offshore powerful position in the process once outcome. credit funds, for Network 10. There is the company goes into administration. potentially more scope for structuring This is because they can vote their entire a deal in a bilateral negotiation while debt in support of their proposal, and the company is still solvent.

MinterEllison Succeeding in uncertain times 24 Feature Q&A: Restructuring and turnaround best practices

DW: What type of due diligence should completion (e.g. further COVID-19 related Even in the unlisted company space, Having an investors carry out with distressed impacts). Funds need to be speaking with to successfully compete with other investments? How do they prioritise industry experts and professionals who debt providers and provide a financing unsecured position when they’re in a race against the understand the business and industry to package that is attractive for an Australian “ clock to restructure and turnaround gain a comprehensive understanding of borrower, advisors provide the market is a major risk these a distressed firm? the business and risks associated with it, insight into rules, procedures or ‘market funds need to be Glen Sauer: Financial due diligence will including how COVID-19 has impacted it practice’ which can assist in achieving an obviously receive the most time and and may impact it in future. optimal outcome. mindful of since, attention, but investors also need to ideally, you will spend considerable time on the legal Michael Hughes: You also can’t and tax considerations of the deal. underestimate that there are significant want to be in a DW: Is there a role for advisors to regional differences across Australia, so Understanding regulatory frameworks assist debt funds in the restructuring position where around key Australian industries and the it’s important to have advisors on the or generally for distressed debt ground within these regions to advise you can move government support provided in these investments? sectors (particularly those impacted by on best practices, looking at assets and Glen Sauer: One of the key advantages the overall business environment, and into restructuring COVID-19) is also going to be increasingly of consulting advisors is that these important. manage relationships between parties. with a secured experts provide ground-level insights and These insights into the local environment Using warranty and indemnity (W&I) experience on navigating the regulatory and applicable business laws that are debt position insurance can help mitigate risk for these environment that offshore investors may specific to Australia, and different markets and thus have deals and we expect to see more debt not have. Indeed, whenever dealing with within it, can prove invaluable in terms funds using W&I insurance on distressed listed companies, there are a range of of expediting the process, averting greater influence deals in the months ahead. However, ASX and Corporations Act rules, not to breaches and non-compliance and on the process W&I insurance requires an even more mention FIRB rules, which are critical providing a better outcome to the extensive and thorough investigation of factors in shaping how to inject capital whole restructuring or turnaround. and outcome.” the relevant business, and won’t help into distressed companies (and this mitigate against events that occur after involves equity or debt). Michael Hughes, Partner

MinterEllison Succeeding in uncertain times 25 Understanding“ regulatory frameworks around key Australian industries and the government support provided in these sectors (particularly those impacted by COVID-19) is also going to be increasingly important.”

Glen Sauer, Partner

MinterEllison Succeeding in uncertain times 26 Conclusion

Uncertain times often generate a level of • Recognise the different pathways Australia, like the rest of the world, is inertia or indecisive action – or even no across industries. The Australian currently facing uniquely challenging action at all. industries we have outlined in this circumstances. While we may not know report offer a diverse cross section where the finish line will be, as we As we face the immediate impacts of a of opportunities and challenges, with navigate this uncertainty, there is a lot to devastated global economy, the long- recovery and permanent change be optimistic about. Decisive, informed term consequences and permanent expected on different timeframes. and proactive action will help companies changes to society can still only, to a large Detailed industry knowledge, including and funds take strong steps towards a extent, be speculated. However, there are government regulation and incentives, strong, sustainable long-term future. critical actions that companies and funds will help funds and investors can take now that will prepare them for understand how to maximise their opportunities and challenges that the chances of success. future may bring – even if the precise nature of them is unknown. • Understand Australia’s changing regulatory framework. COVID-19 has For example: brought with it new complications • Review, reorganise and recalibrate such as Foreign Investment now. In order to receive capital Review Board criteria changes and funding or investment, companies additional tax considerations. ASX need to demonstrate that they have and Corporations Act rules, for a viable business plan going forward. example, are critical factors in shaping Restructuring and refinancing how to inject capital into distressed decisions need to be made now to companies. An early understanding of ensure companies’ ongoing viability how to operate within this framework and resilience. is key to ensuring a successful outcome.

MinterEllison Succeeding in uncertain times 27 Get in touch To email any of the contacts below: [email protected]

Adelaide Melbourne Brendon Watkins, Partner Michael Hughes, Partner International Andrew Corletto, Partner Nick Anson, Partner +61 3 8608 2601 +61 2 9921 4647 Jeremy Blackshaw, Managing +61 8 8233 5420 +61 3 8608 2167 Partner - International Perth Stuart Johnson, Managing Partner, +61 3 8608 2922 – Geoff Carter, Partner Shaun McRobert, Partner Capital Markets Corporate +61 3 8608 2090 +61 8 6189 7935 +61 2 9921 4907 Lloyd Kavanagh, Brisbane Partner - New Zealand Brendan Clark, Partner Ben Cockerill, Partner Gemey Visscher, Partner Michael Lawson, Partner [email protected] +61 7 3119 6455 +61 3 8608 2909 +61 8 6189 7865 +61 2 9921 4554 +64 9 353 9976

Tom Fletcher, Partner Alberto Colla, Partner – James Mok, Partner Nicola Marley, +61 7 3119 6372 +61 3 8608 2754 +61 2 9921 8612 Partner - United Kingdom Sydney and Europe Simon Scott, Partner Carla Deluca, Partner Wissam Abwi, Partner Caitlin Murray, Partner +44 20 7429 2786 +61 7 3119 6153 +61 3 8608 2397 +61 2 9921 4475 +61 2 9921 4279 George Tong, Melinda Smith, Partner Victoria Allen, Partner John Mosley, Partner Partner - Hong Kong +61 7 3119 6145 Geoff Earl, Partner +61 2 9921 4567 +61 2 9921 4428 +852 2841 6836 +61 3 8608 2531 Michael Vickery, Partner Con Boulougouris, Partner Stewart Robertson, Partner +61 7 3119 6185 Andrea Frank, Partner +61 2 9921 4368 +61 2 9921 4962 +61 3 8608 2492 – Taline Chater, Special Counsel Keith Rovers, Partner Kate Koidl, Partner +61 2 9921 8613 +61 2 9921 4681 Canberra +61 3 8608 2089 David Moore, Partner Rahoul Chowdry, Partner Glen Sauer, Partner +61 2 6225 3044 Ben Liu, Partner +61 2 9921 8781 +61 2 9921 4540 +61 3 8608 2898 Mellissa Lai, Senior Associate Shaun Clyne, Partner Michael Scarf, Senior Associate +61 2 6225 3287 Catherine Macrae, Senior +61 2 9921 4265 +61 2 9921 4045 Associate +61 3 8608 2061 Matt Cunningham, Partner Louella Stone, Partner +61 2 9921 4230 +61 2 9921 4575 Miranda Noble, Partner +61 3 8608 2489 Ron Forster, Partner +61 2 9921 4293 Adrian Varrasso, Partner +61 3 8608 2483 Nicole Green, Partner +61 2 9921 4739

A study in conjunction with