Business Turnarounds

Business TurnaroundsICTF International Credit Professionals Symposium in EuropeBarcelona - 13th May 2014David Bryan – Bryan, Mansell & Tilley LLP

© 2014 Bryan, Mansell & Tilley LLP

Content

Background

Bad Debts and Insolvency

Turnarounds & consensual restructuring

Legal developments in Europe

Dealing with turnarounds

Conclusions

Q&A


Underperformance

Distress

Crisis

Failure

The Decline Curve


Underperformance

Distress

Crisis

Failure

The Decline Curve

Zone of Insolvency

Insolvency


Bad Debts

• When it all goes wrong!• Customer payments take longer and longer• Eventually unable to pay• Customer files for insolvency• You have a bad debt subject to:

• Reclaim of VAT• Credit insurance if covered

• May get a return from the insolvency process• Not a good outcome


Insolvency

• In principle, similar in most European jurisdictions• Handled by a liquidator, receiver, administrator,

insolvency practitioner according to jurisdiction• A statutory process whereby the assets are realised

and distributed to creditors and shareholders in a prescribed order of priority

• It is a necessary tool to deal with the failings of capitalism but often produces a poor return for stakeholders


Typical Insolvency

Claims on the estate Enterprise Value

Receiver Fees – 100%

Secured Creditors 100%

Unsecured creditors 15%

Equity – 0%

Value Break


Why are returns so low?

• Process takes too long and is fee intensive• Goodwill of business damaged• Customers lost or potentially lost• Good employees leave / hired by competitors• Assets sold on a fire sale basis• Typically minimal warranties on sale• Potential difficulties with credit etc post sale and

general stigma• Unsecured creditors often get a poor return• Process works but there must be a better alternative


The Turnaround

Crisis Management

Stabilisation

Recovery

Underperformance

Distress

Crisis

Zone of Insolvency

Insolvency


Evolution of turnaround

• 1979 US bankruptcy code created “debtor in possession”.

• 1980’s / 90’s saw the rise of turnaround managers and the role of the Chief Restructuring Officer (CRO) in the US

• “Company Doctor” arose as a term to distinguish from those that manage insolvency processes

• Influx of American boutiques and banks has seen US terminology gradually take hold


Evolution of turnaround

• No legal definition of turnaround or CRO in most jurisdictions

• No formal training procedures until now. Recent move to replicate US Certified Turnaround Professional (CTP) with EACTP

• Membership organisations exist such as the Turnaround Management Association (TMA) with almost 10,000 members worldwide

• Not every business can be turned round. There are pre-requisites for a successful turnaround


Prerequisites for a successful turnaround

Available short term liquidity



Viable core businessAvailable short term liquidity




Credible management team




Credible management teamFundable business plan


Elements of a turnaround

Operational:• Cash flow management and

improvement• Cost reduction• Revenue improvement• Product / Service portfolio

changes• Closure or sale of non-core

businesses• Management changes• Dealing with unions,

landlords, pensions etc• What should the business

look like?


Elements of a turnaround

Operational:• Cash flow management and

improvement• Cost reduction• Revenue improvement• Product / Service portfolio

changes• Closure or sale of non-core

businesses• Management changes• Dealing with unions,

landlords, pensions etc• What should the business

look like?

Financial:• Business valuation &

liquidation outcome• Re-financing / new debt• Debt / Equity swaps to reduce

debt (existing equity diluted)• Debt forgiveness (“Hair Cuts”)• New equity injection• Compromise agreements with

trade creditors (payment plans, possible hair cuts etc)

• What capital structure does the business need and can support?


Consensual Financial Restructuring

Claims on the estate Enterprise ValueRestructuring Costs

Lenders

Trade

Equity

Consensual Restructuring – Simple Example




Lenders

Trade

Equity

Consensual Restructuring – Higher Enterprise Value




Lenders

Trade

New Equity - Lenders

Old Equity

Consensual Restructuring – Debt Equity Swap example


Turnaround vs Insolvency

• Business value is enhanced• Process is normally quicker• Operational + Financial turnaround should leave the

business able to not just survive but thrive• Avoids a potential “Chapter 22”

• The ultimate objective is to preserve value for all stakeholders


Turnaround – Legal Status

• Originated with Chapter 11 protection in the USA• For many years no statutory protection in any

European jurisdiction• Always a risk that any one creditor could take action

and effectively cause the turnaround to collapse• Practitioners became very adept at persuading

creditors of the merits of the approach and avoiding problems but often like herding cats

• Recently the law has started to change to provide protected pre-insolvency procedures


Changing Laws

• Many countries have updated their insolvency laws in the last few years

• Some have changed their laws to introduce some form of pre-insolvency process, eg:

• France – Mandate ad hoc / Conciliation / Sauveguard

• Italy – Concordata Preventivo / Article 182 bis

• Recent EU proposal in March 2014 to formalise pre-insolvency process across Europe


EU Proposal

• Notes that 200,000 businesses become insolvent in the EU every year

• Notes that “insolvency frameworks in many EU countries currently channel viable enterprises in financial difficulties towards liquidation rather than restructuring”

• Suggests that honest entrepreneurs need to be allowed to learn and try again

• Recommends member states put in place measures within one year to effect five aims


EU Proposal – Five Aims

1. Facilitate restructuring at early stage before insolvency without lengthy or costly procedures

2. Allow debtors to restructure without need to formally open court procedures

3. Allow businesses to request a temporary stay of up to four months (extendable) to restructure before creditors can launch enforcement proceedings

4. Facilitate the process for restructuring keeping in mind the interests of debtors and creditors

5. Reduce negative effects of bankruptcy in particular by discharging debts within three years


EU Proposal

• Will it be adopted? How long will it take?• The trend towards turnaround is there, seen in

practice and increasingly in law• What does it mean for the credit management

industry and you?


Implications for Credit Managers

• Recognise it is a negotiation and you get what you negotiate

• Trade creditors normally numerous and don’t act together

• Typically the 80/20 rule applies • Likely to see trade creditors getting together with a

committee run by the larger creditors and the smaller just tagging along

• Where substantial amounts at stake committee will appoint advisers and share cost and among all



• Much more engagement between creditors and the debtor

• Understand big picture. Why has this happened? How does the whole restructuring work? Why is it better than insolvency? Who is taking the pain?

• Are unsecured creditors being treated equally and fairly?

• Can a better deal be negotiated?• Need to understand the detail or have advisers do

so on the creditors behalf



• Are the issues that got the debtor into trouble being addressed? Don’t want a “Chapter 22”

• How much headroom is there in the plan going forward? Is there sufficient margin for missing the plan before payments to creditors are at risk?

• Can payments be accelerated if performance is better than plan? Make it a condition?

• Are adequate safeguards in place to prevent excess bonuses, dividends, capex, management fees etc?

• Will credit insurance be available?• Negotiate to get the best deal!


Conclusion

• Businesses get into distress more rapidly than management ever expects

• If the requirements for a successful turnaround can be met, a live business is worth more than a dead one

• Consensual restructurings will become more common and legal changes will likely support that

• Trade creditors will need to work together and engage with the debtor

• Understand the big picture and the detail, take advice and negotiate the best deal possible

THANK YOU!Questions please

Business Turnarounds

Documents

Transcript of Business Turnarounds