Managing cross border and international turnarounds

International and Cross Border Turnarounds

Deborah Midanek – Solon, USA

Alan Tilley -- BM&T, London

The Turnaround

Crisis Management

Stabilisation

Recovery

Underperformance

Distress

Crisis

Zone of Insolvency

Insolvency

Per

form

ance

(liq

uid

ity)

Time

The Fundamental Truth

Insolvency in all jurisdictions is enterprise value destructive and fee intensive

It is a legal process and should be a last resort when creditors cannot compromise through negotiation

Consensual restructuring preserves more goodwill and usually is quicker and less fee intensive.

It can often be achieved by leveraging solutions off the threat of insolvency and reduced recoveries for creditors


© 2012 Bryan, Mansell & Tilley LLP

Insolvency – with secured creditors

Admin Fees – 100%

Secured Creditors 100%

Unsecured creditors 40%

Equity – 0%

Claims on the estate Enterprise Value

Value Break


To be negotiated:Write offs?

Redistributions?What leverage?


Consensual Restructuring in a turnaround


Restructuring Costs

Lenders

Trade

Equity

50


Consensual Restructuring – Higher Enterprise Value


Restructuring Costs

Lenders

Trade

Equity


Consensual Restructuring – Separate Lenders & Trade


Restructuring Costs

Lenders

Trade

New Equity - Lenders

Old Equity

50


Consensual Restructuring – Debt Equity Swap example

Prerequisites for a successful turnaround

Viable core business

Available short term liquidity

Credible management team

Fundable business plan

Key International and Cross Border Issues

© 2012 Bryan, Mansell & Tilley LLP

Communication & Stakeholder

Management

Employee Representatives

Employees

Directors

Trade Creditors & Credit Insurers

Customers

Landlords

Pension Trustees

Shareholders

Funders

Key International and Cross Border Issues

Issues are legal and operational

Different insolvency legislation between countries and states in USA affects stakeholder recovery

Stakeholder leverage affects parties’ behaviour and division of recoveries

Efforts have been made by international bodies to bring discipline to the process but harmonisation of insolvency laws has been elusive.

Forum shopping by stakeholders to seek leverage advantage

Process is continuously evolving driven by professionals imaginative response to jurisdictional differences.

Managing International and Cross Border Issues

Legal Issues

Availability in some countries of pre insolvency remedies; Pre packs, Voluntary arrangements and Company Law restructuring schemes

Debtor Friendly and Creditor friendly Jurisdictions;

Flexibility to facilitate Debt to equity restructuring and recognition of bond holder rights differs from jurisdiction to jurisdiction

Case law (Pragmatic and Predictable) versus Civil law (Bureaucratic and uncertain).

Costs of process and recovery percentages are better in case law countries


Recovery values

Recovery % Years Cost % of Estate

Italy 56.0% 2.8 22%

Spain 73.2% 2.0 15%

Poland 29.8% 3.0 20%

Germany 52.2% 1.2 8%

France 44.7% 1.9 9%

---------------------------------------------------------------------------------------------------------USA 76.7% 1.5 7%

UK 84.2% 1.0 6%

Source; World Bank 2008


Standard and Poor’s Ranking of Post Default Recovery Prospects - 2014Net of fees, length of time, employee rights, government priorities, outcome predictability

A1; Australia, UK, Ireland, Singapore, Hong Kong, Netherlands, Scandinavia

A2; USA, Canada, Israel, Japan, Switzerland, Germany, Belgium, Luxembourg. S Africa

B; France, Brazil, Italy, Mexico, Spain, Turkey, UAE

C; Russia, Kazakhstan, Ukraine


Operational issues

Cash management usually managed locally leading to cash hoarding in subs

- Payment priorities distorted by defensive local strategies

Many groups depend on intergroup trading which can be disrupted

- International groups can have common suppliers who hold solvent subs to ransom

Debtor in Possession and DIP Funding

- Some jurisdictions allow management to retain day to day business control

- Some jurisdictions allow DIP (super priority) funding.


International Regulatory structure -- Forum Shopping

UNCITRAL, EU Regulation (2002) and Chapter 15

- Aim to promote cooperation not harmonisation

- Defines Main Proceedings and secondary proceedings

- Main Proceedings define the Jurisdiction managing the process with creditors

- Local law still prevails on property security rights and labour law.

Definition of Centre of main Interest (COMI)

- Presumption in country of registration

- But (loosely) defined where principal activity is seen to take place

- Has led to some “spurious” definitions

- Has encouraged jurisdictional change to discourage forum shopping

- Now being tightened up by review by EU Commission

- US Courts have “pierced the veil” of offshore Topco’s


Why Forum Shop (mainly to USA and UK)

Preserve Shareholder interest.

- Schefenacker used English Law C.V.A. to preserve family interest

- La Seda de Barcelona used English Company Law Scheme of Arrangement to cram down dissenting syndicate members outside of insolvency

Ease of Restructuring

- German law was too restrictive to permit debt to equity swaps

- Spanish law (until March 2014) had no provision to cram down obstructive hold outs

Predictability

- US Chapter 11 and UK Insolvency Law was tested and familiar to advisors.


Future Trends

Tightening up on COMI definition and applicable jurisdictions

- EU Regulation review 2014 applying tighter criteria

- US Courts view on applicable jurisdiction of Caribbean Topco’s used by Hedge Funds and Private Equity.

Changes to Legislation

- Germany ESUG Insolvency law amendments 2012

- New French, Spanish and Italian Laws 2013/4

- EU Recommendation that all member states introduce pre insolvency restructuring regimes by end 2015.

Use of Consensual Arrangements to preserve value and reduce costs

- Creditors Consensual Compositions

Managing cross border and international turnarounds

Documents

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