By Jamie Ensor
Posted: 20th June 2013 08:30
Where utilised effectively, out-of-court restructurings can offer both a struggling debtor (being a company debtor for the purpose of this article) and its creditor(s) workable solutions that do not have to mean the ultimate involvement of a company in an insolvency process or measure which more often than not will result in the least favourable returns for creditors.
A Private Process
Out-of-court restructuring in Ireland is confined to private restructuring arrangements between companies and their stakeholders that can be agreed between themselves. Generally the only out-of-court restructurings that come into the public domain are those arrangements which involve pre-negotiation that ultimately benefit a formal insolvency process such as examinership, pre-pack receiverships or, in rare circumstances, court approval of schemes of arrangement or compromise.
There have been a number of recent high profile examinerships and pre-pack receiverships which have benefited from restructuring proposals that were negotiated prior to the commencement of formal insolvency processes and where the pre-negotiated restructuring was the key factor contributing to their ultimate success. For example, the speed with which the restructuring of eircom last year through the examinership process was concluded was due to the pre-negotiation between the company and its creditors before the process began.
Out-of-court restructurings can take many forms. It is not possible to examine all the ways in which restructurings can be agreed between debtors and creditors in this article. Three of the more commonly seen and topical mechanisms which may be considered in an out-of-court restructuring are standstill agreements, workouts and debt equity swaps.
i) Standstill Agreements
While a standstill agreement is in place a struggling company is afforded breathing space while the bank evaluates its business to see whether a viable formal restructuring can be put in place to save the business. A significant benefit of a standstill agreement is that the evaluation can take place without drawing the attention of the company’s customers or suppliers that the company might be facing difficulties. Standstill agreements can range from simple form agreements where a creditor (usually a bank) agrees not to take enforcement action for a period of time while the parties discuss options, to more multifaceted agreements that can include periods of forbearance, independent reviews of the business and then a formal restructuring of the business and existing facilities.
During the duration of the standstill agreement it is not uncommon for a bank to require that an independent business review (“IBR”) be carried out by a third party. An IBR will assess the business of the company including appraising such key factors as the company’s prospect of survival, additional funding requirements, confidence in the company’s management team and the terms whereby the existing facilities might need to be restructured.
A workout is when a debtor and its creditors agree upon a private restructuring agreement or a debt composition or rescheduling contract. Debt workouts are usually between a debtor company and its secured creditors and other significant stakeholders, although it may also be with any stakeholder in the company, for example, bond holders, customers and/or suppliers.
In order for a workout to be workable, creditors must be willing participants and must be agreeable to forbearance. At a minimum the provision of accurate and complete information to creditors is essential to the process being successful. The object of a workout is to ensure that a company can repay its debts and that its commitments can be funded going forward. Typically a debt workout might involve splitting debt into a number of categories or parts with, for example, some parts being serviced fully with interest and repayment, some parts being interest-only repayments for a term and some parts of the debt being parked for a longer period, with write-down a possibility at some point.
iii) Debt Equity Swap
Debt equity swaps are more commonly seen in the UK and are becoming more so here. A recent example in Ireland is the debt equity swap taken by banks in Independent News and Media. It has been reported that a consortium of eight banks have agreed to write off one-third of INM’s debt and in return the banks took a €10 million stake in the company, worth 11 to 16 per cent of the media group.
In a debt equity swap, a bank will convert debt owed to it by a company into one or more classes of that company’s share capital. As a consequence the original shareholders’ stake in the company is generally diluted. Typically the proposals for a debt equity swap would arise where a borrower is struggling with its repayments on borrowings due to cash flow problems for example, but the value of its underlying assets provide an incentive for the bank to take an equity stake in the company in exchange for a reduction in the debt.
From a bank’s perspective, if it sees the company as a viable entity in the long term, it is reducing the company’s short term repayment burden but hoping to recoup some of the debt write-down where the share capital increases in value in the future. While insolvency measures will realise only partial value for creditors or certain class of creditors, a debt equity swap has the potential to create long-term appreciation in value for all stakeholders. From the company’s perspective, a debt restructuring will usually render it a more financially stable trading concern and more attractive to investors.
Where To From Here?
With asset values as a whole generally remaining low, creditors of companies in difficulty are aware that the return for them in an insolvency process or measure will often deliver little value on their debt and therefore restructurings often represent a better alternative. For that reason restructurings have and will continue to become more of a feature of the debtor / creditor landscape in Ireland.
Anecdotally we have seen that as restructurings have become more commonplace that creditors, debtors and other stakeholders are also voluntarily engaging in restructurings outside of the court processes to save on legal costs and to preserve goodwill and third party confidence in a business which the element of confidentiality helps to maintain. Accordingly, while the instances of out-of-court restructurings are ever increasing, it will be hard to evaluate to what extent, apart from where we see pre-negotiated restructurings in advance of companies commencing formal insolvency processes. It is also reported that the government is in talks with EU and IMF on a new out-of-court system to allow small firms to restructure their borrowings, however we have not seen any indication from the government as yet as to whether they propose to put in place a formal out-of-court restructuring programme as is seen in other countries.
As a member of the Corporate Recovery and Insolvency group in Dillon Eustace, Jamie has a wealth of experience in acting for liquidators, receivers, creditors and distressed companies in relation to all aspects of corporate insolvency and restructuring. Jamie’s particular expertise is in advising banks, distressed loan portfolio funds and insolvency practitioners in the wide-range of litigation proceedings that can arise from insolvency appointments.
Jamie is a member of the Law Society of Ireland, the Law Society of England & Wales, the Irish Society of Insolvency Practitioners and INSOL International. Jamie lectures on banking law in the Law Society of Ireland with particular emphasis on insolvency issues. He also holds a diploma in Applied Finance Law.
Jamie Ensor can be contacted on +353 1 6670022 or alternatively via email at Jamie.Ensor@dilloneustace.ie