Asia restructuring and insolvency briefing - Restructuring and workouts - some practical pointers

February 2009

Introduction

Welcome to the last in our weekly Asia restructuring and insolvency briefings - this note focuses on some of the practical matters banks and investors may need to consider when faced with a counterparty in financial distress.

It is a sign of the times that our series of briefings that have been run over the last eight weeks or so have received substantial positive feedback with an unusual number of requests for new contacts to be added to the mailing list!

In tandem with the briefings, which are a good way of sharing technical information, we have been running a series of workshops for financial institutions throughout Asia. These workshops have been exploring the options available to banks with distressed borrowers and also review some of the typical documentation used in such circumstances: there is no APLMA  standard form! If this is something that you would like us to present to your team please let either of us, or your local contact listed here, know.

This briefing complements our other publications on corporate restructuring and the sale or purchase of distressed assets.

Getting your house in order

Understand your counterparty risks

It is very important in the present climate to understand your contracts and your counterparty risks. We are finding an increasing number of clients “stress testing” their contracts and considering the consequence of an insolvency event. This is good practice; particularly since to identify weaknesses in structures and counterparty risk upon insolvency may afford you the time to fix it before things do go wrong.

Where are the documents?

Connected with understanding your contracts and your counterparty risk is knowing where the documents are! In good times the collection of original documents and the file of conditions precedent very quickly gets passed to the junior members of the team and it can be surprising just how much ‘uncertainty’ that can arise in the archive process. If your portfolio includes companies already in distress (or likely to be in the near future) it is advisable to recall the archived documents and ensure that you have all the right originals and registration certificates. You do not want to be in the position of missing crucial papers when the time comes to act quickly.

Record your decisions responsibly

You will invariably have notice of pending financial difficulty. Certain sectors (such as bulk shipping) may be facing significant difficulties irrespective of the quality of your borrower’s assets or management; some borrowers may ‘misplace’ or ‘forget’ to provide the regular management accounts or audited financials or other information typically required under your finance documents may be slow in arriving - these actions can set alarm bells ringing with more experienced bankers.

As the warning signs start to manifest themselves, correspondence between back office, credit, origination and internal restructuring teams will start. All of your teams need to be aware that at some time in the future those emails, which are internal correspondence, may need to be disclosed in proceedings (or in some jurisdictions under data protection laws). Your discussions should therefore be business like and in a manner and tone that avoids professional embarrassment. Make sure your team knows this.

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Rescue or not?

In the Asia financial crisis, most defaults were dealt with through a contractual workout borne more out of necessity than desire, as many of the bankruptcy laws gave little creditor protection. In general terms, a number of jurisdictions with more developed insolvency regimes have also moved in the last 10 years towards facilitating a process that seeks to protect all creditors (as opposed to just secured creditors) by fostering an atmosphere, that as far as possible, rescues the corporate or enables it to trade its way through financial difficulty.

For example, in 2003 the right of floating charge holders in the UK to appoint an administrative receiver was (in most circumstances) replaced with the requirement to appoint an administrator who owes duties to a wider body of creditors than just the charge holder.

In some respects there has been a convergence in approach to financial distress between developed and less developed countries with an overall preference to maximize enterprise value as opposed to straight asset disposal. Some Asian countries have in the intervening period updated their bankruptcy regimes (such as China) to facilitate a rescue culture but the processes remain largely untested to date. This convergence arguably gives us (in an Asian context) greater flexibility than ten years ago.

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Financial Information

All decisions, when facing a company in financial difficulty, have to be made with a clear understanding of its financial soundness and this can best be determined through a combination of valuation techniques including:

  • Discounted Cash Flow
    The value of EBIT or EBITDA discounted back using an appropriate discount rate of cost of capital.
  • Comparable Multiples
    The market valuation multiples of similar companies.
  • Asset-based value
    The market valuation multiples of similar companies Invariably the book value or market value of assets on a liquidation.

Obtaining the right information from management (particularly current liabilities) and a realistic stress testing of future income is a must to undertake this exercise and access to this information must be the key driver of any willingness to enter into a temporary standstill arrangement when problems first arise.

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What are your options?

Acting early and taking advice early are imperatives in this situation. Situations can deteriorate incredibly rapidly and to understand your options and those of other stakeholders are fundamental.

The options will include:

  • Rescheduling and/or restructuring of debt;
  • Asset sales or disposals (known as “Accelerated M&A” in distressed scenarios) perhaps combined with a reduction in head count or retention or replacement of senior management;
  • Debt for equity swaps;
  • New debt - structures can include super-secured, convertible loans or new loans with stapled warrants;
  • New equity - either in the form of equity or junior or mezzanine debt;
  • Pre-pack sales at operational level (now common in Europe) or insolvency proceedings being used as a restructuring tool;
  • Security enforcement.
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How can we help?

Our Asia finance team works as one integrated team across Asia and includes partners and associates in:

We work closely as a regional team and also with our restructuring teams elsewhere in the Group. This gives us access to know how on some of the most complex restructurings taken in recent times. Our team consists of corporate and debt specialists supported by a litigation team that can take swift action to protect your interests.

Please call us if you would like to discuss your options on a specific matter or if you would otherwise like to run a workshop or briefing for your team.

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Contacts

Stephen Begley

Partner - Hong Kong
stephen.begley@nortonrose.com
+852 3405 2543

Leigh Borrello

Partner - Singapore
leigh.borrello@nortonrose.com
+65 6309 5336

Peter Haslam

Partner - Hong Kong
peter.haslam@nortonrose.com
+852 3405 2308

Gervais Green

Partner - Singapore
gervais.green@nortonrose.com
+65 6309 5326

Jim James

Partner - Shanghai
jim.james@nortonrose.com
+86 (21)6137 7022

Somboon Kitiyansub

Partner - Bangkok
somboon.kitiyansub@nortonrose.com
+662 263 2811

Nick Merritt

Partner - Singapore
nick.merritt@nortonrose.com
+65 6309 5318

Yu-En Ong

Partner - Hong Kong
yu-en.ong@nortonrose.com
+852 3405 2310

Jeff Smith

Partner - Singapore
jeff.smith@nortonrose.com
+65 6309 5312

Chris Viner

Partner - Tokyo
chris.viner@nortonrose.com
+813 4360 9140

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