Precondition for Rehabilitation An international perspective

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1 Precondition for Rehabilitation An international perspective

2 PricewaterhouseCoopers

3 Corporate Life Cycle Growth Maturity Loss Profit Start-up Decline Transformation Time Turnaround Insolvency 3

4 Causes of Corporate Decline Internal Causes External Causes Poor management Changes in market demand Inadequate financial control Competition Poor working capital management High costs Adverse movements in commodity prices Lack of marketing effort Overtrading Big projects Acquisitions Financial policy 4 Organisational inertia and confusion

5 Four stages of crisis development Stages Typical organizational behaviour Crisis denial Complacency: signals completely overlooked Hidden crisis Crisis explained away; belief that it will disappear Disintegration of organization begins Some action taken but need for action underestimated Organizational collapse Inability to take action Recovery Failure 5

6 General objectives of restructuring 6

7 Components of successful restructuring Successful restructurings involve both operational and financial restructuring: Operational restructuring will increase the size of the cake available to the stakeholders while Financial restructuring will determine how that cake is divided amongst the stakeholders, taking into account the priorities and requirements of each stakeholder group 7

8 Operational and financial restructuring Operational improvements may include development of new products and markets, cost reduction, productivity improvement, cash flow improvement Financial restructuring involves restructuring the business s financial obligations to match cash generation capacity, including debt forgiveness or rescheduling, conversion of debt to equity, divestment of non-core activities to provide funds to offer creditors improvement of operational and working capital performance 8

9 Requirements for financial restructuring 9

10 Requirements for successful restructuring Restructuring proposals need to be: Realistic - challenging but not impossibly optimistic Attractive compared with the alternatives Flexible and adaptable to changing circumstances Equitable 10

11 Reasons to support rehabilitation To reallocate resources from inefficient to efficient uses In most cases rehabilitation, rather than mere realisation of assets, is in the interests of all stakeholders because: banks need ongoing customers going-concern values of assets generally exceed break-up values cessation of business may crystallise liabilities - eg lease/employee termination costs loss of human capital - training and know-how need to preserve key industries This is not to say that the law should distort market forces by featherbedding non-viable businesses 11

12 The importance of the legal framework for rehabilitation A legal and regulatory framework which supports the objectives of operational and financial restructuring greatly enhances the chances of restructuring being available as a tool to return poorly performing assets to productive economic use Even where restructuring are carried out outside a legal process, the existence of a workable bankruptcy law provides the backstop against which the various interested parties can assess the restructuring proposals and their options The London Approach has proved a successful approach to outof-court restructuring, the tenets of which have been applied to many other jurisdictions 12

13 The London Approach A key component of any effective restructuring regime is the existence of a mechanism to promote agreement among the creditors. The London Approach has been applied in other countries with varying success: Bangkok Approach Jakarta Initiative Seoul Solution Czech Republic 13

14 Out-of-court restructurings: The London Approach code promulgated by Bank of England Objective - to bring stability and buy time for rescue for businesses capable of rehabilitation Success relies on while preserving equity of creditor rights Requires co-operation of management but directors liability issues Provides for leadership through biggest creditor Debt trading has positive/negative implications 14

15 Tenets of the London Approach To support businesses capable of rehabilitation To preserve equity of creditor rights To provide for leadership through biggest bank creditor(s) Equality of data on: diagnosis of problems business prospects liquidation losses legal structures lawyers Builds bridge between borrower and creditors 15

16 Restructuring in Brazil

17 Key issues impacting restructuring environment in Brazil Succession issues: potential assumption of hidden liabilities, including tax and labour claims uncertainty in respect of potential lender liability when introducing advisors and/or new management into a troubled customer Laws are unclear, making informed decision-making difficult Lack of consistency in courts (quality, time to deliver judgement etc) Lack of trust and collaboration amongst creditors 17

18 Key issues impacting restructuring environment in Brazil Quality and reliability of information several sets of accounts? potential cash leakage issues Priority of government and labour claims Power of the unions Current provisioning rules act as a disincentive to lenders to support prolonged restructuring 18

19 Existing law Generally regarded as outdated, unnecessarily rigid and not responsive to the needs of modern business Not suited to large companies with hundreds of employees Does not provide an effective mechanism for restructuring of a business in a financial crisis: secured creditors not included government claims not included gives significant power to the existing management - can be used as a stalling tactic, allowing depletion of assets Unrealistic time scales and payment terms 19

20 Lessons drawn from experience

21 Essential additions Need to incentives creditors and debtors to recognise and deal with the issues Means of promoting agreement between debtor and creditors. A way of giving super-priority to providers of rescue finance. Means of removing uncertainty due to one or more parties using the courts to delay the process 21

22 22 The Asian parallel

23 Essential additions 23 The Thailand debtor/creditor agreement provides: Sanctions on creditors who do not deal with non-performing debt Appointment of a lead institution with responsibility for driving the process to completion Dissenting creditors bound by consensus if a sufficient majority in favour is achieved. Strict and realistic time limits for presentation of proposals and voting thereon. Clear voting rules. Appointment of arbitrator with power to impose agreement in the event of deadlock. Establishment of creditor s committee to support a consensus approach A fast track to agreement with a specialist court given power to make final determinations without recourse to other courts.

24 Other issues Reliable financial and commercial information is a prerequisite for informed decisions. The process should be stakeholder-driven: the involvement of the courts should be minimal. There are inevitable trade-offs and compromises (eg between tax and labour rights) - the essential is clarity and predictability. 24

25

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