This panel discussion at INSOL London 2022, moderated by Debra Dandeneau, Chair of the Global Restructuring & Insolvency Group at Baker McKenzie, explored how rescue financing works in different parts of the globe and provided insights on some issues that alternative capital providers typically face. The panellists also brought a wide variety of experience and views to creating an ideal system that promotes restructuring and rescue financing.
Some of the key takeaways and insights were:
- Rescue financing can be defined as a “financing of last resort,” which does not necessarily mean a financing for the purposes of restructuring.
- Alternative investment providers would focus on various factors of the target company – such as its cash flow, value of the assets and the going concern value. Also, what that rescue financing is doing to existing debts would be a really important part of the analysis for a third party investor.
- Although banks still play a major role in corporate restructurings in Europe and Asia, it is fairly unusual for commercial banks to retain their loans against a distressed company in the US. Having robust market and infrastructure for private debt trading, as that in the US, would be required to facilitate the debt investments for the purpose of restructuring the distressed debtors.
- In the post-Global-Financial-Crisis world, commercial banks are subject to regulatory capital requirements which leads to a shrinking of bank’s investments in high-risk business. Also, in general, capital infusion made by alternative capital providers are, because of the simplicity of negotiation, flexibility of financing conditions and speed of execution, more attractive than the traditional bank debts. As such, there would be a global trend that the direct lending markets is substantially increasing in size, and therefore, the roles of alternative investors are becoming more important in the corporate restructuring context.
- However, in many jurisdictions, there still remain a number of challenges for such alternative investors in making rescue financing. For example:
- In some jurisdictions, regulations do not allow foreign investors or non-banks.
- Banks may be unwilling to sell their positions or are afraid of reputational risks.
- The EU Directive gives member states a lot of flexibility in implementing the law, but such ‘fragmentation’ makes cross-border restructuring in Europe quite complicated. To promote restructuring or liquidation of all related debtors based in different jurisdictions before a single court and under a single restructuring law, group restructuring regimes should be introduced.
- In Southeast Asia, the key challenges for the investors are the lack of confidence because of the complicated environment where the outcome is hardly predictable. Singapore is now trying to lead the charge towards harmonization and coordination to encourage new capital infusions for distressed companies.
- Even long-standing restructuring regimes have their own problems. The US restructuring regime is expensive, which prevents such companies as SMEs from filing for formal restructuring proceedings. There should be a more streamlined process for SMEs’ restructurings.
- The following are some of the key features of restructuring law that would help attract alternative capital providers to the jurisdiction:
- Certainty, clarity and consistency of the enforcement of the laws. Investors would be incentivised to provide rescue financing where they are free from fear of clawback and lender liabilities.
- Clear and consistent corporate governance standards, while avoiding too much criminal liability for directors which would cause an inability to act.
- Ability to sell companies and their business and assets as a going concern quickly. Some panellists pointed out the following features that would be desirable from the creditor’s viewpoint:
- Right to credit bid of the secured creditors
- Flexibility in the method of sales (not just by way of public auction)
- Permissibility of break-up fees for stalking horse bidders
- Effective forum for valuation disputes
- Ability to close a sale in the face of an appeal
- Protection of third party bidders from post-closing legal challenges
- Cramdown (or ‘cross-class cramdown’ in Europe) that allows dissenting creditors or classes to be bound by the restructuring arrangement where it is deemed fair and equitable, with reduced voting thresholds.
- Sophisticated, reliable and transparent court system. Specialist judges who are commercially savvy would be essential to make in-court restructurings efficient and to get reasonable and predictable outcomes. Further, online access to documents filed with the court would be helpful for the investors in making decisions.
- To put it in a nutshell, the ideal restructuring system must have the features that give investors a sufficient level of confidence regarding enforcement of the laws.
Debra Dandeneau’s fellow panellists were:
Pierre Bour, of Fidera
Ashok Kumar, BlackOak LLC
Damon Meyer, Highbridge Capital Management
Federica Pietrogrande, Gordon Brothers
With thanks to INSOL International. Find out more about INSOL London 2022, and other events, by visiting www.insol.org/events.