Ensuring a successful turnaround/restructuring of a company in distress has become even more complex. At the recent Abu Dhabi Global Market Financial Restructuring MENA Conference, it was claimed that 80% of restructurings fail and only 9% of companies with a successful turnaround deliver better financial results post the turnaround.
So why do many restructurings fail? There are many reasons and these may include:
- the directors may not seek advice early enough to get all stakeholders onside;
- lenders may not wish to be proactive due to long-standing relationships with the borrower;
- getting creditor support for on-going facilities will be very difficult if fraud has been suspected;
- deal fatigue;
- advisers may have greater expertise in insolvency which may result in them placing more importance on the prospect of future insolvency fees than on a successful turnaround; and
- the inability to get the majority lenders to agree to a turnaround plan.
In this article, we focus on the difficulties of getting creditor/lender support and the importance of putting in place the right coordinating committee for the situation.
Background
It is commonplace for even larger SMEs to have multiple lenders. This traditionally has allowed the company to borrow at the lowest interest rates and obtain specialist services from individual lenders. The situation is known as ‘multi-bank lending’ which is different from syndicated lending where all lenders provide a percentage of the facility under one document. A multi-bank facility will have several offer letters and most will differ in the terms of tenor, interest rates, the security given to each lender and covenants. It is for this reason why it is often difficult to get the diverse lender group to agree to a unified/single ‘over-riding agreement’ as part of the future facilities offered to the corporate.
So how can a corporate, with several lenders, gain the support from all?
Seeking a court moratorium – a last resort
Too many corporates and their advisers see the Federal Decree-Law No. (51) of 2023 on Financial Restructuring and Bankruptcy as the optimum solution to seeking a moratorium. At Quantuma, we believe that the application to the court for a moratorium should be undertaken as a last resort. Ideally, the court moratorium should implement an already agreed solution, rather than impose a solution that then runs the risk of being voted down. Yet with the new and updated Bankruptcy Act coming into effect in May 2024, there could be many more companies seeking the court protection when perhaps a better solution may be a very different path.
Focusing on trade creditors and non-bank lenders
Gaining a list of all creditors and their exposures, is one of the first actions we undertake on behalf of a corporate facing a cash tightening. Often it is trade creditors or other non-bank lenders who have the most to lose and, as a result, are often the key to a successful turnaround. Key suppliers will work with a co-ordinating committee, should one be put in place, and provide the company with vital supply lines and time to agree a longer-term solution.
The coordinating committee
We would guide the corporate through the advantages and limitations of a coordinating committee and the potential make-up of that committee – which isn’t always straightforward as the lenders may have very different positions in relation to security, par vs sub-par holdings, senior/subordinated lenders etc. In addition, if the corporate is a listed company, any lender joining the coordinating committee may not be able to trade any loans it holds in the corporate.
We would recommend the forming of a coordinating committee where there are more than four or five lenders with different and often competing priorities. For example, if there were five senior lenders, three subordinated lenders, some bondholders and maybe key suppliers, it would be important to form a committee, otherwise there’s a possibility that each class of lender may be demanding different and competing solutions which cannot all be delivered by the corporate.
Which lenders should make up the committee?
Firstly, where possible, the coordinating committee should be made up of the lenders with the largest exposures under each classification e.g. senior and subordinated lenders, bondholders and trade creditors. This enables members of the committee to represent all other lenders within their classification and means that the corporate is negotiating a settlement with a smaller group of lenders which should make the process more efficient, quicker and cheaper. It also provides the corporate with the knowledge that any turnaround plan has the support of the largest lenders, thus providing a higher chance of unanimous acceptance.
It is important to note that the members of the committee should be representing all their lender group, and not just their institution. If the latter occurs, the committee may become dysfunctional and could jeopardise the entire turnaround plan.
The role of the committee
The committee will act as a conduit to gain information on behalf of all lenders and, if this is undertaken in an out-of-court process, the collection and distribution of financial information should remain confidential. The committee will be responsible to achieve this confidentiality.
Keeping the financial detail and strategy of the corporate and all its creditors confidential, will provide an optimum opportunity for everyone to trade out of its current difficulties. We believe this is one of the major benefits of an out-of-court turnaround.
In addition to respecting confidentiality, the committee will also arrange for a standstill to be agreed by each lender. In simple terms, a standstill agreement is a non-binding moratorium that provides time for the turnaround plan to be delivered to the lender group. The standstill agreement will often be extended when lenders can see progress being made towards a solution that they feel will be supported by all lenders.
It is not unusual for some lenders to reject the turnaround plan that has been negotiated on their behalf by the committee. Where regular communication has taken place between the corporate and the entire lender group, naturally this risk is minimised. However, sometimes a lender wishes to ‘go at it alone’. In these situations, the committee will try and influence the lenders to ‘play ball’ and will be advocating for the company’s plan. This may seem simple, but it is not. The committee will expend numerous hours or even weeks or months in ensuring they keep the entire lender group together. They have more influence over other lenders than any corporate will have in this situation. It is one of the main advantages of having a committee, and the reason why the corporate will pay a fee for the committee’s services.
Getting agreement on the turnaround proposal
It should be stressed however, that any turnaround proposal delivered to the coordinating committee will NOT be binding on any member of that committee. It will be unusual for the proposal to be rejected by the credit committee of a lender represented on the coordinating committee, but at no point can the lenders on the committee guarantee that a non-committee lender will accept the terms of the turnaround plan. This is often a source of frustration to the corporate, but it must be understood that, in an out-of-court turnaround, all lenders will need to agree to the proposal and terms of the ongoing facilities. Generally, where the proposal does not dilute any lender, and any new security is shared pro-rata to exposures, then the proposal will have a high chance of success.
In summary
One cannot highlight all the advantages and potential limitations of forming a committee - only the facts and stresses facing the individual corporate will flush this out. However, in short, we would recommend that the forming of a committee where there are more than five key lenders should be considered.
Further guidance
With our expertise in guiding corporates out of distress and back to growth, we would encourage corporates to take early advice and use advisers with the expertise in turnarounds.
Should you require further guidance on how to achieve a successful turnaround and gain the support of your lenders, please contact: Nigel Smith, Managing Director, Deal Advisory & Turnaround Services.
Nigel has led successful turnarounds for a number of household names including Swiss Air and WPP, and for a GCC listed Finance Company, Middle East automotive retailer and numerous listed and unlisted companies.
Nigel Smith
Managing Director
Deal Advisory & Turnaround
e: nigel.smith@quantuma.com
m: +971 58 503 2646
The above article constitutes general advice and should not be acted upon without taking specific advice. Neither the authors nor Quantuma Advisory Limited accept responsibility for any actions based upon this general advice.
