Practical Issues in Debt Restructuring & Schemes of Arrangement

Transcription

1 Practical Issues in Debt Restructuring & Schemes of Arrangement Patrick Ang Partner, Rajah & Tann LLP 19 March Scope 1) Introduction 2) Overview of Insolvency Legal Framework 3) Consensual debt restructuring Why? Why not? Procedure Issues Typical terms 4) Scheme of Arrangement Introduction Procedure Issues 5) Cross border issues 6) Challenges & issues 7) Question & Answer 2 1

2 Introduction Introduction 15 September 2008 Lehman Brothers filed for bankruptcy protection under Chapter 11 Lehman Brothers collapse has become symbolic of the current financial crisis almost pivotal Financial stability of US and European institutions called into question even before then subprime mortgage crisis Financial crisis hit equity markets, commodities, trade became worst global economic crisis in decades 4 2

3 Introduction Singapore s export driven/open economy amongst first in Asia to go into recession String of listed companies announced losses and several have started debt restructuring discussions with creditors, some filed for schemes The stronger ones are also preparing for the worst and raising finance and taking measures to ride the storm with no visibility 5 Overview of insolvency framework 3

4 Overview of insolvency framework Liquidation Judicial management Receivership Schemes of Arrangement (section 210) Consensual debt restructuring 7 Consensual debt restructuring 4

5 Why consensual debt restructuring? Inadequacies of formal insolvency procedures Higher prospect of proper rescue with higher returns to stakeholders Creditor community more matured in approach towards identification, realisation or preservation of commercial value A more save face method less stigma of failure Greater incentive to owner/management to maintain and enhance value No workable legal option in certain legally less developed countries many only offer liquidation as the only legal option internationally recognised 9 Why consensual debt restructuring? Preservation of confidentiality or better managed publicity Flexibility in negotiating positions without Court intervention yet not giving up option to resort to legal options [restructuring in the shadow of liquidation] 10 5

6 Why NOT consensual debt restructuring? Too flexible debtor drags feet/ delays time Too flexible creditors cannot reach consensus It requires 100% of the relevant creditors to agree to the restructuring plan Distrust in management of debtor company Inability of group companies to hold subsidiaries together Inability to persuade small or medium sized creditors to participate in the restructuring plan small creditors insist on being paid 100% Debtor is in sunset industry or is inefficient Creditors temptation to investigate affairs No moratorium against legal action 11 Debt restructuring - procedure Announcement or notification of insolvency Initiation of collective creditors forum Formation of committees and professional advisers Financial review by professional accountants Standstill agreement Formulation of restructuring plan 12 6

7 Debt restructuring - procedure Negotiation of restructuring plan Monitering of business and cash flows Reach agreement on restructuring plan Implementation of restructuring plan 13 Debt restructuring - Issues When to announce inability to pay debts? Who should be notified of inability to pay debts? Who should be members of debtor s task force? Which creditors should be in Steering Committee? Composition and terms of Steering Committee? Should a fee be paid to Steering Committee members? How about Committee s advisers fees? How many members? 14 7

8 Debt restructuring - Issues How much information ought to be given to creditors and in what manner? How long is standstill and on what terms? Creditors view is that they are giving a lot for forbearance to sue and they expect security and other gives by debtor in exchange. Debtor looks at standstill as a necessary prelude to restructuring. Often standstill agreement is achieved while negotiating it! Who should the advisers be and on what terms and scope? Conflict of interests? Should creditors and company each have separate representation? Who pays the costs? 15 Debt restructuring - Issues Creditors sell their debt changing creditor base. [Can facilitate or destroy restructuring]. Some owners of debtor corporates buy out debt to ensure success. Which creditors ought to be preferred or paid in full? Eg employees, critical suppliers, secured creditors Does the debtor company have a runway to continue business and operate pending the restructuring? interco fund transfers/ interim financing and cash flow 16 8

9 Debt restructuring - Issues Different levels of expertise and experience amongst creditors representatives at collective forum Creditors having divergent views or interests eg long v. short term view/ exit v. stay view/ optimistic v. pessimistic outlook 17 Debt restructuring typical terms Term out payments Hair cut Interest or default interest waivers or reduction New monies from current stakeholders or new party New security or guarantees Debt equity swap Call or put options on shares issued to creditors Hive off Payment in kind Preferential treatment of employees/critical suppliers Cash sweeps or cash pooling arrangements 18 9

10 Schemes of Arrangement Introduction to Schemes Cram-down mechanism allowing a restructuring plan to bind a class of creditors once 75% in value and majority in number of the class have approved the plan and the plan is sanctioned by the court Schemes became widely used after 1997 crisis, and often in preference to judicial management

11 Schemes - Procedure 1. Application to Court for sanction to convene creditors meeting 2. Moratorium against legal action under section 210(10) may be applied for 3. Scheme is negotiated and finalised 4. Company convenes creditors meeting to voting on the proposed scheme 5. Second application to Court to approve the scheme 6. Scheme takes effect upon Court s sanction and lodgement of Order with ACRA 21 Schemes - Issues Can a Scheme to scheme be accepted? What is a reasonable timeline for a scheme to be presented and for a creditors meeting to be called? Is there an influential block of creditors who can veto any Scheme proposed by the debtor? Classification of creditors Everybody thinks they are in a special class! Secured / Employees/ CPF/ Creditors receiving different treatment/ related parties? 22 11

12 Schemes - Issues Material disclosure and transparency Sufficient information necessary to make informed decision Scheme can be set aside Objections to a scheme to record your objections and communicate it clearly to the Company and its advisers ensure that the objections are well founded raise the objections as soon as possible [even if negotiations are ongoing] 23 Schemes - Issues Moratorium against legal action must be applied for not automatic Most contracts now make a compromise or scheme of arrangement an event of default Appointment of special accountant or monitering accountant what scope? Confidence issue once Scheme is announced

13 Cross border issues Cross border issues Schemes have no legal effect overseas although a scheme can be proposed for a foreign company. [Foreign companies cannot apply for judicial management] Ring-fencing tendencies amongst local creditors in each jurisdiction Upstreaming of revenue from overseas subsidiaries stop upon scheme or restructuring being announced Certain foreign countries have strong labour laws union rights/ social issues/ large payouts 26 13

14 Challenges and issues Challenges and Issues 1) Speed and extent of current downturn 2) Lack of visbility of what lies ahead 3) Increased complexity of corporate structures and transactions 4) Deluge of information and documentation 5) Difficulty of valuations (utility of valuations diminished) 6) Revamped Scheme of Arrangement provisions? Chapter 11 style? 28 14

15 Question and Answer THANK YOU For more information, please contact: Lawyer s name: Patrick Ang Tel: patrick.ang@rajahtann.com Website: