Lenders are increasingly changing their approach in dealing with customers facing financial difficulties, with a preference for rescue and value preservation. PHOTO | POOL
Lenders are increasingly changing their approach in dealing with customers facing financial difficulties, with a preference for rescue and value preservation over traditional recovery-focused approaches.
This shift is the result of the realisation by stakeholders that consensus-driven solutions often provide better outcomes for all stakeholders, especially when dealing with viable businesses in distress.
Formal restructuring and insolvency processes still play an important role in dealing with non-performing accounts, especially where the business is not viable.
However, while the formal legal framework for corporate reorganisation will always provide a “backstop” if consensus-driven negotiations fail, decades of experience in insolvency cases tell us that consensus-driven solutions can provide better outcomes for all stakeholders.
Out-of-court workouts (OCWs) in particular, have been gaining traction recently, particularly in the sub-Saharan African region where court-based processes can sometimes be lengthy and unpredictable.
In our experience, certain critical issues need to be considered to give OCWs the best chance of success.
This experience resonates with the INSOL International Statement of Principles for Multi-Lender Workouts published in 2017 and the “London Approach” spearheaded by the Bank of England and other UK lenders in dealing with multi-lender workouts in the United Kingdom in the 1970s.
Firstly, and most critical, steps need to be taken to arrest any value deterioration in the borrower and stabilise the business.
This is challenging as it involves bringing together stakeholders who should ultimately have the same long-run objective but who often take opposing courses of action in the short run to achieve those objectives.
These are actions such as seeking additional working capital funding or entering barter arrangements with creditors or suppliers.
This worsens both the cash flow and the indebtedness of the company and may do so in a way that is hard to track, especially if done off the balance sheet.
Such situations are more easily resolved where a clear “leader” can emerge.
Usually, but not always, this is a creditor with the most “skin in the game” who can be looked upon to take decisive action or a strong leader who can bring together a “committee” of the key lenders by initiating and committing to commonly agreed to milestones and objectives and winning the support of other creditors in executing and enforcing these.
Typically, in these multi-lender situations, it is necessary to enter into a standstill arrangement that effectively freezes the lending positions of all participating creditors on the commencement date and in so doing, allows a starting point to be drawn in the sand for financial analysis and negotiations to take place.
The standstill arrangement would normally involve both the borrower and all participating creditors agreeing on a modus operandi to ensure that value in the business is preserved.
This could include avoiding auctions of business assets to improve a particular creditor’s position or actions by the borrower to adversely affect potential returns to one or more creditors.
The intention of this type of arrangement should be to give the borrower breathing room for a fixed period, during which a restructuring proposal could be formulated.
The other critical consideration is the need to close, or reduce to a minimum, the information asymmetry between lenders and the company and among lenders themselves.
This usually necessitates an independent business review (IBR) to provide a better understanding of the business of the debtor company to be used as a basis for discussions between all parties involved in the restructuring.
When restructuring, a procedure that allows alignment to be reached quicker helps preserve value for all parties involved.
Once a standstill arrangement is in place, the onus is on the lenders to push for a speedy resolution to the situation.
This means rapidly reviewing the viability of the business, assessing its debt-carrying capacity and then identifying what that means for the lenders involved.
Such a review could also determine whether there is any way to quickly improve cash flow.
After putting together a comprehensive restructuring proposal, the next phase may involve negotiations – among lenders themselves, between lenders and the company and sometimes with creditors who are not part of the standstill process but who exercise a strong influence upon the outcome of the restructuring.
For lenders, it is critical to ensure that their organisations are set up to separate distressed cases from “business-as-usual” and accord them a priority for decision-making in these types of situations.
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