Precondition for

Rehabilitation
An international
perspective
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PricewaterhouseCoopers
 Corporate Life Cycle

Maturity

Growth

Decline Transformation
Profit

Start-up Time
Loss

Turnaround

Insolvency

3
 Causes of Corporate Decline

Internal Causes External Causes

z Poor management z Changes in market demand
z Inadequate financial control z Competition
z Poor working capital z Adverse movements in
management
commodity prices
z High costs
z Lack of marketing effort
z Overtrading
z Big projects
z Acquisitions
z Financial policy
z Organisational inertia and
confusion
4
 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 Some action taken but need for action underestimated

organization begins

Organizational Inability to take action

collapse

Recovery Failure

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 General objectives of restructuring

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 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
 Operational and financial
restructuring
z Operational improvements may include
– development of new products and markets,
– cost reduction,
– productivity improvement,
– cash flow improvement

z 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
 Requirements for financial
restructuring

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 Requirements for successful
restructuring
Restructuring proposals need to be:

z Realistic - challenging but not impossibly optimistic

z Attractive compared with the alternatives

z Flexible and adaptable to changing circumstances

z Equitable

10
 Reasons to support rehabilitation

z To reallocate resources from inefficient to efficient uses

z 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

z This is not to say that the law should distort market forces by
featherbedding non-viable businesses

11
 The importance of the legal
framework for rehabilitation
z 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

z 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

z The “London Approach” has proved a successful approach to out-

of-court restructuring, the tenets of which have been applied to
many other jurisdictions

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 The “London Approach”

z A key component of any effective restructuring regime is the

existence of a mechanism to promote agreement among the
creditors.

z The “London Approach” has been applied in other countries with

varying success:
– Bangkok Approach
– Jakarta Initiative
– Seoul Solution
– Czech Republic

13
 Out-of-court restructurings: The
“London Approach”
z ,QIRUPDO code promulgated by Bank of England

z Objective - to bring stability and buy time for rescue for

businesses capable of rehabilitation

z Success relies on XQDQLPLW\ while preserving equity of creditor

rights

z Requires co-operation of management but directors’ liability

issues

z Provides for leadership through biggest creditor

z Debt trading has positive/negative implications

14
 Tenets of the “London Approach”

z To support businesses capable of rehabilitation

z To preserve equity of creditor rights

z To provide for leadership through biggest bank creditor(s)

z Equality of data on:

– diagnosis of problems · DFFRXQWDQWV
– business prospects · DFFRXQWDQWV
– liquidation losses · DFFRXQWDQWV
– legal structures · lawyers

z Builds bridge between borrower and creditors

15
Restructuring in Brazil
 Key issues impacting restructuring
environment in Brazil
z 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

z Laws are unclear, making informed decision-making difficult

z Lack of consistency in courts (quality, time to deliver judgement

etc)

z Lack of trust and collaboration amongst creditors

17
 Key issues impacting restructuring
environment in Brazil
z Quality and reliability of information
– several sets of accounts?
– potential cash leakage issues

z Priority of government and labour claims

z Power of the unions

z Current provisioning rules act as a disincentive to lenders to

support prolonged restructuring

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 Existing law

z Generally regarded as outdated, unnecessarily rigid and not

responsive to the needs of modern business

z Not suited to large companies with hundreds of employees

z 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

z Unrealistic time scales and payment terms

19
Lessons drawn from
experience
 Essential additions

z Need to incentives creditors and debtors to recognise and deal

with the issues

z Means of promoting agreement between debtor and creditors.

z A way of giving super-priority to providers of rescue finance.

z Means of removing uncertainty due to one or more parties using

the courts to delay the process

21
 The Asian parallel

22
 Essential additions

z 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.
23
 Other issues

z Reliable financial and commercial information is a prerequisite for

informed decisions.

z The process should be stakeholder-driven: the involvement of the

courts should be minimal.

z There are inevitable trade-offs and compromises (eg between tax

and labour rights) - the essential is clarity and predictability.

24
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