Debt restructuring – an overview

(Conclusion)

There is then a higher moral ground by which lenders should try to fathom, one that goes beyond self-preservation in many respects. And this is the motivation to give a second chance to a company to recover and prove itself, and help other lenders recover too.

If these two principles are understood and accepted by both the borrower and lenders, then the execution should be a straightforward and uncomplicated activity.

VI   The challenges to restructuring (assuming the company is viable)

1) To convincingly bring to and keep in the negotiating table the lender/s who individually has the right, legally and morally, to do anything other than restructure, and to renew their trust, this time collectively, in the borrower who has failed them in many ways.

By and large this is the most intimidating and thorny challenge to someone who proposes to undertake a restructuring. Be it for a lead bank (the bank that comes forward and says I will lead this deal), for a restructuring advisor, or for a consultant hired to execute the restructuring plan, this is the mother of all challenges. This is so because all that the restructuring leaders and advisors will ask of the lenders is TOTALLY COUNTER-INTUITIVE to all their individual rights as a lender. And to make it more difficult, the restructuring proponent will also ask that all of them put their trust again in the borrower who has not only failed to pay them, but maybe also, did not tell them the truth about some important items in the operations, in the revenues, in the profits, etc. This is just like asking your girlfriend to take you back right after she has caught you in flagrante delicto. Be prepared to dodge some bullets or many knives thrown at you.

2) Once everyone is on board, the next challenge is to make everyone understand and accept the 2 principles mentioned in V and  to keep the focus of all the lenders and the borrower throughout the process

Restructuring is a time consuming and labor intensive process. As such it requires a lot of focus, energy and fortitude in getting the job done. In the most complicated deals where it involves a lot of institutions, it would be of help if restructuring advisors are taken in to guide and drive the process, and hopefully conclude it in the minimum amount of time. I have seen restructurings that took more than 2 years to conclude and in these cases, the leadership changed hands several times, friends became foes, enemies became mortal enemies, and foes became friends and collaborated against whomever and the files accumulated so much it could fill a small room. And in the end, everyone recovered only about 10 centavos to a peso.

3) Induce the borrower to tell the truth, if he hasn’t, or more challenging, gauge if he isn’t

This is the trickiest. As mentioned, the lender/s will probably have lost trust in the borrower once a default has occurred. Even if the lead in the restructuring process has managed to somehow renew the trust in the borrower, this trust is at best a shaky one. All means must be employed to impress upon the borrower that he must be thoroughly candid with the lender. After all, the future decisions of the lender/s will depend on the data coming from the borrower; e.g., projections, manufacturing data, ledgers, trial balances, etc. Hence, it is of vital importance that the data provided by the borrower are truthful.

VII  Are there any benefits to restructuring? Or can we just say to heck with it since it’s too  time-consuming , tedious and cumbersome?

1) It will be good for the borrower’s and the lender’s industry and the economy. Liquidations and write offs are not good for any industry and any economy.

Some borrowers deserve a second chance. (Note: some and some only). Some do indeed as long as they are still viable, still cooperative, and candid.

2) A major account that is restructured is a wake up call to the lender/s and their industry.

The lender/s learns to strengthen his systems, policies, and his institution when he goes through a major restructured account. He has to or he will get hit again. The lender’s industry learns to police itself or to close ranks and assist each other in difficult times.

3) Many major accounts in any industry that are restructured are a wake up call to the country

This has happened unfortunately, in several industries and in several countries, often with very painful consequences.

4) By the same  token, other companies in the borrower’s industry will also experience a wake up call

If the account being restructured is an industry leader, then they may have real cause to worry. They may be doing something wrong or they may be doing something right, which can only be proven if they either go into restructuring also or they stay afloat longer than the one who is undergoing the restructuring. Then they need to either revisit or strengthen their own systems, control measures, etc. so that they don’t go into the same path.

VIII What happens after a successful restructuring is done?

• Everybody happy?

Well, maybe not all. Some are bound to lose a little; some are bound to get more than the guy in the next seat. In multi-institutional debt restructuring and especially in cases where the best assets are held by a few lenders and the others are on a clean basis, no matter how hard the leader tries in obtaining parity for each and every lender, there will sometimes be some unhappy lender who feels he did not get the best deal for his institution. In cases like this, it becomes a very arduous task to please all the secured lenders and the unsecured lenders. Ray Davis further said “The best restructurings are the ones where everyone goes away unhappy but still agreed to do the deal”.

Bottom line, restructuring is never easy, never without conflict of some sort and never without pain. This is probably why restructurings are called WORKOUTS. They are tough, they are demanding in terms of discipline, focus and patience, they drain you physically and mentally. But it can be very rewarding and fulfilling to those who persevere.

(Vicente J. Sarza, is a Principal for Business & Financial Advisory Services of  Manabat & Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. This article is for general information only and is not intended to be, nor is it a substitute for, informed professional advice. While due care was exercised to ensure the quality of the information contained in this article, readers should carefully evaluate its accuracy, completeness and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances. For comments or inquiries, please email [email protected] or [email protected]).