Financial Restructuring
Nadyn Saleh
Associate
Al Markaz Law Firm
Financial Distress
Financial distress is the condition where the company’s
liquidation of total assets is less than the total value of
creditor claims.
When a company recognizes that it is in financial
distress, it is vital that it responds immediately by
taking corrective measures to enhance efficiency and
control costs.
Options available to a company in
financial distress
Economic deterioration and financial problems encountered may
eventually threaten the further existence of a company and its
capacity to meet liabilities towards creditors. This inevitably
leads to bankruptcy or forced liquidation
An alternative to bankruptcy or forced liquidation is
restructuring, which is a process of implementing fundamental
changes aimed at improving the firm’s capital structure, thereby
increasing the value of the company for creditors and/or
shareholders, and improving relations with stakeholders.
Corporate Restructuring
Corporate restructuring entails any fundamental change in a company's
business or financial structure, designed to increase the company's value
to shareholders or creditors.
Managerial Restructuring: encompasses changes in the firm’s top
management
Operational Restructuring: aims at improving efficiency, controlling costs
and coping with the changing business environment. This includes
revenue growth strategies, cost-cutting or employee layoff
Asset Restructuring: changes in business configuration through
acquisition and divestitures
Financial Restructuring: changes to the firm’s capital structure
Stakeholders
Government
Shareholders
Local
Community
Management
Company
Creditors
Banks
Suppliers
Unions
Employees
Media
Companies that have undergone
financial restructuring
Ezz Steel (Egypt)
Global Investment House (Kuwait)
Hewlett Packard (HP)
Google
Ezz Steel
In January 2015, Ezz Steel, Egypt's largest steelmaker, entered into a
restructuring arrangement with two major banks, National Bank of Egypt
and Arab African International Bank, to help restructure its debt worth
EGP 1.7 billion ($236 million.
Ezz Steel operates four plants in Egypt and controls more than half the
country's steel market.
Like other heavy industries in Egypt, its profitability had suffered in
recent years from weak exports and a chronic gas shortage as the
Egyptian government diverted supplies toward electricity production
to ease regular blackouts.
Ezz Steel
Restructuring
The company signed a long-term financing agreement
with the two banks that entails repaying the loan in
quarterly installments over seven years starting in 2015.
The deal with National Bank of Egypt and Arab African
International Bank is part of its plan to restructure the
company's credit facilities by repaying some of its existing
debt.
Global Investment House (Kuwait)
Restructuring Method
On December 10th 2009, Global entered into formal restructuring agreements
with all of its financiers to restructure its debt worth $1.7 billion. Under the
plan, Global separated its core fee business from other parts of the company
which were spun off into two special purpose vehicles (SPV).
One holds company assets, along with debt, worth $1.3 billion.
The other took part in a capital increase for the parent company, in which
Global offered 122.2 million Kuwaiti dinars ($429 million) of new shares to
creditors, leaving them owning 70 percent of the investment firm.
The plan was completed in July 2014.
Hewlett Packard
High Technology
Hewlett Packard
Hewlett Packard Co.
HP Inc.
Enterprises
Computers and
Printers
Some Aspects of the Restructuring
The split aimed to provide each new company with the independence, focus, financial
resources and flexibility they need to adapt quickly to market and customer dynamics,
while generating long-term value for shareholders.
Both entities will operate as independent, publicly-traded companies. Each business
contributes about half of HP's revenue and profit.
HP shareholders would own a stake in both businesses through a tax-free transaction
next year.
Restructuring also entailed cutting approximately 30,000 jobs.
Google
Google
Alphabet
Calio
Ads
Search
Fiber
YouTube
Nest
Apps
Life
Sciences
Maps
Ventures
Capital
Google
X
Google
Some aspects of the restructure
Some aspect of Google that typical consumers interact with, such as
Android and Youtube, are staying a part of Google.
Other companies that are not directly related to main internet
products are becoming directly owned by Alphabet
The structure aims to increase transparency and give greater clarity
into how Google invests in various ventures, including driverless cars,
high-speed Internet service and health-related technologies.
All shares of Google will automatically convert into corresponding
shares of Alphabet, which will continue to trade.
Case Study: Kuwaiti Investment
Company Restructuring
Background
OldCo. is a Shariah-compliant Kuwaiti shareholding company founded
in October 1994 that invests in a multiple businesses with diversified
activities.
This entailed OldCo. receiving financing facilities from a number of
creditors of different magnitudes, ranging from individuals to major
financial institutions. As a result of the financial crisis of 2008, OldCo.
was unable to service its debt in accordance with its obligations in the
respective facility agreements.
OldCo. sought to restructure its debt under the Kuwaiti Financial
Stability Law (FSL), which grants a stay of legal proceedings to
companies in financial distress as a means of granting them more
favourable conditions to repay their debts. In 2011, the FSL court
approved OldCo.’s debt restructuring plan
Case Study: Kuwaiti Investment Co.
MANAGEMENT
•
•
•
•
Recognise that investors
want to see near term asset
sales
Management alone lack
ability to deliver asset
monetisations given that
shareholders control the
Company
Currently have the best
knowledge on the asset
base
Lack of incentives to
monetise the asset base
STAKEHOLDERS
CREDITORS
•
•
•
•
•
•
•
Lack of information makes it difficult
to assess options and manage credit
General mistrust of existing
management but recognition that
they have the best current
knowledge of the asset base
Desire to have control to drive their
own destiny but they lack the means
to assert control today
Unwilling to take a haircut on claims
Belief that in investors hands, the
asset portfolio would achieve higher
recoveries
Large investor base may make
achieving unanimous consent very
challenging
SHAREHOLDERS
• Believe if the
Company was given
the right timeframe,
the asset base could
be monetised to
service creditors’
claims and achieve
equity recovery
• Limited incentive to
sell assets
• Desire to have
amortisation relief /
• maturity extension to
maximise option
value on the portfolio
Options available to OldCo. under
Kuwaiti Law
Bankruptcy
In the event that bankruptcy procedures are initiated against
OldCo., a fire sale of assets would likely result in material
investor impairment well below book value, and the recovery
prospects for most creditors would be materially impaired. In
addition, the process is significantly long and may take up to 10
years to complete. The company executives and board of
directors may also be liable for causing (or were in a position of
responsibility) at the time of financial distress.
Options available to OldCo. under
Kuwaiti Law
Liquidation
OldCo. may seek to dissolve the company under Chapter 4 of
the Kuwaiti Company Law. All debt maturity dates are waived
as of the date of announcing the company’s liquidation, and
creditors are notified by way of an official announcement and
invited to file their claims.
However, liquidation proceedings do not come with a stay of
legal proceedings, leaving the company vulnerable to
extensive litigation and the possibility of a bankruptcy claim.
Options available to OldCo. under
Kuwaiti Law
Financial Stability Law
OldCo. may seek to restructure its debt under the Kuwaiti Financial
Stability Law (FSL), which grants a stay of legal proceedings to
companies in financial distress as a means of granting them more
favourable conditions to repay their debts.
Schemes of Arrangement
OldCo. may seek to restructure its debt under schemes of
arrangement (Chapter 4 of the Kuwaiti Commercial Law) which takes
place under the court’s supervision and a schemes supervisor. This
requires the consent of at least 66.7% of debt holders. Upon the
court’s acceptance of the application to schemes of arrangement, a
stay of legal proceedings is put in place.
Case Study: Kuwaiti Investment Co.
OldCo.
(Debtor)
Existing
Claims
Remaining
Assets
Assets
Participating
Creditors
OldCo. Holding
Jersey
Holding
OldCo.
Holding
Investors
Holding
Subsidiary
Project Holding (SPV)
Transferable Assets
Aspects of the Restructuring
Structural Enhancement
Creditors’ claims are transferred to the newly incorporated Project
Holding, with a clearer balance sheet. This alleviates some of the
pressure off OldCo., and provides structural enhancement to
participating creditors.
The Structure aims to carefully balance OldCo, creditors and other
stakeholder objectives fairly. The objectives included:
• Provide a clear path to decision making on assets monetization
• Enable more creditor oversight
• Incentivise deleveraging and monetisation of the portfolio
• Align interests of key stakeholders
• Treat all creditors fairly and equally
Aspects of the Restructuring
Creditor Control
Creditors are given co-management and control rights via board
of directors and creditor committee through the shared board
governance over Project Holding Co.
In an event of default, creditors have a more direct route to
enforce security.
Creditors may also create creditors monitory committee which
gives a higher degree of control (subject to authorities granted)
and strengthens governance, monitoring and transparency.
Aspects of the Restructuring
Improved Asset Monetization Prospects
With greater stakeholder alignment, there would be less
perceived distress around OldCo and there will likely be greater
ability to monetize the asset portfolio.
Restructured claims allows for more flexible conditions to
maximize asset value.
Final words..
Financial restructuring has opened a door to a
spectrum of solutions to companies, not only in
financial distress, but may merely be seeking
growth or the fulfilment of other objectives.