24 February 2014
Practice Group(s):
Restructuring &
Insolvency
Opportunities in distressed single-name
investments in Poland
By Lech Giliciński & Grzegorz Rabsztyn
For years now, Poland has been experiencing a vibrant and well functioning market for
NPLs portfolio transactions with a sizeable share of consumer loans and some presence
of SME loans. While this has not been the case of single-names, the situation is likely to
change in the course of 2014 with more Polish banks willing to clean up their balance
sheets at an earlier stage. The Polish market for single-name restructurings is expected
to grow rapidly in 2014. Discounted, but still valuable assets, should be increasingly
available on the Polish market, and may satisfy a growing investment appetite of
investors, including private equity funds and investment banks. The range of available
single-name receivables will vary, but is likely to emerge in the case of companies from
the construction, telecommunication, and retail sectors. In addition to investments in
distressed loans, distressed bonds or other debt instruments, investments in distressed
equity or assets may be considered or associated with investments in distressed loans.
1. Claims Trading
In principle, claims trading in Poland is only restricted by contractual limitations on
assignments that may among other things take the form of required debtor's consent.
Legal regulations governing the protection of banking secrecy also constitute an
impediment to the claims trading, provided that the relevant prohibitions are lifted for the
assignment of claims that are deemed "lost" according to the banking regulations on
mandatory provisioning or the assignment is made to a regulated entity called a
securitization fund that is formed under the Law on Investment Funds. Securitization
funds have been frequently used for NPLs transactions in Poland since 2005 although
such transactions covered almost exclusively portfolios of loans (of mostly consumer, but
also some corporate loans) rather than single-names.
In principle, the assignment of claims also involves the acquisition of any collateral
security rights accompanying the claim. However, for registered pledges, the transfer of a
registered pledge to the assignee requires the re-registration of the relevant pledge in the
pledge registry. In turn, in the case of mortgage loans, the re-registration of a mortgage in
the name of the assignee in the land and mortgage registry is a condition precedent to
not only the acquisition of collateral security, but also for the valid assignment of the
mortgage claim. This is a practical hurdle for trading in mortgage claims as the reregistration may take on average 1-3 months.
2. Debt to equity conversion and discharge of debt
Single-name restructurings are often associated with debt-to-equity swaps. Conversion of
debt into equity of distressed companies can happen in several ways. During prebankruptcy it can be effected upon the adoption of an appropriate corporate resolution on
the increase of the debtor's share capital. Cooperation of the debtor and the debtor's
majority shareholders are obviously required in such circumstances.
Opportunities in distressed single-name investments in Poland
A debt-to-equity swap could also be part of an arrangement among the company's
creditors after the debtor commenced a Chapter 11 style restructuring proceeding called
"postępowanie naprawcze". While the debtor conducts this proceeding out-of-court, it is
subject to supervision of the court-appointed supervisor and the arrangement is subject
to the approval of bankruptcy court. Once the arrangement is approved, the respective
changes to the debtor's ownership structure are made without a need for a separate
resolution of shareholders.
A similar debt-to-equity swap could also be effected as a part of the arrangement in the
course of bankruptcy proceedings with the option of an arrangement ("arrangement
bankruptcy"). Following an affirmative creditors vote, a court decision approving the
arrangement is also required. Such creditors vote and conversion into equity can actually
take much longer that an arrangement reached in "postępowanie naprawcze". On the
other hand, an expedited track for an arrangement bankruptcy and debt-for-equity swap
is also available through a so-called preliminary creditors meeting. Such creditors
meeting may take place within ca. 2 months following the filing of a motion for the
declaration of arrangement bankruptcy. Assuming an affirmative creditors vote, the
bankruptcy court would (subject to certain mandatory conditions) approve the
arrangement and arrangement bankruptcy in one decision.
A debt-for-equity swap is practically not an option in a liquidating bankruptcy. However, a
liquidating bankruptcy can be converted into an arrangement bankruptcy in case the
grounds for conducting the arrangement bankruptcy (which is essentially a better
satisfaction of creditors compared to liquidating bankruptcy) develop in the course of
proceedings.
3. Investments in assets
Single-name restructurings may also consist of investment in assets, in particular in the
course of liquidating bankruptcy. Acquisition of assets from an insolvency administrator in
a liquidating bankruptcy is made free and clear of liabilities and encumbrances (subject to
certain minor exceptions). The framework for such acquisitions is not really efficient timewise due to the fact that they need to be preceded by an appraisal which is often fairly
unrealistic while the bankruptcy court requires that one or more court auctions should be
held where the bidders can only bid at the level of appraisal at a minimum. Only after
those court auctions (often) fail, can the judge-commissioner (or a creditors council
formed in the proceeding) allow the administrator to conduct a free-hand sale with an
asking price that is more realistic.
Such stringent restrictions with respect to setting a minimum price are not present in
arrangement bankruptcy. However, even though a sale of assets to an investor could be
part of the arrangement, there is no clear safe harbor for such a sale allowing it to be run
free and clear of liabilities.
4. Material limitations
The lack of a well-developed "restructuring culture" is arguably a major obstacle to
distressed investing in Poland. This is supported by the fact that less than 25 % of
bankruptcy proceedings in Poland are arrangement bankruptcies and so far there have
been very few successful out-of-court ("postępowanie naprawcze") restructurings. An
attempt to change the current liquidation approach to a more restructuring oriented one is
currently being made in that a special governmental committee has recently proposed a
new bill that contains multiple routes for restructuring. It also seems that the existing
Opportunities in distressed single-name investments in Poland
regulation of pre-packs at the preliminary creditors meeting is fairly efficient and simply
not used by creditors (including distressed investors); bankruptcy judges sometimes
complain about this fact. Finally, it is conceivable that debt-for-equity swaps are effected
in cooperation with the company and/or its shareholders without a resort to court
proceedings.
5. K&L Gates expertise
The Banking, Finance & Restructuring team of K&L Gates Warsaw has broad experience
and unique expertise in single-name restructuring transactions as well as NPLs portfolio.
We advised one of the leading financial institutions on the acquisition of portfolios of
NPLs, which were the largest transactions of their kind in the Polish market. We also
advised in many single-name restructurings, including advising a consortium of banks
financing a transportation company in Poland on the restructuring of its debt amounting
to PLN 1.3 billion and in several distressed private equity transactions, including
investments in distressed assets.
Dr. Lech Giliciński, the head of the Banking, Finance & Restructuring team of K&L Gates
Warsaw and the Coordinator of Restructuring & Insolvency Practice of K&L Gates LLP
has been recommended numerous times by international directories such as Chambers
Global, Chambers Europe, International Financial Law Review 1000, The Expert Guide
to the World’s Leading Insolvency & Restructuring Lawyers, and PLC Which Lawyer?
Authors:
Dr. Lech Giliciński
lech.gilicinski@klgates.com
+48.22.653.4215
Grzegorz Rabsztyn
grzegorz.rabsztyn@klgates.com
+48.22.653.4258
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