Business Turnarounds
ICTF International Credit Professionals
Symposium in Europe
Barcelona - 13th May 2014
David Bryan – Bryan, Mansell & Tilley LLP
Content
Background
Bad Debts and Insolvency
Turnarounds & consensual restructuring
Legal developments in Europe
Dealing with turnarounds
Conclusions
Q&A
© 2014 Bryan, Mansell & Tilley LLP
The Decline Curve
Underperformance
Distress
Crisis
Failure
© 2014 Bryan, Mansell & Tilley LLP
The Decline Curve
Underperformance
Distress
Crisis
Zone of Insolvency
Insolvency
Failure
© 2014 Bryan, Mansell & Tilley LLP
Bad Debts
• When it all goes wrong!
• Customer payments take longer and longer
• Eventually unable to pay
• Customer files for insolvency
• You have a bad debt subject to:
• Reclaim of VAT
• Credit insurance if covered
• May get a return from the insolvency process
• Not a good outcome
© 2014 Bryan, Mansell & Tilley LLP
Insolvency
• In principle, similar in most European jurisdictions
• Handled by a liquidator, receiver, administrator,
insolvency practitioner according to jurisdiction
• A statutory process whereby the assets are realised
and distributed to creditors and shareholders in a
prescribed order of priority
• It is a necessary tool to deal with the failings of
capitalism but often produces a poor return for
stakeholders
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Typical Insolvency
Equity – 0%
Unsecured creditors
15%
Value Break
Secured Creditors
100%
Receiver Fees – 100%
Claims on the estate
Enterprise Value
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Why are returns so low?
• Process takes too long and is fee intensive
• Goodwill of business damaged
• Customers lost or potentially lost
• Good employees leave / hired by competitors
• Assets sold on a fire sale basis
• Typically minimal warranties on sale
• Potential difficulties with credit etc post sale and
general stigma
• Unsecured creditors often get a poor return
• Process works but there must be a better alternative
© 2014 Bryan, Mansell & Tilley LLP
The Turnaround
Underperformance
Distress
Crisis
Recovery
Crisis Management
Zone of Insolvency
Insolvency
© 2014 Bryan, Mansell & Tilley LLP
Stabilisation
Evolution of turnaround
• 1979 US bankruptcy code created “debtor in
possession”.
• 1980’s / 90’s saw the rise of turnaround managers
and the role of the Chief Restructuring Officer (CRO)
in the US
• “Company Doctor” arose as a term to distinguish
from those that manage insolvency processes
• Influx of American boutiques and banks has seen
US terminology gradually take hold
© 2014 Bryan, Mansell & Tilley LLP
Evolution of turnaround
• No legal definition of turnaround or CRO in most
jurisdictions
• No formal training procedures until now. Recent
move to replicate US Certified Turnaround
Professional (CTP) with EACTP
• Membership organisations exist such as the
Turnaround Management Association (TMA) with
almost 10,000 members worldwide
• Not every business can be turned round. There are
pre-requisites for a successful turnaround
© 2014 Bryan, Mansell & Tilley LLP
Prerequisites for a successful turnaround
Available short term liquidity
© 2014 Bryan, Mansell & Tilley LLP
Prerequisites for a successful turnaround
Viable core business
Available short term liquidity
© 2014 Bryan, Mansell & Tilley LLP
Prerequisites for a successful turnaround
Credible management team
Viable core business
Available short term liquidity
© 2014 Bryan, Mansell & Tilley LLP
Prerequisites for a successful turnaround
Fundable business plan
Credible management team
Viable core business
Available short term liquidity
© 2014 Bryan, Mansell & Tilley LLP
Elements of a turnaround
Operational:
• Cash flow management and
improvement
• Cost reduction
• Revenue improvement
• Product / Service portfolio
changes
• Closure or sale of non-core
businesses
• Management changes
• Dealing with unions,
landlords, pensions etc
• What should the business
look like?
© 2014 Bryan, Mansell & Tilley LLP
Elements of a turnaround
Operational:
Financial:
• Cash flow management and
improvement
• Cost reduction
• Revenue improvement
• Product / Service portfolio
changes
• Closure or sale of non-core
businesses
• Management changes
• Dealing with unions,
landlords, pensions etc
• What should the business
look like?
• Business valuation &
liquidation outcome
• Re-financing / new debt
• Debt / Equity swaps to reduce
debt (existing equity diluted)
• Debt forgiveness (“Hair Cuts”)
• New equity injection
• Compromise agreements with
trade creditors (payment
plans, possible hair cuts etc)
• What capital structure does
the business need and can
support?
© 2014 Bryan, Mansell & Tilley LLP
Consensual Financial Restructuring
Consensual Restructuring – Simple Example
Equity
Trade
Lenders
Restructuring Costs
Claims on the estate
Enterprise Value
© 2014 Bryan, Mansell & Tilley LLP
Consensual Financial Restructuring
Consensual Restructuring – Higher Enterprise Value
Equity
Trade
Lenders
Restructuring Costs
Claims on the estate
Enterprise Value
© 2014 Bryan, Mansell & Tilley LLP
Consensual Financial Restructuring
Consensual Restructuring – Debt Equity Swap example
Old Equity
New Equity - Lenders
Trade
Lenders
Restructuring Costs
Claims on the estate
Enterprise Value
© 2014 Bryan, Mansell & Tilley LLP
Turnaround vs Insolvency
• Business value is enhanced
• Process is normally quicker
• Operational + Financial turnaround should leave the
business able to not just survive but thrive
• Avoids a potential “Chapter 22”
• The ultimate objective is to preserve value for all
stakeholders
© 2014 Bryan, Mansell & Tilley LLP
Turnaround – Legal Status
• Originated with Chapter 11 protection in the USA
• For many years no statutory protection in any
European jurisdiction
• Always a risk that any one creditor could take action
and effectively cause the turnaround to collapse
• Practitioners became very adept at persuading
creditors of the merits of the approach and avoiding
problems but often like herding cats
• Recently the law has started to change to provide
protected pre-insolvency procedures
© 2014 Bryan, Mansell & Tilley LLP
Changing Laws
• Many countries have updated their insolvency laws
in the last few years
• Some have changed their laws to introduce some
form of pre-insolvency process, eg:
• France – Mandate ad hoc / Conciliation /
Sauveguard
• Italy – Concordata Preventivo / Article 182 bis
• Recent EU proposal in March 2014 to formalise preinsolvency process across Europe
© 2014 Bryan, Mansell & Tilley LLP
EU Proposal
• Notes that 200,000 businesses become insolvent in
the EU every year
• Notes that “insolvency frameworks in many EU
countries currently channel viable enterprises in
financial difficulties towards liquidation rather than
restructuring”
• Suggests that honest entrepreneurs need to be
allowed to learn and try again
• Recommends member states put in place measures
within one year to effect five aims
© 2014 Bryan, Mansell & Tilley LLP
EU Proposal – Five Aims
1. Facilitate restructuring at early stage before
insolvency without lengthy or costly procedures
2. Allow debtors to restructure without need to
formally open court procedures
3. Allow businesses to request a temporary stay of up
to four months (extendable) to restructure before
creditors can launch enforcement proceedings
4. Facilitate the process for restructuring keeping in
mind the interests of debtors and creditors
5. Reduce negative effects of bankruptcy in particular
by discharging debts within three years
© 2014 Bryan, Mansell & Tilley LLP
EU Proposal
• Will it be adopted? How long will it take?
• The trend towards turnaround is there, seen in
practice and increasingly in law
• What does it mean for the credit management
industry and you?
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Implications for Credit Managers
• Recognise it is a negotiation and you get what you
negotiate
• Trade creditors normally numerous and don’t act
together
• Typically the 80/20 rule applies
• Likely to see trade creditors getting together with a
committee run by the larger creditors and the smaller
just tagging along
• Where substantial amounts at stake committee will
appoint advisers and share cost and among all
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Implications for Credit Managers
• Much more engagement between creditors and the
debtor
• Understand big picture. Why has this happened?
How does the whole restructuring work? Why is it
better than insolvency? Who is taking the pain?
• Are unsecured creditors being treated equally and
fairly?
• Can a better deal be negotiated?
• Need to understand the detail or have advisers do
so on the creditors behalf
© 2014 Bryan, Mansell & Tilley LLP
Implications for Credit Managers
• Are the issues that got the debtor into trouble being
addressed? Don’t want a “Chapter 22”
• How much headroom is there in the plan going
forward? Is there sufficient margin for missing the
plan before payments to creditors are at risk?
• Can payments be accelerated if performance is
better than plan? Make it a condition?
• Are adequate safeguards in place to prevent excess
bonuses, dividends, capex, management fees etc?
• Will credit insurance be available?
• Negotiate to get the best deal!
© 2014 Bryan, Mansell & Tilley LLP
Conclusion
• Businesses get into distress more rapidly than
management ever expects
• If the requirements for a successful turnaround can be
met, a live business is worth more than a dead one
• Consensual restructurings will become more common
and legal changes will likely support that
• Trade creditors will need to work together and engage
with the debtor
• Understand the big picture and the detail, take advice
and negotiate the best deal possible
© 2014 Bryan, Mansell & Tilley LLP
Questions please