New European restructuring Deloitte’s sale of its Reforms to European tools will boost mid-market UK restructuring insolvency laws needed for distressed deals arm is back on 1.4 trillion euro NPL boom Germany: Page 8 Firms in the News: Page 5 Analysis: Page 6 GL BALTURNAROUND The international magazine for company rescue and insolvency specialists November 2020 I issue 250 ISSN 1743-1751 Spiralling D&O costs threaten contents 1-2 Spiralling D&O costs threaten turnaround industry turnaround 2 Letter from the Editor 3 News: Norwegian Air enters Irish Examinership 4 Firms in the News: Vikas Papriwal joins FTI to lead Middle East restructuring industry practice; Ian Williams becomes consultant to Ritchie Brothers; The cost of directors and officers (D&O) liability insurance has more Paul Hoffman joins BCLP in Chicago than doubled in the second quarter of this year in the US and UK, 5 Perella Weinberg to list via Spac; while the same cover for boards of distressed companies has risen Deloitte’s sale of its UK restructuring arm is back on; Philip Taylor joins by over five times in some instances – threatening the very idea Alston & Bird; Ian Benjamin leaves of corporates bringing in turnaround managers. BCLP for Stephenson Harwood 6 Analysis: Reforms to European aurice Moses, a UK-based independent turnaround professionals from being appointed, insolvency laws needed for 1.4 trillion director specialising in distressed just at the moment when the economy needs euro NPL boom Msituations who recently retired from EY, them most,” said Moses. 7 European NPL market recovers after said he was worried that not enough attention “Some premiums this year have risen to March ‘standstill’; Private credit to the was being paid to spiralling D&O costs. five or six per cent of the cover you want. So rescue! BlackRock tips alternative “I’ve heard instances of premiums for D&O the premium for UK£10 million of cover would lenders to power restructuring boom liability cover increasing by over 5 times this year cost you UK£0.5 million. Distressed companies 8 Germany: New European restructuring for boards, including those with independent often simply can’t afford to pay that kind of tools will boost mid-market distressed directors, in the distressed space,” said Moses. sum,” he said. deals; Let’s embrace the German Average costs of D&O premiums were “In the unfortunate event of a claim, this will Restructuring Framework! already on an upward path generally because usually occur sometime after the event giving 9 How will all these new European of an increase in class action litigation, especially rise to the claim, probably after the director has restructuring systems fit together?; involving securities matters. Moses observed: vacated the role, which makes ensuring run-off Will the Dutch Scheme beat the German cover is in place really important,” said Moses. Framework?’ Germany’s Restructuring Framework ‘no use for auto industry’ “It seems to be exacerbated “Typical premiums being 10 German trade unionists launch because of the Covid-19 6 billion euro vulture fund; crisis. As far as cover for quoted are 200 per cent German auto insolvencies pick up troubled companies goes, of the annual premium.” 11 President Bill Clinton calls for another the insurers are running round of ‘significant’ Covid-19 aid; Moses added that if the market is not delivering, The London restructuring market braces for the hills.” then maybe the profession can create an itself for Brexit; At least half of EU states will not hit Preventive Restructuring insurance captive which provides the cover at a deadline; Covid-19 crisis: an opportunity ‘’This unlikely issue could be a threat to the reasonable cost. Such an approach has worked for significant reform? successful restructuring of many companies for providing cover for insolvency practitioners if the prohibitive cost of cover stops the in the UK, he said. 12 Analysis: UK pre-packs get new controls appointment of independent directors and continued on page 2 News

continued from page 1

Howard Morris, head of restructuring and insolvency at Morrison & Foerster in London, commented: “Rapidly rising D&O liability premiums have become a big problem in the UK this year. Letter from “We’ve seen it in workouts where companies want to bring on to their the Editor boards directors with restructuring and turnaround expertise. “Lenders and other stakeholders welcome this approach, and the plan is to rescue the enterprise without having to resort to a formal insolvency procedure that can further erode value. hile a combination of record low interest rates, “These specialist directors are a million miles from rash risk-takers, Wcontinued quantitative easing and government and yet the premiums for their D&O cover has inflated to levels not seen support for businesses has prevented a boom in insolvencies before,“ said Morris. and restructurings in this year of Covid-19, you can’t help “And our experience is exactly mirrored for similar situations in the USA. hear the clock ticking. It makes it untenable for independent directors to come in to work out The flip side of that is the frenzied preparation restructuring companies in distress.” and insolvency professionals and their firms are making to be “I don’t understand how the insurance industry is coming to this pricing,” prepared for an anticipated uptick in work, which some pencil said Morris. in for the second quarter of next year. “This is a serious threat to the turnaround industry. The proposed sale of Deloitte’s UK restructuring and “How can turnaround specialists help to rescue or work out troubled insolvency unit led by Dan Butters is now firmly back on, with companies if their D&O insurance is too expensive for those companies to senior members pushing for a form of private equity-backed afford? Distressed companies are, by definition, short of cash.” management buyout. KPMG meanwhile appears to be edging towards a trade sale Average premiums double of its own UK unit to a firm like Duff & Phelps – one with deep pockets and as-yet unfulfilled European ambitions. None of the Even looking at healthy companies as well as distressed, the Covid-19 crisis parties in this saga is commenting, as we get closer to deal time. appears to have turbocharged premium prices for D&O cover. Average Meanwhile the various European jurisdictions jostle for costs of premiums in the US rose nearly 60 per cent according to insurance position in a post-Brexit world, with Amsterdam leading the brokerage Marsh, and 74 per cent according to Aon. charge for cross-border restructuring work previously headed Meanwhile in the UK most prices have doubled, according to Marsh. for London. This general increase was caused by a rise in class actions and increased This is where the EU’s call for member states to enact their settlements, as boards were targeted over issues such as cyber breaches or own out-of-court restructuring mechanism’s comes in (see alleged failures in corporate culture. This effect was boosted by the Covid-19 pages 8-11). The idea is that Europe will finally be able to crisis, and in the US coincided with a rise in Chapter 11 bankruptcies this year. see off competition from England’s Scheme of Arrangement D&O policies are traditionally designed to apply if directors and officers and America’s Chapter 11. EU Directive (EU) 2019/1023 on are sued in bankruptcy. Recently, however, insurance carriers have sought to preventive restructuring needs to be transposed into national impose bankruptcy exclusions when policies are renewed, and companies in laws by July 2021. financial distress may not have options other than to accept the exceptions. It’s a tight timetable, considering everyone has the Covid-19 Industry analysts expect D&O premiums generally to continue increasing crisis to deal with at the same time. this year. For distressed companies, meanwhile, the threat is that they will be A clear East-West split has opened up. Most western driven out of the market completely, ending the ability to appoint specialist jurisdictions, led by The Netherlands, are on track to have their turnaround managers as directors. ‘schemes’ in force by the New Year. Most Eastern European This has prompted a search for new solutions to directors’ liability, possibly countries are now expected to request a year-long extension for using an insurance captive or some form of mutual fund. enactment of their own ‘super schemes’ (see page 11). Meanwhile some intriguing new factors have emerged in the A search for new solutions in Australia race for cross-border restructuring work post-Brexit. Irish lawyers A client note this month by two lawyers at Clayton Utz in Australia, Fred make the excellent point that US stakeholders may feel more Hawke and Lucy Terracall, indicates similar problems are being seen in that comfortable with ‘going to Dublin’ simply because they share a country, prompting a search for new solutions. Common Law tradition. The Clayton Utz duo engaged with clients, insurers and insurance brokers However good the Dutch Scheme or German Framework may to discuss “left-field solutions” to “the D&O dilemma.” be in theory, in practice a New York-based PE fund will see them The lawyers observed that the upward pressure on D&O premiums was as rooted in a thoroughly alien Civil Law tradition. being driven by insurance companies trying “to replenish the premium pool.” Also the Irish Scheme of Arrangement is very similar to its They noted that part of the Australian Government’s package of measures English antecedent, they add, so there’s not much new stuff to tackle the Covid-19 crisis included temporary relief for directors from to learn. potential personal liability for insolvent trading. We shall see. There’s still plenty to play for. Hawke and Terracall said: “There is an expectation that once these measures are lifted there may be an onslaught of voluntary administrations, many of which will proceed to insolvency. “This in turn will provoke attempts by investors to find grounds for claims against directors, along with any other relevantly insured protagonists, to try to recover debts or lost investments,” said the Clayton Utz duo. Therefore it was unlikely D&O premiums would reduce in this area. Telephone: + 44 (0)1225 421 273 This D&O problem appears to be widespread around the world and Website: www.globalturnaround.com Email: [email protected] getting rapidly worse. Turnaround managers must be hoping that solutions Editors Mobile: + 44 (0) 7710 394476 start appearing soon.

2 www.globalturnaround.com I November 2020 News Norwegian Air enters Irish Examinership Six Norwegian Air companies entered Irish Examinership in Dublin on 18 November to tackle US$7.4 billion of debt just six months after using an emergency Norwegian restructuring law to execute a US$1.2 billion debt/equity swap.

he Dublin filing came after the Norwegian initial five months in which to shed debt, sell only, with six of its 140 aircraft flying. It has airline Government rejected the latest request for assets and seek fresh capital. In the event the subsidiaries in Sweden and the UK, which are Taid from the national flag carrier, and as at mechanism works, the Norwegian that emerges continuing to trade normally. It recently offloaded least two creditors of Irish subsidiaries threatened will probably be a much smaller, leaner airline an Argentinian subsidiary. legal action. The background to the company’s focused on Norway and Scandinavia. troubles is of course the Covid-19 crisis, which is The company said in a statement on Dublin restructuring forecast to push the majority of airlines around the 18 November: “Based on Norwegian’s current market is busy world into some form of insolvency. cash position and the projections going forward, It has been a busy couple of weeks for Wallace The restructuring includes the airline’s top the company believes it has sufficient liquidity and the Dublin market. Earlier in November he company, Norwegian Air Shuttle, as well as to go through the above-mentioned process.” was appointed receiver over certain assets of Norwegian Air International, Arctic Aviation Assets Geir Karlsen, the company’s CFO, said it Development Securities Properties Donnybrook DAC and three other leasing platforms. would meet with creditors and discuss how Limited and Spectre (Ballymoss House) Limited. “Norwegian has chosen an Irish process since to reconstruct the debt and fleet so that Wallace was appointed at the request of its aircraft assets are held in Ireland,” the company Norwegian comes out of the process in a Quadrant Real Estate Advisors, a US property said in a statement. stronger position. The company’s creditors are lender. The filing represents a boost for the Dublin a mix of leasing firms and banks. Interestingly, the Irish restructuring and restructuring market on the back of Nordic “We have had a good dialogue with all the insolvency units of both KPMG and Deloitte are Aviation earlier in the summer. It also comes at a big creditors since Covid-19 broke out, I don’t not included in the current sales talks for their UK time of uncertainty over London’s role as a cross- think this will be a very big surprise,” Karlsen said. counterparts (see page 5), and will instead remain border restructuring hub following Brexit, with “We are optimistic that we will get through this within their Big Four parents whatever happens to both recognition under the European Insolvency and come up with a good solution.” their London-based counterparts. Regulation and under the Brussels Regulation for He said the airline still plans to have both As such the Dublin-based units might expect ordinary commercial judgments set to fall away. short-haul and long-haul service. referrals both from the newly independent units Norwegian has scaled back its schedules as well as the remaining Big Four audit practices, Kieran Wallace appointed drastically and is now serving domestic routes an intriguing prospect. Interim Examiner Kieran Wallace of KPMG was appointed Gategroup agrees restructuring Interim Examiner of Norweigen by Mr with US$550 million of new money Justice Michael Quinn. Wallace is likely to be wiss airline caterer Gategroup based company said. confirmed as Examiner (previously Gate Gourmet) has reached Before the Covid-19 crisis hit, the group when the parties San agreement with its owners and was serving more than 700 million passengers return to court for the creditors to a restructuring to deal with the annually from over 200 operating units in over Kieran Wallace, KPMG petition hearing set Covid-19-inspired collapse in demand. 60 countries across all continents. for 7 December. The deal provides US$550 million in new Just two years ago Gategroup made The company is represented by Tony O’Grady, funding from Singapore state fund Temasek and US$5.3 billion in revenues generated by who leads Matheson’s restructuring practice, Asian investment firm RRJ, including US$28 million approximately 43,000 employees worldwide. together with litigation partner Brendan Colgan. in equity and a US$523 million subordinated, Gategroup is being represented by Allen & For UK issues the company is also using convertible loan. Overy and financial adviser is Moelis. Hogan Lovells, led by Joe Bannister. The company Another US$220 million is coming from a The company’s banks are being advised has engaged a financial adviser, aviation specialist senior secured interim liquidity facility extended by FTI, led by London restructuring partner Seabury Capital, led by Alexis Fekete, who is by the shareholders, repayable upon completion Duncan Turner. Turner was one of a trio based in London. of the transaction or at the latest six months of high profile restructuring partners from The Interim Examiner is represented by William after issuance. The deal also includes extension PricewaterhouseCoopers who moved to the Fry, led by restructuring partners Fergus Doorly of the maturity of the group’s syndicated loan boutique, the two others being Diederick van and Ruairi Rynn. Deloitte put together the expert’s facilities to October 2026, as well as certain other der Plas and Nick Carmichael. report to enable the Examinership application, led amendments. The bonds are being advised by Perella by head of restructuring in Ireland, Ken Fennell. On 13 November Gategroup Holding AG Weinberg. Coincidentally, Perella Weinberg has issued a statement saying “its shareholders, just announced its intention to list via a Spac Five months to restructure RRJ Capital and Temasek, and all bank lenders (see page 5). Norwegian Air is famous for having reinvented providing syndicated loans to the group have In April 2019 RRJ Capital became sole trans-Atlantic budget air travel, being the biggest reached an agreement in principle, under a shareholder of Gategroup, acquiring all the non-US carrier serving New York, as well as binding term sheet, to support a comprehensive shares from HNA Group. Temasek remained Europe’s third-largest low-cost airline. restructuring of the group’s financial indebtedness. invested in Gategroup through a mandatory The Irish Examinership process, which blends “The proposed transaction will provide the exchangeable bond. elements of the US Chapter 11 and the English group with significant new liquidity to address White & Case is the long-term legal adviser Scheme of Arrangement, will give the airline an short and medium-term needs and will help to RRJ Capital. establish a stable capital structure,” the Zurich- www.globalturnaround.com I November 2020 3 Firms in the News Vikas Papriwal joins FTI to lead Middle East restructuring practice

TI Consulting has hired Vikas Papriwal, GEMS International and Drydocks Dubai. US$10 billion debt. Fformerly head of KPMG’s restructuring Simon Granger, Vikas Papriwal, FTI Consulting practice in the United Arab Emirates, to FTI’s head of corp- lead its Middle East corporate finance and During this period Papriwal orate finance and restructuring in EMEA, said: restructuring segment in Dubai. served on the Board of Dubai “We have been keen to build our team in the Papriwal joined the Big Four world in 1993. World, one of the largest Middle East for some time. Vikas [Papriwal] has After spending eleven years at Arthur Andersen government-related entities worked on big ticket restructurings and is well and EY, he joined KPMG as a partner. connected with local governments, entities, During his time in the UK, Papriwal advised in the Middle East, as lenders’ banks and people. on some of the largest leveraged buyout representative and advised the “We hope to strengthen our presence in the transactions in Europe, including Casema-Essent lenders on the US$25 billion market in the Middle East, where we see plenty Kablecom and Multikabel, Danish, Belgium, and debt restructuring. of prospects for activity,” said Granger. Swedish Posts, Com Hem, and UPC Sweden. “Vikas brings with him extensive strategic He relocated to the UAE in 2014, and most and leadership acumen and an extensive recently served as KPMG’s head of advisory He has also helped a group of unsecured lenders network at what is an exciting time of growth for the Lower Gulf region. Notable projects to a large UAE-based government-related for our corporate finance and restructuring he worked on include advising on the sales of entity on a consensual restructuring of its practice.”

Ian Williams becomes consultant Paul Hoffman joins to Ritchie Brothers BCLP in Chicago

K-based restructuring professional Ian Williams is well- aul Hoffman, a finance lawyer who UWilliams has become a consultant to known to many Phandles the full gamut of lending Ritchie Brothers (RBA), one of the world’s readers of Global work as well as advising lenders on biggest auctioneers of heavy equipment, Turnaround as the restructurings, has joined BCLP in as it seeks to expand its appeal to main organiser of Chicago from Vedder Price. insolvency and restructuring professionals the ABI’s annual Hoffman was in Europe. International formerly assistant Williams set up his own consultancy WCI Insolvency general counsel when he left RSM last year, and he will continue Symposium, the at cycling and his restructuring work alongside his new sixteenth of which Ian Williams fitness equip-ment role with RBA. RBA was launched sixty years was held online this maker Roadmaster ago in Canada and now has a market cap of year on 18-20 November (see page 11). Industries. US$3.5 billion. Williams added that RBA has sophisticated Jim McAlpin, In 2019, RBA sold US$5.1 billion of heavy support services and 2,200 staff and is keen Paul Hoffman, BCLP global leader of earth-moving equipment and the like through to hear from insolvency and restructuring BCLP’s banking its auction sites, its online auctions and multiple professionals who have equipment to sell. group, commented: “We work with sales platforms around the world. RBA also has valuation services that can banking clients around the world, and Last year, RBA received nearly 10 million bids handle other types of assets through its global Paul’s background and experience will be on assets and 24 million searches on their App. network of subcontractors. a huge benefit to our team and clients.” Williams said: “RBA has made the strategic Christian Sonneville, RBA’s Netherlands- “His experience with complex banking decision to get involved in the restructuring and based Strategic Accounts Manager Europe, issues makes him an excellent addition to insolvency market in the UK and Europe and said: “We’re glad to have Ian on board to help our team and will provide added depth for has asked me to assist them in this endeavour. us to get the message out to IPs, restructuring our clients firmwide,” said McAlpin. professionals and finance companies that we can BCLP’s global restructuring practice is “I’m looking to connect add a layer of value for assets through our live led by Brian Walsh in St. Louis/Atlanta, with insolvency practitioners and online products. Our international clientele where he focuses on representing is the game-changer in terms of realisations. lenders, workout bankers and real estate (IPs) and restructuring financiers. professionals as the RBA “We’re looking forward The EMEA side of the restructuring offering is blue chip and to working with Ian and practice is led by Ben Jones in London. BCLP’s restructuring practice also has offers access for placed gaining access to his UK and a strong presence in Germany, led by Till equipment to buyers in 160 international contacts so that Buschmann in Frankfurt, who advises funds countries, maximising value they can take advantage of like Centerbridge and Oaktree, as well as and validating the process.” our services,” said Sonneville. corporates.

4 www.globalturnaround.com I November 2020 Firms in the News

Perella Weinberg to list via Spac Phillip Taylor joins Alston & Bird

erella Weinberg Partners (PWP), a boutique investment estructuring partner Phillip Taylor has left Sidley Austin in London Pbank which has become increasingly influential in Rafter 21 years there to join Alston & Bird. restructuring work in the US and Europe, is in talks to take its Taylor joined Sidley as a trainee in 1999 and was deputy to Patrick Corr, advisory business public using a special purpose acquisition who himself left for Faegre Drinker’s London office earlier this year. vehicle (Spac) and valuing the business at US$1 billion. Alston & Bird’s global restructuring practice is led by Gerard Catalanello, The firm’s asset management business will remain independent. based in New York. Catalanello focuses on bankruptcy and creditors’ rights Spacs have grown popular in recent years as a way of companies law. He represents lenders, funds, financial institutions, liquidation trusts, to go public without the costs and unpredictability of an IPO. The equity holders, debtors, indenture trustees, and acquirers of assets of identity of the company PWP will merge with has not been divulged. troubled companies in formal bankruptcy proceedings as well as in out-of- PWP was launched in 2006 by veteran rainmakers Joseph Perella court workouts. and Peter Weinberg, and is hoping to list as early as the first quarter For instance, Catalanello, Jim Vincequerra, and Geoff Williams have of 2021. The firm would be following other boutiques including recently represented Qatar Airways in a US$1.15 billion debtor-in-possession Evercore, Greenhill, Lazard and, most recently, Moelis in going public. financing plan for LATAM Airlines. PWP’s restructuring unit is led by is Bruce Mendelsohn, who is based in New York and who joined the firm four years ago from Goldman Sachs, where he had been head of the Americas restructuring group. Ian Benjamin leaves BCLP In 2019 PWP made key hires in London to build out its European for Stephenson Harwood restructuring team. These included Clinton Ray and Guy Morgan from Goldman Sachs and Romain Lanier from PJT Partners. Ray previously led Goldman’s restructuring business in Europe, the Middle an Benjamin has joined Stephenson Harwood in London as a East and Africa for about three years. Ipartner in the restructuring and insolvency practice, after nearly The New York office includes Kevin Cofsky, another leading seventeen years with BCLP and previously its legacy firm Berwin restructuring partner, who joined from Evercore in 2007, and Mike Leighton Paisner. Genereux, who joined from PJT this April. Benjamin, who specialises in non-contentious insolvency work, Spacs have become one of the hottest products on Wall Street originally trained with Dechert in 2001-3. He has experience in this year, with a record US$55 billion raised. The vehicles use retail, hospitality & leisure, real estate, financial services, automotive money raised on the stock market to hunt for private companies to and healthcare. take public.

Deloitte’s sale of its UK restructuring arm is back on Deloitte restructuring and insolvency (R&I) staff in the UK were informed on Friday 6 November that the Big Four’s global partnership has given the green light for a sale, reversing an earlier apparent veto of a sales process.

eloitte’s 30 UK (R&I) restructuring partners burst into the media on 22 October. A PE-funded This follows widespread perceptions of conflict Dand 350 staff are led by Dan Butters, and deal was the favourite theory, but now it appears of interest and a series of high profile corporate are understood to be pressing hard for a form a trade sale of its UK-based practice is more likely. scandals, such as the collapse of one of the UK’s of PE-financed management buyout. A trade KPMG’s UK practice has 22 partners and 475 biggest outsourcing companies, Carillion. sale to another firm has not been ruled out, staff, making revenue of around UK£100 million In October, the Big Four auditors had to however. a year. submit plans to the UK’s Financial Reporting Separately, it has emerged that KPMG’s Both units would be selling into a period Council (FRC) demonstrating how they intended UK-based restructuring and insolvency practice, when formal insolvencies in Europe are forecast to ‘operationally separate’ their audit and which is also up for sale, is now more likely to to boom, due to the Covid-19 crisis and the consulting arms by 2025. be sold to another firm such as Ankura or Duff inevitable winding down of government support Meanwhile the flow of senior restructuring & Phelps rather than to a Private Equity (PE) firm, for businesses. professionals from the Big Four in the UK to as originally anticipated. This may make them attractive to a financial independent firms continues. Deloitte, KPMG, Ankura and Duff & Phelps backer, with one proviso: what is your exit? The head of Deloitte’s alternative capital team declined to comment. Once the immediate economic fallout from the in London, Floris Hovingh, has resigned to join In September there was confusion when news Covid-19 crisis has been cleaned up - which may Alvarez & Marsal (A&M). He follows a number of emerged that Deloitte’s UK unit was up for sale, take several years – what price would a PE firm other Deloitte restructuring professionals based only for the global partnership to announce that get for a big R&I practice in the UK? in the UK heading to A&M recently, including it was not. Michael Magnay, Dario Bortot, Christian Ebner It appears early sales discussions leaked to the Huge pressure from regulators and James Dervin. media. Now the search for a deal is definitely The Big Four accountancy firms are under huge Hovingh was head of the Big Four firm’s back on. pressure from UK regulators and legislators to alternative capital unit and sat within the debt As for KPMG, news of the proposed sale of separate their audit from non-audit operations advisory team, which works closely with the firm’s the UK restructuring unit led by Blair Nimmo over the next four years. restructuring business.

www.globalturnaround.com I November 2020 5 Analysis Reforms to European insolvency laws needed for 1.4 trillion euro NPL boom

The European Commission (EC) is set to call for reforms to insolvency and debt-recovery frameworks next month in order to deal with a “severe but plausible” scenario where non-performing loans (NPLs) at eurozone banks reach 1.4 trillion euro.

hese will also include measures to further would like to service it, what would be their idea, a “pre-liquidation tool” allowing her agency develop secondary markets for NPLs. how would they deal with it.” to intervene earlier in a crisis to save the good T There is also a lively debate going on She added that in the current crisis there was part of a bank, preventing needless destruction at the moment over whether to launch a pan- still a market for bad real estate and corporate of value. European asset management company or ‘bad loans. The SRB and the broader system it oversees bank’ to handle this surge in NPLs, or a network When it comes to loans to small and medium- has been fully up and running since 2016, of such companies. sized enterprises and retail customers, these are and in that time has handled one bank failure: The European Central Bank (ECB) has floated traditionally “professionally managed by a bank Spain’s Banco Popular. such an idea. as an ongoing relationship”. It would enable a bad bank to access funding One ongoing problem, she at ECB rates, as well as achieving economies of König warned that while scale. The bad bank could then go to market in said, was that the conditions a co-ordinated and large-scale way. NPLs are about to surge, attached to banks put However Elke König, chair of the Single the agency is still working through national insolvency Resolution Board (SRB), the EU’s agency with an incomplete system proceedings differed responsible for winding down failing lenders, of EU bank-crisis rules has rejected such an approach for the moment. from those attached to which must operate over interventions by her agency. One big objection to a a patchwork of different pan-European approach national arrangements. This issue flared up in 2017 when two regional Italian banks received state aid as part of is that national insolvency bankruptcy proceedings while their senior König said it was too soon to know how bad regimes clash. creditors were shielded from losses. the situation with NPLs would get, because This prompted complaints at the time from this would depend on the nature of the It might be better therefore to tackle NPLs on a Berlin and some other capitals that the measures downturn and recovery. Current actions by national level. amounted to a loophole allowing nervous governments, such as state guarantee schemes, König is against a European bad bank. She governments to get around the principle adopted were “shielding” the lenders, she added. told journalists this month that banks doing by the EU in the wake of the financial crisis that But she said that non-performing loans could their “homework” was the easier way forward. investors, including senior creditors, should face start coming through in the first and second “The entire debate . . . always lacks one losses before the taxpayer. quarters of next year. In light of this, her message component: who is footing the bill,” she said. König underlined the extensive work that has to banks was “be aware NPLs are coming and the König added that “it feels sometimes as if been done since the dark days of the eurozone best thing to do is address them early . . . That is this is the magic system,” one where losses are crisis to strengthen the resilience of banks, and the best thing we can do for the time being, and supposed to evaporate, something “that is not to ensure that they can be safely wound down then it is steering through the fog.” going to happen”. if they fail. Banks need to “get the full transparency” of these portfolios, she said. “They need to be able A new pre-liquidation tool This work has included to separate a portfolio and to set out how they One step she has called for is the creation of making sure money can be raised by wiping out European NPLs by country bank bondholders, so

35.2 EU/EEA Non performing loans shielding taxpayers from 2.7% footing the bill.

19.3 She noted that one of the tools available to her 18.2 agency was an “asset separation” power to strip bad loans out of broken banks’ balance 7.6 6.7 sheets. 5.4 4.9 4.9 4.7 3.8 3.3 3.3 3.2 3.2 2.6 2.5 2.5 2.3 2.0 1.8 1.8 1.5 1.4 1.3 1.3 1.3 But she emphasised that the EU system 0.5 Non performing loans (%) for handling failing banks was still a work in GR CY BG PT IT HU LT RO PL SI IE LV ES MT IS FR EE AT NL BE DK LU FI UK DE NO SE progress. Source: European Monetary Authority (EMA) The European Commission is set to review the bank resolution system next year.

6 www.globalturnaround.com I November 2020 Analysis

European NPL market recovers after March ‘standstill’

he European market for non-performing loans (NPLs) came performance data and provisions needed to facilitate market activity. to a standstill in March due to the Covid-19 crisis, but deal “Governments all over Europe have supplied liquidity to small Tflow has restarted, albeit at a lower level (see Table 1). businesses,” he observed. For instance, in Germany the State-controlled Greece, Portugal and Spain have led the recovery in activity, according KFW bank guaranteed 100 per cent of small business loans. Support to Ajay Rawal of EY, who participated in a recent presentation with schemes existed in France, Switzerland and the UK, he said, often SmithNovak, an NPL consultancy (see Table 2). involving loans. “The European NPL market has been pretty busy since September,” “One big question is, who will collect the debt?” said Rawal. “There said Rawal, EY’s global banking and capital markets restructuring leader, is a lively debate on this subject.” who is based in London. Should it be the bank? The Government? Should collection be Unlevered internal rates of return (IRR) had fallen to 6-7 per cent subcontracted? How would all this play out politically? with selling banks and investment banks providing high levels of Rawal praised the efforts of the ECB in leading efforts to debate how leverage. this NPL surge should be dealt with, in contrast to foot-dragging after During the Covid-19 crisis the bid ask spread widened, with stability, the global financial crisis of 2007/8.

Table 1 Table 2 The NPL market came to a standstill Starting to see some activity return but at lower levels

# Deals Figures in 4b-total volume of closed and ongoing deals YTD (Oct-2020) 4 2013 32b 52 Greece 11.1 31 2014 479b 94 Italy 25 25 Spain 2.5 11.5 2015 4117b 138 UK 0.3 5 4 137 2016 89b Cyprus 1.5 2.5 2017 4155b 166 Portugal 3 Ireland 2 2018 4224b 254 CEE* 2 2019 4149b 194 Germany 0.5 1 Completed Ongoing 2020 440b YTD 50 France 0.5

Sources: EY, European NPL activity 20132019 (includes announced deals for 2020) *CEE: Central and Eastern Europe. Sources: EY on various sources

Private credit to the rescue! BlackRock tips alternative lenders to power restructuring boom

lackRock, the world’s largest fund manager, has warned that Since 2007, private credit has been especially fast-growing, expanding scale of corporate restructuring globally could exceed the to US$850 billion by financing companies that would previously have Bprevious peak that followed the 2008 global financial crisis. looked to banks or the public high-yield market, it added. The company’s research arm, BlackRock Investment Institute, declared Firms will probably have to evolve their business models amid the in a note last month : “We see a historic opportunity for the private pandemic, and BlackRock sees a “wave of restructurings” and room for markets to fund post-Covid-19 corporate restructuring.” private credit to cater to smaller borrowers. The amount of outstanding debt with ratings below investment grade, including loans and private credit, has more than doubled to US$5.3 trillion since 2007 (see chart). “One big reason is the significant growth in sub-investment grade Sub-investment grade debt outstanding: 2007 and 2020 debt,” said BlackRock. As the overall cost of borrowing fell, companies loaded up on debt. Global high yield Global loans Emerging markets Private credit This has left many vulnerable as their revenues came under pressure from Covid-19-related disruptions. 6 BlackRock isn’t the only one warning of the risks of company failures. Despite low rates, US corporate bankruptcies posted their worst third 4 quarter ever. While supportive fiscal and monetary policies have helped companies raise capital and lower borrowing costs, “not all borrowers have benefited 2 equally” and smaller firms have lacked access to the public markets,

BlackRock said in the note. Amount (trillions of USD) Many companies may need to turn to private credit to restructure 0 post Covid-19, according to the asset manager, and this offers potential 2007 2020 return diversification for investors.

www.globalturnaround.com I November 2020 7 Germany New European restructuring tools will boost mid-market distressed deals

By Wolf Waschkuhn, Managing Director at One Square Advisors and Felix Schaffner, an Associate

is the latest example, joining the already All of this is good news for distressed announced Dutch Scheme. One of the biggest companies and investors in distressed situations. hopes for the proposed German mechanism But the Framework faces the same hurdles as is that it will make it worthwhile for the first any new piece of legislation – it needs plenty time to do mid-market deals, in terms of of use before people will be convinced of its management time as well as cost. usefulness and predictability. Nobody likes to Previously, under Germany’s unwieldy ‘go first’. This could make take-up quite slow insolvency code, only stakeholders in large at first. companies could afford to pay for relocating The US and UK systems are long-established Wolf Waschkuhn, Felix Schaffner, One Square Advisors One Square Advisors the business’s COMI to the UK or US to avail of as well as being flexible. The new Dutch their more user-friendly reorganisation systems. Scheme, although not enacted yet, has he impending deadline for the EU The German Framework should open the door been longer in development than its new Preventive Restructuring Directive to for smaller companies to do the same. German rival. Tbe transposed into the national laws These opportunities in Germany should Thus, as far as the German Framework is of the 27 member states halfway through be further improved by the Framework’s concerned, we should expect to see mainly next year is rightfully being heralded as a clarification of directors’ fiduciary duties when debtor-led pre-insolvency restructurings at first, paradigm shift for the restructuring market nearing insolvency, or entering the so-called together with a few cases led by courageous in many of those jurisdictions. ‘zone of insolvency‘. It was previously extremely and opportunistic distressed debt funds. Every EU country will have its own pre- unclear how and when directors‘ responsibilities Once the first precedents have been insolvency restructuring proceeding enabling shifted from shareholders to creditors under established and found to be to the liking of it to do things only previously possible via an Germany’s corporate law. the community, and sufficient liquidity has English Scheme of Arrangement or a pre-pack This should lead to more creditor-led developed in the secondary market for bank Chapter 11 in the US. restructurings that can compromise existing debt of mid-size EU companies, we should see The unveiling in September of ambitious equity holders, if necessary, by means of more distressed debt funds getting involved in proposals for a German Restructuring Framework cram-down. Europe’s biggest economy.

Let’s embrace the German Restructuring Framework!

ichael balances written into it, he said, which could number of cases for judges to get used to Thierhoff, tempt non-consenting parties to “play games”. supervising the new framework. Mwho heads This is a different take from some other the restructuring commentators, who think that the Framework’s Is COMI shifting in Europe over? practice in Europe powers for cross-class cramdown will weaken the One big result of the Framework will be the and Germany ability of minority stakeholders to form blocking end of a type of forum shopping that appeared inside the re- positions and hold-outs. Again, Thierhoff stressed, after the European Insolvency Regulation was launched Andersen it would take time to see how the Framework enacted in 2002, reckons Thierhoff. global network, ful- deals with these challenges in practice. A series of large German corporates like Michael Thierhoff, somely welcomed There is also a question mark over how Schefenacker ‘went to London’ in order to utilise Germany’s proposals for a Restructuring quickly and enthusiastically Germany’s banks the UK’s more user-friendly insolvency laws. Framework: “The proposed Framework is will embrace the new Framework, he said. “Our Thierhoff thought that these deals were the a great tool. I think we should embrace it, banks are very shy in applying something really exception to the rule anyway, since they only apply it, use it creatively. new. They don’t embrace change, they love the really suited large companies which could afford “We should help develop it in the ‘running- beaten track.” the high costs involved. Even these would no in’ period,” said the veteran restructuring Another constituency that might be less than longer be tempted to go to London because professional. All new bankruptcy regimes take time forthcoming in embracing the new restructuring the German framework provided an adequate to ‘bed in’, he said. For example the US Chapter mechanisms were Germany’s insolvency judges, solution, he said, adding: “They won’t be going 11 legislation was enacted in 1979 but took many Thierhoff added. to Amsterdam either.” years for it to attain its present state of efficiency. Germany has over 100 regional bankruptcy There had been much speculation in German Thierhoff added that another reason the courts in 16 states, the idea of limiting the restructuring circles whether big German Framework would take time to bed in was that competence for the Framework to only some corporates might be interested in the new Dutch the proposed procedure was “straightforward, 20 may not necessarily meet the approval of Scheme due to be introduced coincidentally but not simple.” the states, which have the say when it comes on the same day as the German Framework – The Framework has a lot of checks and to courts. And it will take time and a decent 1 January 2021.

8 www.globalturnaround.com I November 2020 Germany How will all these new European restructuring systems fit together?

he European Union’s Preventive “We need cases!” Covid-19 crisis recedes, said Schelo, and when Restructuring Directive required all they can sell the businesses on. One of the biggest challenges to launching any its member states to have in place T new restructuring mechanism is getting people by halfway through next year an out-of- to use it. No one likes ‘going first’. So it will be Is restructuring coming home? court restructuring mechanism at least as vital to have a reasonable number of cases for the Now that it looks like Germany will possess a efficient as, if not superior to, the English new framework to be used on. For comparison, well-designed restructuring tool, does this mean Scheme of Arrangement. the English restructuring reforms under this year’s forum-shopping is over for German distressed Now that the UK has Brexited, that leaves CIGA legislation were immediately enthusiastically corporates? Schelo issued a cautious ‘yes’. “If the a patchwork quilt of 27 different local ‘super taken up and used in the restructurings of Virgin company has German liabilities it might as well schemes’ to deal with. Some are ready to go, Atlantic and PizzaExpress. stick with German law and language – this would like the Dutch Scheme. Others are being hurried A big challenge Germany faces in this respect, appear to be more cost effective.” through, like the German Framework. Are there said Schelo, is the sheer lack of local restructuring The important exception to this would be any plans to co-ordinate them in some way? cases to test the new Framework out on. where the corporate has New York law or English In particular, how will these new restructuring “German insolvencies are running at their lowest law bonds. This can happen even with mid-market mechanisms be recognised by, or listed in, the rate for 30 years. There are hardly any cases.” companies, said Schelo. European Insolvency Regulation? In order to ‘bed in’ the framework, he said, “One question will be, how do you bind in Until now, all member state insolvency “we need to have cases!” overseas liabilities using German restructuring mechanisms have been listed in one of the Distressed investors will only enter the tools? Legal practice will find an answer to that Annexes to the Regulation, thus giving them market when businesses start work again as the question.” automatic recognition across all 27 member states. It remains to be seen whether these new out-of-court mechanisms will be listed in the Will the Dutch Scheme beat Regulation’s Annexe. Sven Schelo, a the German Framework? restructuring partner with Linklaters in hristof Schiller, a restructuring Schiller also referred Frankfurt, said: partner with Anchor in Mannheim, to the current “This is the last Ccommented on the different ways situation in the UK missing piece of the the EU Restructuring Directive was being where Deloitte and puzzle; how will the transposed into local legislation in Germany, KPMG have both remaining mechanisms with the Restructuring Framework, and The put their national [that haven’t been Netherlands, with ‘the Dutch Scheme”. restructuring and Sven Schelo, Linklaters announced so far] “I think that it will be very interesting to insolvency businesses work? And how will watch the competition between the restructuring up for sale. they fit together?” regimes in The Netherlands and Germany,” said “I also do not feel Christof Schiller, Anchor “Will there be another European Regulation Schiller. “Personally I would put my money on the very hopeful for the covering this area? I doubt it,” said Schelo. Dutch scheme. One simple reason is that their English restructuring business,” said Schiller. “And will there be inter-Governmental legislators are faster. “The pressure on the Big Four to separate their agreements on how all these new schemes will “I see no way that the new German regulation restructuring arms from the rest of their business fit together? Again, I doubt it.” will become effective on January 1st, 2021. deprives them of a tremendously important “My suspicion is that cases under the new “There is still a lot of debate going on about competitive advantage: the international set-up. German Framework that are made public will the contents of the law and the new restructuring “When I was with PricewaterhouseCoopers be covered by the Regulation’s Annexe, and we courts have yet to be established,” said Schiller. “In one of the most amazing things was that you will live with the status quo.” the past, the German judiciary was never famous could have a restructuring expert from almost As for the ambitious timetable to enact the for its speedy reaction to a new legal environment every country on the phone within hours. German Framework on 1 January 2021, Schelo – to put it mildly. “And Brexit will not help either,” Schiller said: “I think it’s realistic. “So I assume that the Dutch will be able to added. “Even if these wounds are self-inflicted “I can’t see any roadblocks or headwinds attract the first cases and develop a track-record – accounting scandals and Brexit – it is a sad from critics that can delay it.” faster than the Germans.” development.” There have been some criticisms from the banking industry and some insolvency administrators, said Schelo, but it was difficult Framework ‘no use for auto industry’ to see how the latter in particular could hold up the process. He did observe however: “The German Framework is a financial “For that, you will still need to rely on the formal “I think insolvency administrators are very restructuring tool, not an operational one,” insolvency process,” said Müller. worried; they think it will take any last remaining cautioned Renate Müller, a restructuring partner This view was echoed by Heiko Tschauner, business from them. On the other hand, given with Andersen in Leipzig. “It won’t help for a restructuring partner with Hogan Lovells in the broad spectrum of services they have on auto industry cases, for instance, where you Munich. “I don’t think the Framework will help offer, they shouldn’t be worried to find new need to reorganise operations and significantly with the auto sector, auto companies don’t just roles under the new law.” cut employment. have balance sheet problems.”

www.globalturnaround.com I November 2020 9 Germany German trade unionists launch 6 billion euro vulture fund

KKR, Apollo, Blackstone and other investors have a brand new PE rival for investing in distressed companies in the German auto sector – a fund owned and operated by some of Germany’s largest trade unions.

he Best Owners Group (BOG) is aiming to generate stable returns over many years,” he said. BOG ‘the good vultures of IG Metall.’ acquire a portfolio with a turnover of up to “In contrast to the classic private equity The BOG is aiming for a long-term rate of T6 billion euro. business, there is no resale in the BOG model,” return of 5 per cent. Hopes for profits are high, This Summer German workers launched the he added. since the BOG model eliminates major overheads BOG in response to the likely fallout from the such as development costs and new investments. German auto industry’s transition from petrol ‘The good vultures of IG Metall’ The unions have invested a couple of and diesel to electric and autonomous cars. They The trade unions have launched BOG in order to hundred thousand euro of their own funds to believe they can buy stakes in profitable autoparts soften the upheaval for their members in the auto seed the new vehicle, and aim to raise a total of makers, or even whole businesses, and continue industry, and as such, it represents an interesting 500 million euro from wealth managers, private to run them for a decade or more as the demand blend of business and social aims. The fund will investors and hedge funds, as well as from for parts to petrol and diesel cars declines. be able to issue loans to provide companies foundations, producers, business families and The managers at BOG even think the fund can with capital at reasonable rates, for instance. the Government. turn a profit by doing so, and at the same time This means that PE funds aiming to buy Meanwhile BMW, one of Germany’s largest preserve jobs for a lot longer than purely financial distressed German auto parts companies automakers, has already welcomed “the fund’s investors would be prepared to. cheaply will have competition, as the BOG model basic idea.” Stock purchasers from the company gathers pace. are already “in contact” with the BOG fund, The idea is that it will be One German newspaper has even dubbed the BMW said. a ‘win-win’ – good for investors, good for workers. German auto insolvencies pick up The BOG founders claim the fund will help ensure the maintenance of the automakers’ supply chains, while also facilitating the nsolvencies in the German auto industry elimination of ‘overcapacity’ or the shutdown have picked up this year, and accelerated 2. Schlemmer Münchingen GmbH & of entire businesses. Isince the summer break, due to growing Co. KG has entered insolvency, and the The fund’s founders include IG Metall, Chinese competition, the transition from Administrator is Dr. Hubert Ampferl, Germany’s biggest trade union with around petrol to electric, and the impact of the a partner with Dr. Beck & Partner. The two million members, and its counterpart in the Covid-19 virus. Schlemmer Group is an international chemical industry, IG Bergbau, Chemie, Energie Heiko Tschauner, a restructuring partner with manufacturer of complex plastic parts (IG BCE), with about half a million. Hogan Lovells in Munich, said: “Many auto in extrusion and injection moulding The BOG certainly has credible management. parts suppliers will completely disappear. Others for the automotive industry. The It is headed by the former head of Germany’s will survive for years to supply spare parts for Administrators have sold six companies Federal Work Agency, Frank-Jürgen Weise, the declining number of petrol cars. in the group with operations in and Bernd Bohr, who previously led the “There is going to be a big consolidation,” Germany, Romania, Russia, Spain, Italy, vehicle division at Bosch. They are assisted by said Tschauner. “We will see some bigger Morocco and Tunisia to French auto Andreas Zielke, a senior figure in McKinsey’s insolvency cases next year.” supplier Delfingen Industry. German auto practice. Dr Beck & Partner has worked with Weise said that the fund initially plans Some of the automotive cases a number of auto suppliers including HAAS, RFP, Jacob Plastics Group, Takeo, to acquire five to eight companies or corp- breaking this year orate divisions with a sales volume of up to Plastal and Sellner Group. 6 billion euro. 1. Nanogate SE, which makes 4. WAFA Germany GmbH, a specialist “Basically, we’re talking about medium-sized components and surfaces for the auto maker of chrome-plated plastic car-parts, automotive suppliers, that is, classic medium- sector, has entered Self-Administration entered Self-Administration in the district sized companies with around 1,000 or 2,000 and is currently negotiating with new court of Augsburg. The company’s employees,” said Weise, who used to work as investors. The company’s supervising supervising trustee is Wolfgang Müller a manager in the automotive supplier industry. trustee is Günther Staab, of Staab & of Müller Rock, based in Kempten. Below this limit, the task would be too small- Kollegen. scale, he said, and above that corporations would 2. Maier Präzision Gesellschaft already have good access to the capital market. Michael Thierhoff, a restructuring partner with mit beschränkter Haftung, a car The BOG fund prefers complete takeovers, Andersen in Frankfurt, said: “We will see a components manufacturer, has entered but at least wants to secure a majority stake in whole lot more cases in the German auto sector. Self-Administration. The company’s companies. “This is due to a combination of the paradigm supervising trustee is Dr. Dirk Pehl The BOG does not want to get involved in shift in the car market from petrol to electrical, of Schultze & Braun. restructuring cases, said Weise. coupled with the Covid-19 crisis, which has “We will invest in profitable companies and created a whole lot of new problems.”

10 www.globalturnaround.com I November 2020 News

President Bill Clinton calls for another round of ‘significant’ Covid-19 aid

ormer President Bill Clinton gave a rousing four years. term supporter of the ABI’s international Fkeynote speech to the ABI’s sixteenth But he denied that it was impossible to deal conference. annual International Insolvency Symposium with the economic shock of Covid-19 and a Clinton spoke of the loss in trust over on 18 November, calling for more Federal aid pivot to more environmentally friendly policies recent years, trust and confidence being vital to combat the Covid-19 crisis, a return to trust at the same time. The US could and should do components of any corporate restructuring. in politics and at the same time a renewed both, he told his online audience. He also acknowledged the important role drive for a greener environment. Clinton was presented with questions by Bill restructuring professionals could play in Clinton mourned the loss of trust both on Brandt, a principal with restructuring boutique rebuilding the shattered global economy a national and international level in the last Development Specialists, Inc (DSI) and a long following the Covid-19 crisis.

The London restructuring market At least half of EU states braces itself for Brexit will not hit Preventive Restructuring deadline ollowing former President Clinton’s Perhaps ever.” Fkeynote, a panel at the ABI Symposium “The predictability underpinning things discussed some of the issues thrown up by like the English Scheme of Arrangement is a here is a good chance that at least a his address, as well as some other topics. huge advantage. Other European jurisdictions Thalf of the European Union’s (EU) 27 One was how far London’s status as a have made great strides in insolvency and member states will apply for a year-long cross-border restructuring hub might be restructuring law reform recently, such as at the postponement next July from having damaged by Brexit, even as other centres Dutch Scheme and the German Restructuring to introduce local versions of the EU’s like Dublin and Amsterdam look forward Framework. But neither of them are tried and Preventive Restructuring Directive. to picking up such work. tested. The EU Directive (EU) 2019/1023 on These expectations might be over-stated, “The UK might have been left behind if it preventive restructuring needs to be transposed according to one of the panel members based hadn’t kept up with these innovations,” said into national laws by July 2021. in London, Adam Gallagher, a restructuring Gallagher. “But this year’s CIGA legislation, The Directive requires each member state partner at Freshfields. introducing the Restructuring Plan, a sort of to design and launch their own out-of-court Gallagher accepted that following the ‘super Scheme’, means that you can now restructuring mechanism, equal to or better completion of the UK’s transition period from use cross-class cram-down in the UK, for than the English Scheme of Arrangement. the European Union at the start of next year, example. While The Netherlands is on track with the automatic recognition of UK judgments “Even after Brexit, we will still have the its Dutch Scheme for 1 January 2021, and across the EU’s 27 remaining member states is advantages of parties’ preference for English Germany has advanced plans for a Framework expected to fall away. law, predictability of our judges, the local (see pages 8-10), the vast majority of Central Automatic recognition of UK insolvency ecology of restructuring lawyers, accountants and Eastern European (CEE) countries have not procedures under the European Insolvency and financial advisers, the English language and announced plans for their own mechanisms Regulation will also lapse unless agreement is the timezone – halfway between New York and so far. reached for it to continue. Hong Kong/Singapore. A clear East-West divide has opened up; with On the other hand, said Gallagher: “For any loan agreements governed by the former wanting a delay and the latter ready “I don’t think Brexit will have much of an English law the Gibbs Rule will serve as a tether for an early launch. impact on London’s status as a restructuring to England for any restructuring,” Gallagher Catherine Bridge Zoller, senior counsel hub at least in the short to medium term. added. for the EBRD’s legal transition team based in London, told ABI Symposium attendees: “I think at the moment the Netherlands has transposed the Directive into national legislation, while Covid-19 crisis: an opportunity for significant reform? the CIGA legislation in the UK passed earlier this summer is substantially in line with the EU • The EBRD is currently carrying out an summarising its findings will be made Directive, but the UK is Brexiting. Assessment of insolvency laws aimed publicly available online in the first “There is a good chance that a lot of at identifying gaps and weaknesses in quarter of 2021. member states will use an extension provision reorganisation procedures. • This study is being carried out in by a year – at least a half [of the 27 member • The Assessment will provide an up-to- partnership with the International states],” said Bridge Zoller. date map of restructuring frameworks Development Law Organisation (IDLO), She acknowledged that Latvia and Hungary across the EBRD regions in Europe, INSOL Europe and INSOL International appeared to be on track. But others in CEE were Asia and Africa. and in cooperation with the European lagging. “A lot of the countries we are working • Results of the assessment and a report Commission (EC). with are really struggling,” she said. “People For further details, go to: www.ebrd-restructuring.com have been redirected to Covid-19-related work. It requires a big change to existing legislation.”

www.globalturnaround.com I November 2020 11 Analysis UK pre-packs get new controls The UK jurisdiction is rightly famous for its user-friendly insolvency legislation, but London’s status as a global restructuring hub is under threat from Brexit. Now the UK Government has introduced new rules for pre-packaged Administrations, one of the jurisdiction’s key restructuring tools. How will these new rules work? Edward Downer, a restructuring partner with Willkie Farr & Gallagher in London, explains the proposed regulations. Edward Downer, Willkie Farr & Gallagher

re-packaged sales in UK Administrations written opinion has been given. whether or not the substantial disposal can be continue to attract attention and criticism, made, and in doing so, opining on whether: (i) the Pin spite of measures introduced following Connected Party relevant property, (ii) the terms of the substantial the 2014 Graham Review. ‘Connected person’ is broadly defined as disposal, or (iii) any circumstances relating to the On 8 October 2020 the UK Government ‘a relevant person in relation to the company, substantial disposal, have materially changed published a further report: “Pre-pack sales in or a company connected with the company. since the date of the Written Report. Administration”, to analyse the effectiveness of It includes those with a significant prior The statement given in the Written Report the measures introduced by the Graham Review connection to the insolvent company, such as uses comparable language to the Fairness and to propose further reforms. directors and shareholders. Opinion which can be given under the Loan These new proposals will continue to permit In a footnote to the Report regarding the Markets Association recommended form of pre-packs, but introduce significant new breadth of ‘connected party’, the Government intercreditor agreements (ICA) to facilitate controls on how pre-packs can transfer insolvent sought to exclude from enhanced scrutiny those distressed disposals, and may well take the form businesses to ‘connected persons’. pre-pack sales to ‘secure lenders with voting of a Fairness Opinion in practice. However the rights in the normal course of business of a process is notably different in that: One of the greatest third or more’. • The Administrator can depart from the challenges facing any However the Draft Regulations do statement made in the Written Report business rescue is the not account for this. The Graham Review provided that the administrator disseminates recommended that in circumstances where a copy of the Written Report to creditors, need for speed. a secured lender may have voting rights alongside a statement setting out why the associated with their debt, a carve-out to administrator choose to depart from the Many businesses in crisis, such as retail, can the definition of ‘connected party’ would statement. A security agent has no such unravel very quickly if news gets out that they overcome unnecessary value-destruction in the power in the context of an ICA. are entering ‘the zone of insolvency’. restructuring of large companies/groups. • A copy of the Written Report and the Pre-packs permit the ‘day one’ sale of a We anticipate further discussion about proposal to creditors is to be provided to (i) all business or assets of an insolvent company by the definition of ‘connected party’ to clarify creditors and (ii) the registrar of companies, a licensed insolvency practitioner through a whether loan-to-own transactions will face the excluding any sensitive or confidential pre-arranged contract of sale. enhanced scrutiny of prior creditor approval or information. No such right would usually The oft-stated rationale is to mitigate value- a written opinion. accrue to creditors under an ICA. destruction on the saleability of a company’s The creditor approval process requires business brought about by the public becoming an Administrator to report on the proposed • Unlike the LMA ICA, which requires an aware of its insolvency. pre-pack to creditors in the Administrator’s opinion from an “independent, reputable The conundrum of pre-packs is that their proposals to creditors. While approval by and internationally recognised” bank, usefulness relies on the secrecy of the company’s creditors is by a simple majority in value, this accounting practice or third party, the Draft insolvency, which draws criticism by creditors route is both public and time consuming. As Regulations only require that the individual for a lack of transparency, particularly where a result, its utility to authorise pre-packs to believe they have the requisite knowledge the purchaser and seller are connected persons. connected parties is thought to be limited. and experience, and are independent. The evaluator will be “independent” provided The proposed Draft Written reports (i) they are not a connected party and have The option likely to be used most frequently not provided restructuring advice to the Regulations seek to strike a is for the purchaser to procure one or more company or connected companies within balance between the need written report(s) prepared by an evaluator in the preceding 12 months of the Written for secrecy, while responding respect of the proposed substantial disposal. Report; (ii) they are not “excluded” from to the pressure for The Written Report(s) must include a doing so (e.g. bankruptcy); and (iii) are statement that either the evaluator is or is not not the Administrator, an associate of the enhanced transparency. satisfied that the consideration provided and Administrator, or connected with a company the grounds for the substantial disposal are with which the Administrator is connected. The Draft Regulations would prevent an reasonable in the circumstances. In making this Administrator from making a disposal of all statement the evaluator is required to provide If the UK Parliament approves the Draft or a substantial part of a company’s assets to their reasons for making the statement, a Regulations in good time, the UK Government a connected person in the first eight weeks of summary of the evidence relied on and that such would then apply them to administrations an administration in either one or a series of evidence is sufficient. commencing on or after the day on which the transactions, unless either (i) creditor approval The Written Report will then be furnished regulations come into force. The target date is has been obtained, or (ii) an independent to the administrator who will form a view as to June 2021 at the latest.

12 www.globalturnaround.com I November 2020