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Authors Jamie Logie and Chris Howard Restructuring natural resources projects in the emerging markets: features and challenges, part 2 KEY POINTS Maintaining a good relationship with host governments is crucial for project sponsors concerned that a project’s commitments operating in emerging markets. to local employment and procurement Creditors will often require the appointment of a chief restructuring officer (CRO) – (as well as to welfare, health, local these appointments are by no means straightforward for a natural resources project. business, education and other social and Potential third party buyers and new money funding options present challenges for environmental initiatives) are complied with. sponsors and lenders alike in this complex landscape. Although some of the expenses related to these initiatives may not at first appear to COUNTRY SPECIFIC ISSUES natural resources that may be considered to lenders to be vital operating costs, in reality A natural resources project in the be key to the national interest. Furthermore, compliance with commitments of this n emerging markets will be dependent, a change of government since the relevant kind may be important not only to ensure often to a great extent, on the sponsor’s/ concession was awarded may have resulted in compliance with lender environmental developer’s relationship with the host a government that is less sympathetic to the and social policies and related borrower government. Obtaining the licenses/ project than was the case at the time of the covenants in the debt documents, but concessions for exploitation of a natural initial award. An unsympathetic government could also be vital to the continued resource asset in the host country may have becoming aware of financial problems for validity of the relevant concession (either taken many years of careful negotiations. a project may be more inclined either to explicitly in undertakings set out in the As the value of the project will be consider expropriation, or perhaps to revisit concession terms, or implicitly through the dependent on the key licenses, and as the original award of the concession and maintenance of important goodwill with transfers are likely to require government look for reasons (allegations of incorrect national or regional government and the approval (specific or implicit, and possibly procedures, and worse) to review and local community more generally). even for transfer of ownership of the project at a level above the in-country project company/borrower), the lender bargaining ‘A change of government since the relevant power linked to potential enforcement concession was awarded may have resulted in a and sale of the business will lack teeth if the government is not supportive of government that is less sympathetic to the project’ their actions. Depending on the nature of the relationship of the sponsor with perhaps withdraw the original concession. Beyond the issue of the licenses/ the government, lenders may encounter a A government acting in this way may be concessions, local law issues will come under reluctance by the government to approve inclined to try to transfer the concession to scrutiny by lenders as they consider their enforcement of asset security or a transfer a developer more in favour with the regime options. An emerging market jurisdiction of ownership more generally. Of course, at this time and who might be able to pay may not have highly developed insolvency this issue may be overcome in time if a a higher tariff as it has not had to incur or security enforcement laws. As a result, strong alternative sponsor with a good historical capital expenditure. Both debt various usual lender options, for example relationship with the government steps up and equity will be exposed to enhanced an agreed pre-insolvency restructuring and shows interest, or if the economics of political risk of this kind, and discretion and arrangement or pre-pack, appointment the concession are renegotiated in a manner confidentiality in respect of the restructuring of receivers/administrators or similar acceptable to the government. process will therefore be key, particularly insolvency officers, enforcement of in- It would be naïve to assume that all when dealing with the government and country asset security and sale of the project natural resources projects are located government related agencies and companies. assets, may not be a viable or practical in jurisdictions with a benign and open As would be the case in any country, option. A complex and untested court approach to private sector investment in relevant government bodies will be process may be required (especially if there Corporate Rescue and Insolvency April 2016 73 In Practice IN PRACTICE IN is no clear legal mechanism for navigating company holds an individual out as being a generally result in vulnerability to negative junior or dissenting creditors through a director, whether the individual uses the title, perceptions from key offtakers/buyers, scheme of arrangement or a comparable whether an individual has access to board contractors, suppliers and employees. cram-down), and legal recognition of priority level information and whether the individual There may be enhanced risk in this regard of claims of different levels of creditors may makes major decisions). A potential CRO for a natural resources project, particularly be far from certain. Generally, bringing may have more concerns than usual in in a remote location, as it could have limited insolvency proceedings in-country may lead accepting an appointment of this kind. scope to find alternative key contractual counterparties and employees (for example, skilled mining and or/and oil and gas ‘Generally, bringing insolvency proceedings professionals willing to work in emerging in‑country may lead to significant uncertainty as economies remain in short supply). Such an appointment may also create enough unease to outcome’ in the market to undermine any M&A ‘rescue’ process initiated by the sponsors, possibly at to significant uncertainty as to outcome. The prospective CRO appointment will the instigation of the lenders, and could also A well-structured project financing will be occurring in the context of a more limited compromise a potential equity raise. probably have ensured alternatives through pool of potential CROs than may be the case As a matter of English law, and in use of offshore security (for example charges for other businesses. Finding a candidate various other common law jurisdictions and pledges over shares in an offshore with suitable industry and regional (including Australia, New Zealand, holding company), but the palette of lender experience may not be straightforward, Singapore and Ireland), there is a risk contingency options may be much more and current sponsor senior management is that lenders to a distressed borrower may, limited than lenders would like or might likely to be uneasy about the introduction of directly or particularly through the use of a at first assume to be the case given the a new person to sensitive discussions with CRO operating to an extent on the basis of constraints of the concession agreements government officials, contractors, suppliers instructions from them, be acting as shadow and in particular the effects of a change of and buyers with whom they may have directors. To illustrate the point, under control. spent many years developing and nurturing English law, a shadow director is a person or relationships. body corporate ‘in accordance with whose CROS’ AND DIRECTORS’ DUTIES In the context of the appointment directions or instructions the directors of a There has been an increasing trend of a CRO, it is important not to understate company are accustomed to act’ (s 251 of the for creditors to insist that a specialist the key role of the project’s management Companies Act 2006 (CA 2006); turnaround professional (in the role team in the prospects for success or failure s 251 of the Insolvency Act 1986 (IA usually known as chief restructuring of the troubled project. Lenders will need 1986); s 22(5) of the Company Directors officer or CRO) should be appointed by the to be careful that the scope of the CRO’s Disqualification Act 1986) – excluding distressed creditor. This may, but will not appointment does not undermine the those advising in a professional capacity necessarily, be a board level appointment. existing management to the point where they only. Therefore, if the scope of the CRO’s The appointment of a CRO could well be choose to leave at a crucial juncture in the appointment provides the CRO with enough a requirement of continued support by life of the business, perhaps also bringing power to influence decisions of the board and lenders to the distressed project. a claim for constructive dismissal. The the lenders are granted too wide a power to The legal and practical implications of spectre of constructive dismissal of executive instruct the CRO, then whether or not the this are generally not unique to an emerging management has loomed large in number of CRO is actually appointed to the board, the market project restructuring. However, given recent high profile restructurings. lenders may be at an elevated risk of being the potentially enhanced risks to directors For a sponsor that is a listed company, the shadow directors.