According to S&P Global fixed income research, EUR 3.7 trillion of rated European company debt is due to mature between mid-2017 and the end of 2022.This gives rise to anticipation that, in the coming years, the European financial markets will be increasingly driven by refinancing, restructuring and investment in distressed assets. Respondents to the survey “Changing tides: European M&A Outlook 2017” prepared by CMS in cooperation with Mergermarket in September 2017 have also remarked on this trend.
Given the size of the expected refinancing wall facing European companies, and Polish companies are no exception, the inevitable increase in stressed and distressed debt raises the question of whether Poland’s regulatory environment is prepared for the flurry of activity in this area. Fortunately, the answer is positive, thanks to changes to insolvency and bankruptcy regulations made nearly two years ago, which have opened a new market for investment in distressed assets which should not only provide solutions for creditors and debtors alike, but also attractive investment opportunities.
The purpose of the article is to present the various ways in which investment can be made in distressed assets in Poland, whether through a pre-pack, acquisition of assets from remedial proceedings, provision of financing to a restructured entity, and acquisition of NPLs and sub-par debt.
M&A OF DISTRESSED ASSETS – PRE-PACKAGED SALE OUT OF BANKRUPTCY
The main process enabling an investor to buy the business enterprise (or its organised part) of an company in distress is the pre-packaged liquidation (in short “pre-pack”). This fast-track option is possible for enterprises of insolvent companies and involves:
1.filing with the bankruptcy court for acceptance of the terms of the sale at the same time as filing a bankruptcy declaration;
2. in case insolvency is confirmed by the court (i.e. the debtor company is declared bankrupt) and the pre-pack motion is accepted by the court, the assets are purchased free and clear of any encumbrances (subject to certain minor exceptions) and the investor is not liable for any of the insolvent company’s debts which are instead satisfied from the proceeds of sale; and.
3.most administrative licences and permits as well as employment contracts will transfer to the buyer by operation of law, which means that the buyer can continue operations from day one.
The process is supervised by a bankruptcy court – if a proposed purchase price is higher than the amount that may be obtained in ordinary bankruptcy proceedings the court will accept a motion for pre-pack. The terms of the transaction should be agreed prior to filing the motion. If the pre-packed sale relates to assets encumbered with a registered pledge that provides for out-of-court seizure, finalisation of the pre-pack also requires the pledgee’s consent. Thus in most cases the sale needs to be conducted in cooperation with the financing bank(s).
Being able to cherry-pick the best assets of a business, retaining its best staff and continuing operations, without having to take on the existing liabilities to creditors, is clearly attractive to potential buyers. Hence, the Polish market has seen considerable interest in pre-pack acquisitions this year, in particular in relation to building and production companies and – particularly recently – wind farm projects.
INVESTMENT POSSIBILITIES IN RESTRUCTURING PROCEEDINGS
Investment in distressed assets has also been boosted in Poland by the introduction of the Restructuring Law. This law was intended to enable the restructuring of viable businesses and help to restore the financial capacity of insolvent debtors and those threatened with insolvency.
Of the four new types of restructuring proceedings that vary in degrees of formality and protection against creditorsthe most attractive way to invest involves buying assets out of remedial proceedings, as well as providing an external financing injection of capital to the entity undergoing restructuring.
Investment in assets within remedial proceedings
In this context, remedial proceedings (postępowanie sanacyjne), within the framework of which the deepest restructuring of the debtor’s business can be effected, allow investors to acquire assets from the court administrator upon the consent of the judge commissioner. Such acquisition of assets is made free and clear of liabilities and encumbrances (subject to certain minor exceptions).
New financing granted to restructured entity
External financing serving as a capital injection to a restructured entity, either as junior or senior secured debt, enjoys privileged (although not absolutely) treatment.
In case such new financing is provided in the arrangement with creditors approved by the court, it enjoys priority of repayment, i.e. it serves as first-ranking debt and is repaid directly after the secured claims. Such priority is guaranteed, however, only where the arrangement is fails and bankruptcy is further announced as a result of a bankruptcy motion filed with the court within three months after the final revocation of the arrangement.
The new “rescue” financing may also be provided in the course of restructuring proceedings (prior to the arrangement) for the purpose of, for example, covering the costs of the proceedings and the liabilities that arose after commencement of the restructuring procedure, which are supposed to be settled on a regular daily basis. As long as such financing was consented to by the creditors’ council, it falls beyond the scope of the application of any hardening periods. Moreover, it enjoys priority of repayment in case bankruptcy is announced as a result of a so called “simplified bankruptcy motion”, i.e. a motion which can be filed within two weeks from a judgment on discontinuation of restructuring proceedings (or a judgment not approving the arrangement).
It should be noted that the above privileged treatment in repayment is not the same as super-senior position. Even in case the new financing enjoys priority in repaymnt, secured creditors always enjoy priority over the claims of unsecured creditors with respect to the encumbered assets.
In general, debt trading in Poland is subject to contractual regulations. There are certain restrictions in relation to bank debt, which result from the strict interpretation of Polish banking secrecy regulations. The restrictions are lifted in relation to non-performing loans – classified as a loss in accordance with the relevant regulations (e.g. debts in enforcement or with a delay in payment exceeding 12 months). If a debt falls into this category, a bank may enter into negotiations with potential purchasers without the need for the debtor (client) to waive banking secrecy. The same exemption from banking secrecy applies to claim transfers effected to securitisation funds, organised under the Law on Investment Funds (often used for NPL transactions covering portfolios of loans, more frequently consumer loans than corporate).
In principle, an assignment of claims involves the transfer of the security rights provided in connection with the claim. However, any transfer of mortgage claims requires re-registration of a mortgage in the name of the assignee in the land and mortgage register, which is a condition for the valid transfer of the mortgage claim.
Pre-packs and the “no encumbrance” effect of purchases out of remedial proceedings, as well as privileged treatment of new financing granted to a restructured entity, make Poland quite well prepared for the inevitable increase in distressed situations in the coming years. The next steps in improvement of the restructuring law should be focused on the recognition of a super-senior position of rescue finance providers, as well as scaling back banking secrecy in restructuring scenarios. The latter would not only improve the effectiveness of the restructuring process, where multiple banks are involved, but also boost NPL debt trading and pre-packs that can be offered as investment opportunities by the banks who are secured creditors.