What is a debt restructuring?
The aim of any restructuring (also sometimes called a workout) is to rearrange the debtor’s financial commitments so that it is able to service its restructured debts and survive as a going concern. It is important to note that this is a consensual process and is not undertaken under the supervision of a court or other supervisory body - therefore, it is important the all creditors are involved.
If it’s voluntary, how does it work?
A restructuring is typically triggered by a default (or the likelihood of a default) under the debtor’s finance documents. The default may not be a failure to pay, but could be a technical default such as the breach of a financial covenant.
Once a default has occurred, the creditors should meet to discuss the nature and extent of their liabilities - it is important to consider any duties of confidentiality which may need to be waived to allow the open and transparent sharing of information.
The first step in many restructurings involves the borrower and creditors agreeing a standstill arrangement. A standstill (sometimes called a moratorium) is intended to stabilise the debtor and give the parties breathing space to discuss their options in an orderly manner. It is the contractual equivalent to a statutory rescue regime where a debtor is protected by law against creditor claims with a view to implementing an organised rehabilitation - of course, a standstill agreement only binds the parties to it.
What issues should a standstill agreement deal with?
There is no ‘standard form’ standstill arrangement - it will be drafted as bespoke document dealing with the specific circumstances of the borrower and its creditors. However, it is not unusual for creditors to agree that:
- defaults and payment obligations will be temporarily suspended
- debt facilities are maintained (i.e. not accelerated but perhaps placed ‘on demand’)
- there will be no set-off against the borrower’s credit balances
- no individual creditor will take unilateral enforcement action during the standstill
- no debt will be transferred to persons which are not already creditors
Generally, the standstill will end upon the expiry of the agreed standstill period, the conclusion of a restructuring agreement, a breach of the standstill agreement or the commencement of insolvency proceedings against the borrower. It is generally in the creditors’ interests to keep the standstill period as short as possible so as to maintain pressure on the borrower.
Who leads the process?
An agent bank (or, for more complex deals, a steering committee) will be appointed to negotiate with the borrower and co-ordinate with the banks. The agency role can be very demanding and requires a senior team with workout experience.
The agent will quickly need to gather information about the borrower’s financial position - on complex transactions, it may need to appoint investigating accountants to assist.
What happens during a standstill?
The agent will focus on developing a restructuring plan that will enable a borrower to trade through its financial difficulties. A number of options may be considered, including:
- a new business plan for the borrower
- a cost cutting or asset disposal programme
- new capital investment, possibly by injecting new equity
- changes to the management of the borrower
How does a restructuring conclude?
In a successfully negotiated debt restructuring, the standstill period terminates when a restructuring agreement is signed. The restructuring agreement supersedes the terms of the borrower’s original debt facilities and records the terms of the restructuring.
The restructuring agreement will likely be the product of extensive negotiation. The borrower’s restructured obligations should reflect cashflow and other financial projections delivered by the investigating accountants.
As with standstill agreements, there is no ‘market standard’ restructuring agreement. However, the terms of any restructuring may include an ‘interest holiday’, a reduction (or ‘haircut’) in debt, the conversion of debt into equity or the introduction of a convertible bond which alleviates the debt burden on the company but aligns the interests of the creditors with the shareholders in the long term.