The Restructuring, Insolvency and Bankruptcy Group considers the legal, commercial and practical issues.
Spot the early warning signs
These include the borrower breaching or being about to breach its financial covenants or overdraft limits or suddenly requesting new facilities or an extended repayment timetable. The borrower may be under increased creditor pressure (including statutory demands or other debt collection or winding up procedures) or subject to litigation, insurance claims or rent reviews, diverting management time away from the business. Management may be unresponsive to your questions or reluctant to share information with you.
Other warning signs include the borrower:
- losing a key customer or supplier;
- suddenly losing or changing its management team, in particular the finance director;
- having a sudden change of auditors or trouble signing off its accounts;
- late delivery of information;
- asking its bankers to send cheques for round amounts or postpone/push forward certain payments (in particular BACS wage runs); or
- deferring any planned or regular capital expenditure.
Also, in the current banking climate, if a borrower with a previously good working relationship and without warning makes a spurious or unmeritorious complaint about an interest rate hedging product, that could be an attempt to draw attention away from more fundamental problems with its financial position.
Be prepared: Information is key!
If you spot any early warning signs, you should consider:
- meeting with the borrower at regular intervals to open a dialogue and discuss strategies and options;
- getting up-to-date financial information from the borrower, in particular monthly management accounts and cash flow statements as key indicators of expected future financial performance;
- asking your lawyers to review your security and priority position;
- instructing independent accountants to review the borrower's business and prepare accurate financials;
- carrying out regular insolvency and other company searches against the borrower;
- instructing an expert to value important assets; and/or
- assessing your borrower's overseas presence, assets and creditors as this may impact on the choice and jurisdiction of any enforcement options later.
Talk to other stakeholders
You should consider contacting other lenders and investors, and opening a dialogue with them to discuss a common strategy and information sharing. Take legal advice on any confidentiality restrictions first.
Attempt to stop others taking unilateral action
Once you have identified and contacted other stakeholders your advisers can help you put a standstill or other forbearance agreement in place to prevent others from taking action which would frustrate the overall strategy for the borrower. Depending on the number of other financial stakeholders and other important creditor groups you may need to establish a committee amongst you to simplify the day to day decision making process.
Decide on your initial strategy
Whether alone or part of a group of stakeholders, are you going to support the borrower or consider taking action to minimise your exposure through enforcement mechanisms? Are you planning to sell the debt to another financier (either as a one off strategy or part of your institution's current strategy or risk policy)? You can only make these decisions if you are armed with the right information.
A supportive strategy might include:
- providing new money (combined with taking new security) subject to pricing risk vs. reward;
- restructuring existing lending arrangements, giving time to pay, emergency short-term funding;
- considering new credit enhancement, for example, taking guarantees from directors, shareholders or group companies;
- standstill/forbearance agreements in conjunction with other lenders/investors; and/or
- other financial, operational or capital restructuring (see below).
A risk mitigation/enforcement strategy might include:
- identifying and calling events of default;
- accelerating loans or putting them on demand;
- cancelling existing commitments; and/or
- enforcing security and/or appointing an insolvency office-holder.
Is some form of restructuring necessary?
A financial, operational and/or capital restructuring of the borrower and its business may be required alongside support.
A financial restructuring could include writing off debt, swapping debt for equity; or a loan restructuring. Operational changes could include giving the customer time to negotiate a MBO/MBI; or facilitating a change in management (including a bank appointed director specialising in restructuring), or a change in business direction. The borrower may also look to restore distributable profits or balance sheet solvency by issuing new shares or reclassifying existing share capital.
Whatever the plan, consider your enforcement options
Ask your legal advisers to review security and credit documentation to establish defaults and enforcement methods open to you, including a review of any inter-creditor terms to see if this restricts your options or affects priority of payment on enforcement. There may also be temporary regulatory or internal policy restrictions on the options normally available to you (e.g. restrictions on the ability to enforce where a borrower remains subject to the FCA-mandated review of the sale of interest rate hedging products) and these need to be factored in and advice sought if there is any uncertainty. Your legal advisers can also help to consider any cross-default issues; or investigate further the pros and cons of the various enforcement mechanisms, usually the appointment of an administrator.