Debt management: what you need to know about the restructuring process
23/06/2009
Debt management: what you need to know about the restructuring process When a company announces a debt restructuring, this is in most cases the result of an extensive analysis of its debt portfolio involving important economic, legal, tax and accounting decisions. A debt restructuring is therefore a high-profile event, and it is crucial to the financial future of the company that the whole process is handled with great care and efficiency.
On July 23, 2009, Vasil Kisil & Partners law firm and Ernst & Young conducted a round table entitled «Debt management: what you need to know about the restructuring process». Leading experts in debt restructuring gathered top-managers of large companies and Ukrainian banks to discuss all-important aspects of this complex and extremely relevant at the moment issue.
The subject of presentation made by Senior Manager of Ernst & Young Subi Shervella was a case study of a recent successful restructuring (refinancing) of debt of a retail chain active in non-food trade in Russia, having five foreign banks as creditors. It was a typical situation where the debtor claimed being incapable to repay as scheduled, and the banks were ready to restructure the debt but required an understanding of the company’s current liquidity; an understanding how reliable and efficient the business financial model was and how well it reflected the business drivers; how reliable the management’s forecasts were in terms of business development in the nearest three years, as well as the understanding of what maximum repayments were possible and how the management controlled the business development scenarios.
Restructuring was successfully completed after the functionality of the cash flow management system and the time of the company’s coming to negative liquidity with the existing debt repayments were confirmed. The banks obtained the report prepared by Ernst & Young containing the analysis of the company’s business management efficiency, as well as a consistent and arithmetically correct financial model reflecting the business model, allowing to model the business when the operational environment changes and determining the “banking case” which the banks could then submit to their loan committees. On the basis of such “banking case” the banks approved the company’s refinancing to be performed in the shortest time, the best company’s banking covenants were discussed and the most favorable warranties to creditors (banks) in respect of the company’s securing of its obligations were determined. New terms and conditions of refinancing performed by the banks allowed the company to run and manage its business.
Presentation of Vasil Kisil & Partners made by Partner and Head of Banking & Finance practice Denis Lysenko and Senior Associate of the practice Yulia Kyrpa was focused on regulatory and legal aspects of debt restructuring in Ukraine. The feasibility of restructuring itself was analyzed when amid new financial reality all the stakeholders have already realized that in case of the debtor’s insolvency best results may be achieved with no application of any official insolvency (bankruptcy) related procedures. Obviously enough, this requires implementation of special restructuring mechanisms intended to improve the debtor’s financial standing and its reorganization. Possible option of such process may be maintaining the level of debt load with the repayment schedule changed, or reducing the debt load. These two methods described may be also combined.
Compared to bankruptcy proceedings, advantages of restructurings are that it enables the debtor to maintain a higher value of its assets and does not require going public which allows to reduce the negative effect exerted upon the company’s goodwill and long-term business prospects. It also allows to avoid cross-default within the group, provides a greater flexibility for creditors in case of assets write-off which may be required and does not result in termination of employment agreements with the management and dismissal of the debtor’s employees. Experts of Vasil Kisil & Partners described the principal restructuring tools, NBU regulatory restrictions, the whole restructuring process, restructuring of debts to several creditors (syndicated loans) and to bond holders, and touched upon the controversial issue of bankruptcy as an alternative to restructuring.
Tax implications of various debt restructuring mechanisms were explained by representatives of Tax & Legal Department of Ernst & Young Partner Volodymyr Kotenko and Manager Ihor Chufarov. Ernst & Young experts provided a detailed description of the most common methods of debt restructuring including reduction of interest rate under the loan agreement, partial acquittal of debt, debt write-off in the bankruptcy proceedings, loan conversion into equity (shares) of the debtor and transfer of the subject of pledge for the debt repayment, mentioning that tax benefits are not the end in itself of these tools. They believe that, from the taxation point of view, the major objective is to avoid burdensome taxation for creditor and debtor.
Numerous questions from the audience were confirmed that the topic is as complicated as it is vital. Round table participants including Astelit, Vitalux, Poznyakyzhylbud, Ferrexpo Petroleum Onshore, Foxtrot, OTP Bank, Oshchadnyi Bank, First International Bank and many other companies were unanimous in their desire to continue the discussion. For coordination of further events, you may contact Head of Vasil Kisil & Partners PR Department Tatyana Sabitova at [email protected] or +38044 581-7777.
On July 23, 2009, Vasil Kisil & Partners law firm and Ernst & Young conducted a round table entitled «Debt management: what you need to know about the restructuring process». Leading experts in debt restructuring gathered top-managers of large companies and Ukrainian banks to discuss all-important aspects of this complex and extremely relevant at the moment issue.
The subject of presentation made by Senior Manager of Ernst & Young Subi Shervella was a case study of a recent successful restructuring (refinancing) of debt of a retail chain active in non-food trade in Russia, having five foreign banks as creditors. It was a typical situation where the debtor claimed being incapable to repay as scheduled, and the banks were ready to restructure the debt but required an understanding of the company’s current liquidity; an understanding how reliable and efficient the business financial model was and how well it reflected the business drivers; how reliable the management’s forecasts were in terms of business development in the nearest three years, as well as the understanding of what maximum repayments were possible and how the management controlled the business development scenarios.
Restructuring was successfully completed after the functionality of the cash flow management system and the time of the company’s coming to negative liquidity with the existing debt repayments were confirmed. The banks obtained the report prepared by Ernst & Young containing the analysis of the company’s business management efficiency, as well as a consistent and arithmetically correct financial model reflecting the business model, allowing to model the business when the operational environment changes and determining the “banking case” which the banks could then submit to their loan committees. On the basis of such “banking case” the banks approved the company’s refinancing to be performed in the shortest time, the best company’s banking covenants were discussed and the most favorable warranties to creditors (banks) in respect of the company’s securing of its obligations were determined. New terms and conditions of refinancing performed by the banks allowed the company to run and manage its business.
Presentation of Vasil Kisil & Partners made by Partner and Head of Banking & Finance practice Denis Lysenko and Senior Associate of the practice Yulia Kyrpa was focused on regulatory and legal aspects of debt restructuring in Ukraine. The feasibility of restructuring itself was analyzed when amid new financial reality all the stakeholders have already realized that in case of the debtor’s insolvency best results may be achieved with no application of any official insolvency (bankruptcy) related procedures. Obviously enough, this requires implementation of special restructuring mechanisms intended to improve the debtor’s financial standing and its reorganization. Possible option of such process may be maintaining the level of debt load with the repayment schedule changed, or reducing the debt load. These two methods described may be also combined.
Compared to bankruptcy proceedings, advantages of restructurings are that it enables the debtor to maintain a higher value of its assets and does not require going public which allows to reduce the negative effect exerted upon the company’s goodwill and long-term business prospects. It also allows to avoid cross-default within the group, provides a greater flexibility for creditors in case of assets write-off which may be required and does not result in termination of employment agreements with the management and dismissal of the debtor’s employees. Experts of Vasil Kisil & Partners described the principal restructuring tools, NBU regulatory restrictions, the whole restructuring process, restructuring of debts to several creditors (syndicated loans) and to bond holders, and touched upon the controversial issue of bankruptcy as an alternative to restructuring.
Tax implications of various debt restructuring mechanisms were explained by representatives of Tax & Legal Department of Ernst & Young Partner Volodymyr Kotenko and Manager Ihor Chufarov. Ernst & Young experts provided a detailed description of the most common methods of debt restructuring including reduction of interest rate under the loan agreement, partial acquittal of debt, debt write-off in the bankruptcy proceedings, loan conversion into equity (shares) of the debtor and transfer of the subject of pledge for the debt repayment, mentioning that tax benefits are not the end in itself of these tools. They believe that, from the taxation point of view, the major objective is to avoid burdensome taxation for creditor and debtor.
Numerous questions from the audience were confirmed that the topic is as complicated as it is vital. Round table participants including Astelit, Vitalux, Poznyakyzhylbud, Ferrexpo Petroleum Onshore, Foxtrot, OTP Bank, Oshchadnyi Bank, First International Bank and many other companies were unanimous in their desire to continue the discussion. For coordination of further events, you may contact Head of Vasil Kisil & Partners PR Department Tatyana Sabitova at [email protected] or +38044 581-7777.