Bankruptcy and restructuring

December 2024  |  WORLDWATCH | BANKRUPTCY AND RESTRUCTURING

Financier Worldwide Magazine

December 2024 Issue

Global bankruptcy and restructuring markets have been a hive of activity of late. Across multiple industries, troubled companies have sought effective strategies to address financial distress, restructure debt obligations, and resolve complex issues and claims in non-judicial consensual restructurings and contentious bankruptcies. Driven by a combination of economic uncertainty, rising interest rates and pressure on highly-leveraged companies, activity is forecast to remain robust, with the trends of the last 12 months likely to continue.

FW: Could you provide an overview of what you consider to be among the most significant trends in the corporate bankruptcy and restructuring arena over the past 12 months or so?

COLOMBIA

Gomez-Clark: In the last 12 months, nearly 800 insolvency applications have been filed with the Superintendency of Companies, the Colombian authority that regulates insolvency proceedings in Colombia. Of these, around 60 percent have been requests for reorganisation and the remaining percentage corresponds to liquidation cases. Most of these cases are concentrated in Bogotá, the country’s capital. In terms of sectors, commerce continues to lead the trend in insolvency proceedings and is followed by construction, manufacturing and transportation. It is worth highlighting here that the construction sector in the last two years has been seriously affected by changes to the rules on incentives for constructing social housing, high interest rates and current sociopolitical conditions practically stopping construction investment in the country. To give some figures that reflect this situation, in the first quarter of 2024, licensed housing units fell by 35.7 percent and new home sales contracted by 14 percent.

UNITED KINGDOM

Stephenson: Persistently high interest rates are making it more difficult for weaker borrowers to service their debt, especially against a backdrop of sluggish economic growth in Europe. 2024 year to date defaults in Europe are at their highest levels since 2008 – nearly 60 percent of which have been distressed exchanges. Lower-rated issuers continue to struggle with highly-leveraged capital structures, looming debt maturities and changing consumer preferences. 2024 witnessed the true arrival of liability management transactions in Europe, utilising technology imported from the US, such as up-tiering, drop-down and ‘pari plus’ transactions. The year also saw the bedding-in of European preventive restructuring processes, successfully utilised in many complex, international, high-value restructurings. Examples include, among others, Casino and Orpea in France, Gerry Weber, Leoni, Softline, Spark Networks and Branicks in Germany, Cimolai in Italy, Vroon, Steinhoff, Bio City and McDermott in the Netherlands, and Celsa, Food Delivery Brands, Naviera Armas and Pronovias in Spain.

FRANCE

Nerguararian: Apart from the few big restructurings over the last 12 months, such as Casino and Atos, the restructuring market has not been very active for large caps. What we can see though is an increase in the number of insolvency proceedings for small and medium-sized enterprises (SMEs) that, due to a lack of anticipation or the drying up of funding sources, end up in a distress sale of the business to a third party, absent any possibility to restructure it internally. In addition to the structurally ailing industrial sectors – retail, automotive and energy-intensive businesses – we note an uptick in the office real estate sector, similar to what happened in Germany, with the negotiation of ‘amend and extend’ as part of pre-insolvency proceedings, so as to gain time in the hope of a real estate market recovery in a few years’ time.

INDIA

Aggarwal: The key enabler for corporate bankruptcy resolution in India was the introduction of the 2016 Insolvency and Bankruptcy Code (IBC), followed by the Reserve Bank of India’s guidelines for resolution of stressed assets in 2019, which together form the comprehensive basis for resolving stressed assets in India. These measures have been responsible for reducing gross non-performing asset (NPA) numbers in the banking system from a peak of 10-plus percent to about 2 to 3 percent now. Additionally, a number of large legacy NPA cases across various sectors were successfully resolved using these measures. The number of ongoing corporate insolvency resolution cases under the IBC has declined year on year, with 1899 ongoing cases as of December 2023 against 2000 cases in December 2022. By sector, manufacturing accounts for the highest share at 38 percent of overall cases, followed by real estate at 21 percent, construction at 12 percent and trade sectors at 10 percent. Until June 2024, creditors had realised 161 percent of liquidation value and 84 percent of fair value. The cumulative recovery rate has been on a downtrend, decreasing from 43 percent in Q1 2020 and 32.9 percent in Q4 2022 as larger resolutions have already been executed and most of those remaining are legacy cases with limited value. The overall recovery rate up to Q3 2024 was 31.86 percent, implying a haircut of approximately 68 percent for financial creditors.

UNITED STATES

Goffman: There have been a number of important trends over the past 12 months. First, there has been a tendency to try to find out of court solutions, or to use non-US corporate restructuring filings, to avoid the high cost of Chapter 11 restructuring. There has also been a proliferation of private credit to replace bank lending. The use of quick pre-packs to gain the benefits of Chapter 11 while minimising the costs and negative business consequences has also been increasingly common. There has been a continuation of ‘creditor on creditor violence’ as part of liability management transactions. Third-party non-consensual releases in Chapter 11 cases have been eliminated due to the Purdue Supreme Court decision. Likewise, there has been a pushback on Texas two-step bankruptcies by the Third Circuit Court of Appeals. And finally, there has been adjustment across various sectors, and industries, to the lifestyle changes engendered by the coronavirus (COVID-19) pandemic.

AUSTRALIA

Rathborne: From an Australian perspective, there are three key trends. First, large corporates with debt structures of more than $200m-plus have generally avoided formal appointments, with their focus being on consensual amendments and restructurings, notwithstanding insolvencies across the economy are up 40 percent on 2023, the highest in over a decade. Second, inflationary impacts continue to be the key catalyst impacting financial performance and causing distress, and we can see this with the construction sector representing over 25 percent of all insolvencies. Third, the evolution of how private credit reacts through a distress cycle has not fully played out. But with most private credit providers still having duration in their own funds, we are seeing consensual amendments or ownership transitions occur – particularly for larger corporates – providing time for the underlying debtor to recover and reposition ahead of any exit or refinance.

UNITED ARAB EMIRATES

Bhatt: A significant development in the UAE bankruptcy and restructuring framework over the past year has been the implementation of the new Bankruptcy Law, effective as of 1 May 2024. This legislation introduces crucial enhancements, including the establishment of a specialised Bankruptcy Court, a new preventive settlement procedure, and a register for court judgments and insolvency applications against debtors. We anticipate a rise in the number of in-court and out-of-court restructuring processes as lenders and borrowers take advantage of this new legal framework. There is also an increase in investor interest in distressed assets in the UAE, highlighting a shift toward turnaround strategies and the potential for good returns through the improvement of underperforming businesses. Along with this, the growing presence of secondary funders in the UAE market provides alternative exit strategies for key stakeholders, including insolvency practitioners, creditors and financial institutions (FIs). More broadly, the UAE restructuring industry is more and more relevant and more and more exciting.

MEXICO

León: In the past year, the corporate bankruptcy landscape in Mexico has been shaped by three main factors. First, the liquidity challenges faced by non-bank financial institutions (NBFIs). Mexican NBFIs, mainly those focused on financing and leasing, have dealt with a lack of liquidity. The difficulties of finding new funding was accentuated by the four major NBFIs’ defaults, which shook the market’s confidence. Second, the startup crisis. Over the past two years, start-ups have struggled with limited capital and increasingly difficult to continue funding rounds. Macroeconomic and other external factors have played a role. However, over-expansion and competition in saturated markets have been important factors for these companies, particularly for those in the consumer goods and FinTech industries. And third, a proposed amendment to Mexico’s bankruptcy law. This amendment is designed to improve the current insolvency system by enhancing protection for companies, streamlining the insolvency process, supporting SMEs by reducing costs and timings for such companies, expanding the authority of judges and providing a new role to guarantors. A streamlined bankruptcy regime is likely to encourage more companies to use the Mexican Chapter 11 equivalent during their restructuring efforts. However, the uncertainty caused by an overhauled judicial system could derail such expectations.

FW: What options are available to struggling businesses in the current market? How important is it to engage external advisers early when there are serious signs of distress?

UNITED KINGDOM

Stephenson: There are various options available to struggling businesses in Europe, depending on their specific circumstances. These include refinancing, liability management transactions, restructuring, whether in or out of court, distressed mergers and acquisitions and disposals and, in a worst-case scenario, formal insolvency proceedings, which may involve a pre-packaged sale of the business. Engaging external advisers early is critical, as experienced advisers can assess the viability of multiple restructuring options, negotiate with creditors, and guide businesses through legal complexities. Early intervention almost invariably offers greater optionality, preserves more value and provides better outcomes than last-minute efforts.

FRANCE

Nerguararian: Depending on the extent of their difficulties, struggling businesses have a large array of options, from amend and extend to a fully-fledged restructuring or sale of the distressed business. They may use any of the French proceedings available to them, be they pre-insolvency proceedings such as mandat ad hoc or conciliation, or insolvency ones including safeguard and its pre-packaged version, judicial reorganisation or judicial liquidation proceedings. Management are not always aware of the variety of financial and legal restructuring options available, while being reluctant to acknowledge the difficulties faced by their business. Engaging external advisers, both legal and financial, at an early stage is therefore critical to help management make a diagnosis, anticipate and implement the most appropriate and often lightest restructuring solution.

INDIA

Aggarwal: Businesses that are struggling have a variety of options. One is fresh financing. Typically, this can come from specialist credit funds and be structured as pari-passu or super-senior financing and used for growth, capital expenditure or working capital. However, harmonising terms with existing creditors is the key challenge here. Another option is debt restructuring. The firm can seek to restructure its debt under the ‘early identification of stress’, whereby there is a payment delay but the account is still not categorised as non-performing. In this scenario, the option to restructure the debt, either under existing management or with a change in management, exists based on the provisions of the Reserve Bank Of India’s June 2019 circular. Finally, the business could go for a voluntary insolvency application, which will provide a moratorium on debt servicing and also a standstill on any creditor enforcement through the resolution period. As these remedies have significant consequences for existing management and shareholders, it is critical that a financial adviser be onboarded early to analyse various options, their implications for different stakeholders, as well as to formulate and negotiate with creditors a comprehensive plan for business revival and preserving value. Additional and interim financing requirements, if any, can also be built into the proposal.

UNITED STATES

Goffman: There is an extensive panoply of strategies available to struggling businesses, including out of court financing, out of court restructurings, M&A transactions, pre-pack bankruptcies, Chapter 11 restructurings and foreign restructuring options. It is crucial that businesses bring advisers onboard as early as possible, as failure to do so may result in out of court financings, out of court restructurings, M&A options and pre-packs no longer being viable options. The longer a struggling business waits, the more likely it is that it will only be able to react to the actions of unhappy creditors rather than being proactive and driving its own strategy. It is also critical that companies bring in the ‘right’ advisers. While some advisers have a history of having most of their clients file long, traditional and expensive Chapter 11 cases, this is not always the best route for all companies. Often, if a company has to file for a traditional Chapter 11 case, it is the result of advisers being retained too late in the process.

AUSTRALIA

Rathborne: From a macro perspective capital remains abundant. Similar to global trends, the level of private equity (PE) and private capital dry powder remains significant, and we have not seen any material pull back in terms of appetite to deploy. Hence, businesses under pressure are generally able to test full exits, refinancings or capital gap financings before needing to consider balance sheet restructurings. The key issue, as always, is whether a company has left itself enough runway to explore options, and, if new money is needed, whether the current structure is investible. Those debtors who pre-empt by getting the right advice early, if only for contingency planning purposes, are at the very least ensuring they can explore all options and maintain control over the process.

UNITED ARAB EMIRATES

Bhatt: There are more options available to distressed businesses in the UAE market now than ever before, whether formal or informal. Most restructuring deals are conducted consensually, typically involving an extension of terms, refinancing or some degree of cost rationalisation. A good level of early due diligence is important to ensure that there is a tailored plan in place for the restructuring – both to ensure that it is viable and that it meets the needs of stakeholders. Advisers can be helpful and sometimes necessary at the appropriate juncture, because they bring skills and experience that add value and make a real difference – cost and budgetary control, cashflow forecasting, sourcing capital and investors, sector expertise and capital structuring skills. This is particularly important where genuine local and sector experience is often the key. Also important in emerging markets is the risk of misappropriation and malfeasance. In that case, asset tracing, forensic investigations, fund flow analysis and tenacity are important ingredients.

MEXICO

León: Business owners in Mexico tend to view external advisers as damaging for their reputation. This is accentuated when it comes to the restructuring process. As a result, it is common for Mexican companies to delay seeking professional support until they have reached a tipping point with high liquidity constraints. The benefits of hiring a financial adviser to assist with a restructuring process are many. In a distress scenario, a restructuring adviser will make cash preservation the priority for the organisation. By using cash planning tools such as a 13-week cash flow projection model, financial advisers allow companies to completely visualise their actual liquidity position in the short term. While this may seem like an obvious strategy, some companies struggle to build a realistic business plan and communicate it effectively to lenders and suppliers. An external financial adviser can support these efforts to convey the right messages. It can also bring credibility to the company’s projections and proposals. A financial adviser can also help companies access new financing sources beyond a company’s existing ones, as well as bring to the table other restructuring options, such as bringing new capital from PE firms or family offices to relieve liquidity pressures. Although a company’s C-suite often addresses these areas, there is always room for further improvement. An external financial adviser with a fresh perspective can identify additional reduction strategies to help safeguard cash flow.

COLOMBIA

Gomez-Clark: Usually, companies with liquidity problems opt to directly negotiate debt reprofiling agreements with their financial creditors. However, these processes are slow when several financial entities need to agree on the conditions. Secondly, companies consider resorting to insolvency proceedings regulated by law 1116 of 2006, for which they usually turn to legal advisers. Unfortunately, although progress has been made in the distress industry, it is still uncommon for business management teams or boards of directors to seek financial advice focused on distress and turnaround, which means they arrive late to receive specialised advice, limiting the options and probability of business recovery. In my experience, the sooner a company seeks professional advice to overcome financial and operational problems, the higher the probability of successfully recovering the business and guaranteeing its sustainability and financial health in the long term.

FW: To what extent are troubled companies able to refinance and renegotiate existing debt structures in the current market? For those that are unable to do so, how would you gauge appetite in the market for acquiring distressed assets?

FRANCE

Nerguararian: In an uncertain macroeconomic and political environment, where access to capital markets is limited, distressed businesses tend to negotiate amend and extend with stricter financial conditions, such as a higher pricing and increased security package, including the transfer of key assets in certain circumstances in the French law trust. Given the current market, troubled companies in need of refinancing or new money injection are likely to have more difficulty obtaining them and would rather seek partnerships, failing which distress sale of the business would be considered. Business sales in the framework of French insolvency proceedings enable bidders to cherry pick the assets, jobs and contracts they wish to transfer without the debt pertaining to it, save exceptions, for a lump sum that is generally disconnected from the in bonis market value of the sold assets. It should be noted that credit bids are not allowed. Funds and corporates alike are keen to file bids in this context, as we have seen in recent months.

INDIA

Aggarwal: The ability of troubled companies to refinance and renegotiate existing debt depends on a number of factors. These include the cause of stress, whether it is due to industry-wide and external triggers, or to management failure, an assessment of underlying enterprise and asset value left in the business, the composition and nature of creditor groups, the extent of markdown required to be taken by the creditors, the need for additional capital to revive the business, and the extent of sponsor commitment, among others. For businesses that are unable to do so, the most common outcome is resolution under the IBC, which implies a write down of existing share capital, takeover of management by the creditors and a new investor assuming control of the business. If a successful resolution outcome is not achieved, the process moves to liquidation either as a going concern or through sale in parts. As the IBC process has evolved over the years, there has been greater participation of financial and strategic investors in resolution processes, and we have seen successful resolution in many traditional, capital-intensive businesses such as steel, power, real estate and financial services.

UNITED STATES

Goffman: In the current market, there is significant private credit available to refinance maturing debt. According to Morgan Stanley, at the beginning of 2024 there was more than $1.5 trillion in available private credit, with that number expected to grow to $2.8 trillion by 2028. Nevertheless, the interest rate environment is still significantly higher than it has been for most of the past 15 years. As a result, many companies are not able to refinance all their existing debt, requiring either additional high interest mezzanine debt or preferred equity or the conversion of some debt into equity. Businesses that are healthily operating but may be overlevered are generally finding lenders willing to convert debt into equity. In cases where existing lenders are not interested in doing so, there is a vast amount of capital in funds prepared to purchase that debt for the express purpose of converting that debt into equity. Of course, this depends upon the quality of the business and the state of the industry. Similarly, there are funds holding more than $1 trillion dedicated to the acquisition of distressed assets, again depending on the industry and asset in question.

AUSTRALIA

Rathborne: Refinancing and restructuring strategy is increasingly a function of what type of creditors sit in a company’s stack, and what solution the business needs, more so than current market conditions. For example, we have seen private credit held assets with bilateral deals secure amendment or restructuring solutions, with little to no public knowledge given the flexibility those funds can have with respect to flexibility to payment-in-kind extend maturities or take ownership positions. Contrast that with widely held term loan B (TLB) structures with offshore collateralised loan obligation funds or banking-led syndicates, where mandate or regulatory capital restrictions narrow the suite of alternatives they can offer. And if the distress is acute enough, new money or impairment on loans often becomes a catalyst for secondary trading. In short, given we have not yet seen, for large corporates, widespread defaults in bank books or private credit funds, we are seeing each credit be assessed on its individual merits, rather than portfolio-wide decisions to exit or de-weight in a sector.

UNITED ARAB EMIRATES

Bhatt: Many FIs are open to refinancing or restructuring existing obligations, especially when borrowers engage early, present a viable plan and demonstrate an ability to deliver on that plan. FIs in the UAE are also increasingly realistic in terms of pricing expectations, which is leading to greater deal flow, expedited decision making and better solutions. For companies that are unable to renegotiate their debt, the market for acquiring distressed assets is in its early stages and shows significant promise. Investors, including PE firms and distressed asset funds, are actively seeking opportunities with undervalued assets, which itself provides new solutions to local lenders and practitioners and helps develop the secondary distressed market.

COLOMBIA

Gomez-Clark: There are two factors currently affecting companies’ ability to renegotiate and restructure debt. The first is the general macroeconomic market situation that, with high rates and sociopolitical uncertainty, has led to a deterioration of both the consumer and corporate portfolio. Restructured loans as a percentage of the total portfolio of financial entities represent only 2 to 3 percent, consisting of reducing and capitalising interest, extending the term of the debt and granting grace periods. The second factor is qualitative and consists of debtors’ credibility with FIs. If the debtor has a good track record with the bank, the probability of reaching an agreement will be greater than if the creditor entity does not have confidence in the information disclosed by the debtor or in the recovery capacity of the business. In Colombia, there is an appetite to invest in distress. However, the local market is still incipient and there are few specialised funds. External investors have appetite but the size of the ticket in Colombia is very small. There are few exceptions, with recent cases such as Credivalores and other companies in significant distress, in which case they prefer to go to Chapter 11 and carry out transactions in other jurisdictions where the appetite for assets in distress is greater and debtor in possession financing is provided.

MEXICO

León: The refinancing options available to companies in Mexico depend on their profile. Large companies whose financial creditors are mainly banks have a better outlook than SMEs. This is because a significant portion of banks in Mexico are owned by international players. Banks have improved governance and response times in their workout departments, resulting in quicker support for companies seeking debt restructuring agreements. However, SMEs with non-bank lenders and creditors may face a harder negotiation, but their outcome is still positive. This is because non-bank lenders and creditors are more willing than ever to refinance debt or offer creative solutions to support companies in financial distress. That said, the process of finalising agreements can be delayed by local bureaucracy. Finally, for those companies that cannot reach an agreement with their creditors, Mexico offers a small but growing market of distressed asset investors. Indeed, some PE groups have shifted their focus from purely growth equity investments to alternative investments such as debt and distressed debt. In some cases, they are even interested in providing debtor in possession-like financing or exit financing. However, existing distressed asset investors do not provide nearly enough financing. In situations where a company is struggling to reach a solution with its creditors and lenders, identifying market interest in the potential sale of its distressed assets is usually a quick process.

UNITED KINGDOM

Stephenson: Troubled companies are still able to refinance and renegotiate existing debt structures in the current market conditions, although this is of course inherently challenging and does vary across the spectrum of stressed and distressed credits. Broadly, credit markets are open and companies with solid fundamentals and strong management teams can still find opportunities to refinance existing debt. There is a strong, sophisticated distressed debt market seeking investment opportunities across Europe and beyond. Appetite for acquiring distressed assets directly is mixed, with perhaps a greater appetite among trade buyers than credit investors.

FW: How would you characterise the evolving dynamic between various creditors? To what extent do parties need to compromise to achieve a viable solution for a bankruptcy or restructuring plan?

INDIA

Aggarwal: The committee of creditors (CoC) is the key decision-making body in the insolvency process. The IBC and courts have left a wide ambit of commercial and business decisions to the wisdom of the CoC and on multiple occasions held that the COC’s commercial wisdom is paramount and not open to judicial intervention. However, the functioning of the CoC lacks a formal mechanism of monitoring actions or sanctions against the members of a CoC for any acts of omission or commission. Due to the design of the IBC and the distribution waterfall mechanism it provides, the difference in the kind of charge or priority of creditors’ security interests in the pre-insolvency period is negated and secured creditors are accorded the same priority in the waterfall. This has been reaffirmed by the Supreme Court in a few cases as well. Additionally, section 30(2) of the IBC provides for a minimum liquidation value to protect the rights of dissenting financial creditors.

UNITED STATES

Goffman: Over the past few years, creditor on creditor violence has become a real issue. Small groups of creditors try to gain an advantage over other existing creditors, by offering fresh capital to cash-starved companies. While it is possible for such a transaction to solve a company’s problems, often the problems persist, and the company becomes embroiled in litigation, whether in Chapter 11 or state court, over whether the transaction in question was proper or should be undone. This creates extraordinary problems for the company. This is why, historically, when companies sought to raise fresh capital, they would offer the opportunity to most or all existing lenders, as opposed to a small subset. This is important because, at its core, restructuring is premised upon building consensus. That is best accomplished by treating all creditors in a fair and equitable manner, rather than preferring certain creditors. This was a fundamental premise behind pre-packs. Fairness, compromise and consensus building remain at the core of all restructurings.

AUSTRALIA

Rathborne: In the last 12 months we have seen, in off shore-issued TLBs, which might look to use UK or US restructuring processes, even if the core business is in Australia, an increased concern around creditor on creditor violence. This concern, though real for a number of market participants, ultimately just comes back to whether a lead creditor can either use the process – because of the size of its holding or jurisdictional quirks like Chapter 11 roll-ups – or is willing to provide new money to seek enhanced economics through a non-pro rata outcome. Ultimately, we do see creditors in most situations come to agreement upfront as to what a fair allocation of economics is for someone leading the deal or driving the post-deal turnaround.

MEXICO

León: During in-court proceedings the dynamic between creditors tends to be more friendly. Factors that align creditors’ positions in such restructuring processes are that the priority of claims is already established and proposals from the company to its creditors are largely the same. Conversely, out-of-court negotiations present a greater challenge in maintaining a healthy dynamic, as each creditor naturally competes for a larger share of the cake. In this case, maintaining clear communication with its creditors is crucial for the company. Other key strategies include offering the same terms and conditions to each creditor based on their priority claim, and maintaining transparency throughout the process. Companies applying such principles prevent conflicts or misunderstandings among creditors. Nonetheless, in recent months, creditors have collaborated to establish creditor committees. Such committees are an effective tool to maintain the different creditors informed and aligned on the progress of a restructuring. It is also important to mention that both debtors and creditors – whether acting individually or jointly – are in a difficult position, and both sides will need to make concessions to reach a successful negotiation. In bankruptcy or restructuring proceedings, there are no clear winners or losers. Instead, both sides become business partners who, though not entirely willing, make compromises for the greater good. This approach typically aims for either maximising recovery or minimising losses.

UNITED KINGDOM

Stephenson: Creditor dynamics are eternally and inherently complex in situations where the debtor has insufficient assets to repay all creditors in full. Increasingly-complex capital structures, and the recently-imported possibility of liability management transactions, make such dynamics even more complex. There is also now a greater propensity for creditors to challenge restructurings in Europe – in part as investors fight harder for the ‘last dollar’ of returns for their own investors, and in part as new restructuring regimes bed in – creating greater opportunities for challengers, as the acceptable parameters of such procedures have yet to be fully delineated. The advent of cross-class cram-down – that is, the ability to bind entire dissenting classes of stakeholders to a restructuring plan – across Europe means it is not necessary for all parties to compromise to achieve a viable solution. The new preventive restructuring procedures effectively reduce the ability for hold-out stakeholders to insist upon a compromise. However, consensual out-of-court restructuring solutions do remain preferable, wherever achievable.

COLOMBIA

Gomez-Clark: It is common for banks to form creditor committees in which they seek a unified and joint position toward the debtor. In recent insolvency history, there have been cases in which all creditors believe there is value in rescuing the company. However, even when there is a willingness to rescue the business, if solutions take a long time to unfold – such as more than two years – the value destroyed leads the Superintendency of Companies to declare the judicial liquidation of the debtor.

UNITED ARAB EMIRATES

Bhatt: The creditor mix is evolving in the UAE. Historically, the financial creditor landscape comprised numerous international banks alongside local banks. Many of these international banks have exited the traditional UAE market in recent years and local banks have developed enormously. This has led to a growing preparedness to promote restructuring processes and more streamlined restructuring processes and decision making. A compromise can be helpful in a bankruptcy, and it is absolutely necessary in a restructuring. While not the only ingredient, compromise is the key factor that will make or break a restructuring and help avoid bankruptcy. Compromise is not just about numbers. Often, compromising in terms of time, information and structure can be equally important. The key is to communicate early that, insofar as you are concerned, compromise is on the table, and articulate what that looks like. Experience tells us that this typically helps everyone reach a middle ground more quickly and effectively. There has been an emergence of new, non-financial creditors to the UAE market, such as government authorities like the Federal Tax Authority and financial creditors such as alternative funders and distressed asset funds. The creditor dynamic is now more nuanced and typically makes for a better structured and more robust refinancing, restructuring or negotiation process.

FRANCE

Nerguararian: The 2021 insolvency law reform in France has significantly changed the dynamic among stakeholders. On the one hand, where affected parties are consulted in classes, the debtor is now forced to reach a negotiated solution in safeguard, since its management can no longer threaten creditors of an up to 10-year term-out imposed by the court. On the other hand, the newly introduced cross-class cram-down mechanism enables imposing the plan without the need for a positive vote from all classes of affected parties. Although the new system has not yet revealed all its potentialities, we can already note that those senior creditors with a strong security package and those providing new money have gained leverage over the more junior creditors, as well as out of money shareholders, which can now be ousted in practice. The new system is therefore more efficient, with the risk of an increase in creditor on creditor violence.

FW: How do you expect the corporate bankruptcy and restructuring arena to unfold in the months ahead? What prevailing trends and developments are likely to dominate this space?

UNITED KINGDOM

Stephenson: The European restructuring market will remain active in the coming months, driven by a combination of economic uncertainty, rising interest rates and pressure on highly-leveraged companies. Ratings agencies are forecasting a slight decrease in historically-high speculative-grade corporate default rates. From a sector perspective, we expect particular restructuring activity in industrials, automotive, retail and other consumer-facing businesses, among other sectors. We also expect the continued ‘bedding in’ of European preventive restructuring frameworks and liability management transactions in selected large capital structures, as well as the continued selective use of parallel restructuring procedures in multiple jurisdictions. The UK is expected to adopt the UNCITRAL Model Law on Enterprise Group Insolvency and possibly to introduce a special administration regime for entities in the further education sector. In addition, the European Union will continue its initiative to harmonise insolvency laws across member states, specifically directors’ duties, pre-pack insolvencies and the avoidance of transactions entered into in the run-up to insolvency proceedings.

COLOMBIA

Gomez-Clark: We are still experiencing post-pandemic effects. High interest rates, high exchange rate volatility, inflation that has not yet completely subsided and a high level of uncertainty in the sociopolitical sphere means that there is a lot of nervousness in the business sector and, therefore, greater distress. In this context, it is anticipated that the insolvency market will remain active for at least the next 12 months and that additional relevant cases will emerge. It is expected that the construction industry will continue to be affected for a while longer, as well as non-banking entities, which present a mismatch in active and passive rates, and commerce, which faces a drop in consumption affected by interest rates and high inflation.

UNITED ARAB EMIRATES

Bhatt: Investment in the UAE is underpinned by a robust and well-supported view that corporate bankruptcy and restructuring will continue to grow and evolve, with certain key themes being at the forefront of this evolution. First, ongoing regulatory reform. The new Bankruptcy Law remains largely untested and will continue to be refined through practical application and evolving judicial interpretation. One area we may see benefit from further updates is the recognition of UAE bankruptcy processes in other jurisdictions, as currently there is no express adoption of the UNCITRAL Model Law under the new Bankruptcy Law, which would help to expedite cross-jurisdictional restructuring work, asset recovery and bankruptcy processes. Second, increased complexity and deal flow. There are increasing numbers of sophisticated market participants in the UAE corporate bankruptcy and restructuring space, supported by a more robust ecosystem, which is likely to lead to more deals and more complex but reliable solutions – in short, more deals with more transparency and more reliability of outcomes. Lastly, experience and reach. As the market develops, users of the local practitioners and market will identify and prefer those practitioners and service providers with skills and experience, international reach and resources, and a commitment to the UAE. A functioning bankruptcy and restructuring regime is vital and supports foreign direct investment in any jurisdiction, and is key to good business.

FRANCE

Nerguararian: We anticipate that the bankruptcy and restructuring market will continue to pick up, particularly given the current political austerity shift and anticipated economic slowdown in France, and while access to financing remains limited. Companies – in particular so-called ‘zombie’ companies – are likely to struggle to comply with the repayment schedule of state-backed loans that were put in place during the COVID-19 pandemic. Industry-wise, in addition to the retail and automotive industry, we anticipate continued consolidation of the nursing home, daycare and healthcare sectors, with further restructurings to be expected. We do not anticipate any turnaround in the office real estate sector either, given the current flat market. As part of restructuring negotiations, creditors may want to increase the use of cooperation agreements to try and mitigate the creditor on creditor violence risk, as seen in Altice, and regain leverage over management.

MEXICO

León: Over the next 12 months, the Mexican business sector, particularly start-ups and SMEs, will continue to face significant challenges in accessing new capital for stabilising and growing their operations. NBFIs will likely struggle with liquidity pressures due to rising non-performing loans. In response, banks are expected to remain cautious, adhering to conservative credit models without easing their lending criteria. This caution will be primarily driven by uncertainty surrounding the economic policies of Claudia Sheinbaum, Mexico’s new president, and the US election, both of which will have a direct impact on Mexico’s economic outlook and growth prospects. These political developments will shape the next four years of US-Mexico relations, influencing investor confidence and exchange rate forecasts. As a result, a wave of large bankruptcy proceedings in the near term is unlikely. Instead, the sectors most likely to experience difficulties will be start-ups and SMEs within real estate, particularly commercial and office spaces, aviation, FinTech and mining. Additionally, we are closely monitoring the potential effects of Mexico’s judicial overhaul on foreign investment appetite, as well as the anticipated changes to the bankruptcy law. The role of the Instituto Federal de Especialistas de Concursos Mercantiles in managing these developments will be pivotal in shaping the outcome of future insolvency proceedings in the country.

AUSTRALIA

Rathborne: The Australian market has seen relatively benign distressed conditions for the last couple of years. But with rates likely to stay higher and fiscal stimulus likely to see continued inflationary pressures, we will see a number of corporates and sponsor-owned assets that did deals at the low point of the rate cycle in 2020 seeking refinance or extension options. We do not see any change in the private credit landscape which will continue to be a strong supporter of the local non-investment grade loan market. However, it will be interesting to see if, in the next one to three years, those private credit funds with their own fund life or liquidity requirements seek to change their behaviour, and like banks, use amendment and restructuring discussions as an inflexion point to seek liquidity.

UNITED STATES

Goffman: Over the coming months, we expect the trends of the past 12 months to continue. Healthy companies will tap private credit to refinance maturing debt. In some cases, higher yielding mezzanine debt may be needed to cover any shortfalls. Weaker or more highly leveraged businesses will need to restructure. The smart ones will bring in the right advisers early and attempt to restructure out of court or through a pre-pack. Those that do not will often need to use a more expensive traditional Chapter 11 case. Companies that operate internationally will look at foreign restructuring options to avoid the high cost of Chapter 11. Certain lenders will continue to push liability management transactions that give them an advantage over other creditor groups, as creditor on creditor violence continues. In the area of mass torts, now that third party non-consensual releases have been outlawed by the Supreme Court, we will see opt-in or opt-out releases used in Chapter 11 mass tort cases. We may also see more foreign mass tort restructurings coupled with Chapter 15 filings. Some experts believe that mass tort restructurings will utilise District Court proceedings through Bankruptcy Code section 157(b)(5). Certain industries, such as commercial real estate, will continue to evolve based upon lifestyle changes arising from the pandemic. Funds put together to acquire distressed businesses or distressed assets will step in to fill the void when lenders do not wish to become owners. And, of course, black swan events like wars, pandemics and other unexpected events will remain the wild card.

INDIA

Aggarwal: While the IBC envisages time-bound resolution and prescribes timelines for key activities, there have been delays in timely completion of resolution processes mainly due to delay in judicial processes. To reduce judicial overload, it is crucial that out-of-court workouts or a mechanism with limited court intervention are given due emphasis. One of the frameworks proposed to resolve corporate insolvencies is mediation. Mediation can be used effectively to minimise loss of enterprise and asset value, as well as disruption to the affairs of the corporate debtor through effective problem-solving. The process can act as an alternate to the judicial process and provide a cost and time effective way to quickly resolve disputes. It is also imperative to introduce a pre-pack framework for large insolvencies. This will be a combination of both out-of-court and in-court mechanisms which provides financial creditors with the flexibility to tailor the process to the specific requirements of the distressed corporate debtor while ensuring transparency and safeguarding the interests of all stakeholders. There is also a need to revisit section 29A and its utility in the current context. Enough checks and balances can be embedded to avoid ‘gaming’ by existing and erstwhile sponsors. 

Cristina Gomez-Clark is a managing director at Alvarez & Marsal. With 30 years of financial and consulting services experience, she specialises in financial, operational and commercial business diagnoses and turnaround plans, cash flow projections and liquidity management, and financial restructuring. Ms Gomez-Clark serves in interim roles such as chief financial officer and chief restructuring officer and has led several transformations, restructurings and turnarounds for the retail, infrastructure and financial institutions sectors in north Latin America. She can be contacted on +57 310 280 4252 or by email: cgomezclark@alvarezandmarsal.com.

Jorge León Lince is senior director with Alvarez & Marsal in Mexico City. He brings more than 15 years of experience in corporate finance, asset management, and operational and financial turnarounds. During his tenure at A&M, Mr León has led different turnarounds in the retail, financial services and agribusiness sectors. He currently serves as asset manager of different SPVs and sits on the board of the Mexico chapter of the Turnaround Management Association. He can be contacted on +52 55 4525 4898 or by email: jleon@alvarezandmarsal.com.

Kate Stephenson is a partner in Kirkland’s European restructuring group. She has extensive restructuring and insolvency experience, including advising major stakeholders in all forms of national and international financial restructurings and insolvencies. She leads the firm’s technical business development initiatives and supports the team in problem-solving on their market-leading deals. This includes advising on a variety of restructuring plans, schemes of arrangement, company voluntary arrangements, administrations, enforcements (including by way of appropriation) and cross-border recognition. She can be contacted on +44 (0)20 7469 2301 or by email: kate.stephenson@kirkland.com.

Manish Aggarwal is a partner, co-head of the deal advisory practice and head of the infrastructure, disinvestments, and special situations group at KPMG India Services LLP. With 27-plus years of experience, he specialises in areas of strategy, M&A, restructuring, debt advisory, PPPs and divestments. He has worked with a spectrum of clients – large funds, strategics, developers, multilaterals and large, diversified conglomerates – across a diverse set of issues. His sectors of experience include real estate, energy & infrastructure and financial services. He can be contacted on +91 982 058 4506 or by email: manishaggarwal@kpmg.com.

Mihir Bhatt is the head of restructuring for the Middle East at Kroll, based in Dubai. With 20 years of experience – 15 in the Middle East – he specialises in debt capital, turnaround strategies and operational improvement. His extensive work with public and private clients across Saudi Arabia, the UAE and Qatar enhances Kroll’s restructuring capabilities in the region. He can be contacted on +971 50 900 9471 or by email: mihir.bhatt@kroll.com.

Carole Nerguararian is a partner in the restructuring and insolvency practice of Linklaters in Paris. She specialises in complex domestic and cross-border restructurings both in the framework of out of court and formal insolvency proceedings, where she advises all types of stakeholders. Her practice covers all aspects of financial and operational restructurings, including insolvency-related litigations, which enables her to offer full assistance to her clients through the whole spectrum of restructuring and insolvency processes. She can be contacted on +33 1 5643 2704 or by email: carole.nerguararian@linklaters.com.

Paul Rathborne is a managing director at MA Moelis Australia where he is head of corporate finance and focuses on capital structure advisory and M&A across a broad range of industries. He has been with MA Moelis Australia since it was established and has over 19 years of investment banking experience, and worked on many of Australia’s most complex restructurings. He has a bachelor of commerce with distinction from the University of New South Wales. He can be contacted on +61 483 981 347 or by email: paul.rathborne@moelisaustralia.com.

Jay Goffman has been a leading restructuring attorney and adviser for over 40 years. He has received numerous awards for his innovative turnaround work, primarily at Skadden, Arps, Slate, Meagher & Flom LLP, where he served as the long-time global head of corporate restructuring and a member of the executive committee. Prior to Skadden, he began his career with successful tenures at several other leading law firms. Mr Goffman is best known for having pioneered the use of prepackaged reorganisations in the US. He can be contacted on +1 (646) 516 835 or by email: jgoffman@smithgoffman.com.

© Financier Worldwide

THE PANELLISTS

COLOMBIA

Cristina Gomez-Clark

Alvarez & Marsal

MEXICO

Jorge León Lince

Alvarez & Marsal Mexico

UNITED KINGDOM

Kate Stephenson

Kirkland & Ellis International LLP

INDIA

Manish Aggarwal

KPMG India Services LLP

UNITED ARAB EMIRATES

Mihir Bhatt

Kroll

FRANCE

Carole Nerguararian

Linklaters LLP

AUSTRALIA

Paul Rathborne

MA Moelis Australia

UNITED STATES

Jay Goffman

Smith Goffman Partners