Navigating Financial Distress: Financial Debt Restructuring

Key Takeaways

1. 1. Recognition of mismatches between cash flows and debt obligations as well as the need for a restructuring of debts to a sustainable level.
   
   2. Open and continued communications between advisers, management, major shareholders and creditors on the status of discussions with potential white knights and the proposed regularisation plan.
   
   3. Good working relationship between advisers and all key stakeholders required, including sharing of information and status of matters.
   
   4. Early and proactive actions taken (e.g. appointment of advisers and solicitors) to address difficulties faced thus maximising the potential options for a successful restructuring.
   
   5. Need for advisers to assist in bridging gaps, providing independent perspectives to stakeholders, and formulating a mutually acceptable solution, culminating in the implementation of the workout proposal.

Economic and industry downturns are inevitable, often placing significant financial strain on businesses. Companies lacking resilience during challenging periods may face financial difficulties which, if not addressed appropriately, may lead to insolvency. For groups or companies that remain fundamentally viable but face temporary mismatches in cash flows, financial debt restructuring should be a primary consideration. Even where certain parts or businesses of a group are not viable, a financial debt restructuring may still be considered alongside other options (e.g. disposal or winding down of value-reducing assets) to maximise returns for stakeholders.
 

The Challenges and BDO’s Role

As a result of the downturn arising from the COVID-19 pandemic, our client faced an unexpected challenge in its business thus being unable to meet the scheduled repayments for its previously restructured debts.

Recognising that there was a mismatch between cash flows and debt obligations as well as the need to right size its debt proportionately to its expected cash flows and repayment capability, our client approached BDO to assist in formulating a workout proposal in relation to its obligations to financial institutions and other creditors, assist them in bridging the gap with major creditors and to communicate or liaise with the White Knight. 

Our client was in alignment with BDO in respect of having open and continued communication with key stakeholders to keep them appraised of developments within the client’s business as well as options being explored for the debt restructuring. Feedback from stakeholders was also taken on board for consideration and, where possible, incorporated into the final workout proposal.

As there is often a perceived, if not actual, divide between companies and their creditors, there was a need for independent advisers such as BDO to be appointed to provide objective views, bridge any gaps which exist and ultimately devise a workout proposal which is mutually acceptable to all key stakeholders. A workout proposal also requires alignment in relation to, among others, stakeholders’ perception of the strengths of the business and sources of repayment, including whether cash flows are able to sustain the proposed or required recoveries, if there will be potential support from major shareholders and if waivers are required.

BDO was then appointed as the financial advisers to formulate a debt restructuring plan for our client and its key subsidiary as well as to work with the client’s Principal Adviser with regard to its Practice Note 17 (PN17) status. 

BDO thereafter worked in step with the client, key stakeholders and the White Knight to formulate a workout proposal. Feedback for improvement in repayment terms and whether they would be acceptable were sought throughout the process. This involved meetings with key stakeholders and keeping them updated in relation to the progress of the financial debt restructuring. 

As our client was facing mounting pressure from creditors, including potential winding up petitions, there was a need to secure legal protection while a workout proposal was crafted. BDO assisted in applications to the Court by the client’s solicitors for restraining orders (including extensions) under Section 368 of the Companies Act 2016 (the Act).
 

The Outcome

The final workout proposal was a “self-rescue” plan based on the business plan agreed between our client and the White Knight. Key highlights:

1.    The workout proposal was a comprehensive solution involving:

• A capital injection from shareholders (including undertakings in relation to subscription of equity issuances by the major shareholder and the White Knight) where some of the proceeds were used to partially repay creditors;
• Use of existing cash as partial repayment to creditors;
• Issuance of equity as part settlement;
• Waiver of remaining portions of debts which were not settled;
• A regularisation plan to restructure the client’s financial position (including improving its gearing, cash position, net asset position and reducing accumulated losses) to regularise its PN17 condition; and
• A streamlining the client’s operations by liquidating, striking off and/or disposing non-core entities.

2.    The workout proposal was implemented via proposed schemes of arrangement (SOA) pursuant to Section 366 of the Act, where BDO also assisted in the client’s solicitors’ application to the Court for:

• An order for meetings of creditors to be convened for the SOAs pursuant to Section 366 of the Act; and
• Sanction from the Court for the SOA, after it had been approved by the requisite majority of creditors.
• The SOAs were successfully completed after all conditions precedents and repayment terms were met.
• The holding company is now on track to exit from its PN17 status in the near future.

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