James Conomos and Mitchell Carey
Our recommendations to clients have not materially changed despite the current economic environment. We continue to recommend that businesses in financial distress be proactive and seek legal advice at the earliest opportunity.
The sooner advice is sought, the greater likelihood additional and more favourable restructuring options may be available. Where advice is sought too late, attractive options can be lost or their effectiveness greatly reduced.
That said, we consider that the prospect of successfully restructuring is presently greater than what we have previously encountered, aided undoubtedly by the lingering economic uncertainty. In our experience, the receptiveness of third parties to negotiating and reaching commercial compromises is at an all-time high. We expect this willingness will decrease over time as the economy recovers.
On this basis, the only real change to our usual recommendations is that clients who are experiencing or are expecting to encounter financial difficulties should consider restructuring promptly, as it remains a prime opportunity to do so.
For those in a position to acquire distressed businesses and assets, the increasing insolvency activity will give rise to opportunities. However, critically, where sales are by administrators and liquidators, the sale process will typically be short. It is, therefore, necessary to act quickly.
Philippe Termote
The pandemic wasn't bad news for everyone. Companies that had invested in technology fared better and in some cases business boomed, such as the pharmaceutical sector. Elsewhere, many firms in all sectors were quick to adopt new technology models for business operations, which included the use of mobile meeting apps, file sharing and using online apps and channels for sales, service delivery and marketing. The office real estate sector changed for good since homework will stay. We also see a rise in cross-border M&As, funds buying assets and showing interest in buying assets from destressed companies for who the prepack (see above) can be an ideal transaction tool.
Jennifer Haworth
In terms of trends, we are consistently seeing an increase in M&A activity, asset sales (and purchase), cash pool arrangements and the like being deployed by clients. This includes continued consolidation of market share across of a number of sectors, where financially healthy players are merging together to increase the marginalization of their minority competitors or cash rich businesses are picking off their poorer rivals who can no longer compete in tough market conditions. On the lending side, given that financial institutions are being more conservative and not lending on the same terms and to the same degree that parties were used to before, it seems that only the established players tend to be able to secure new financing on acceptable terms, which further tightens the screw on underperforming businesses.
This environment represents a real opportunity for cash buyers. With pressure increasing from interest rates rising and other factors, sellers are often highly motivated by a lack of options and time. This means that, for those can take advantage, there are opportunities for lower than expected price points and, in some instances, deals can be negotiated where there is little payment upfront, with financing to occur over time generated from future profits.
Typically, our firm's work in this space has an international focus, relating to Bermuda companies which are part of a wider group of entities. We have a strong M&A practice to support the increase in activity and have a tremendous amount of experience advising clients on both the sale and purchase of assets or shares.
We are also seeing an increase in foreign investment in Bermuda. There is limited capital available locally and therefore, in many instances, the investment comes in the form of partnerships with existing local businesses. There are limits on ownership by non-Bermudians, with the "60/40 rule" in place (60% control at board and shareholder level), but there are opportunities for non-Bermudian investment by way of an application for a Section 114(b) licence (which allows majority foreign ownership) which can be given at the Minister of Finance's discretion having regard to a number of public interest type factors.
In terms of foreign investment into Bermuda, we have seen examples of this in the hospitality and tourism market which was one of the hardest hit by the Covid-19 pandemic. This foreign investment has involved three different scenarios: equity investment, acquisition and loan finance. Our firm has experience with each of these scenarios and can guide any such foreign investor through the key regulatory, legal and commercial steps.
Elizabeth Dipchand
Intellectual Property assets, such as a registered patents and trademarks, are property properly considered in the context of restructuring, reorganization, liquidation and bankruptcy of distressed companies. For those in a stronger position, companies looking for opportunities may look to the intangible assets and IP portfolios of distressed companies as a way to provide more breadth to their development programs, freedom to operate in the market or even expansion into other jurisdictions.
Intellectual capital and intangible assets – and their potentially untapped value – can be strategically leveraged by companies on either side of the distress equation. We advise companies looking to shore up or take stock of their capital and assets to turn their minds to not only their registered IP portfolios (eg. patents and trademarks), but also the unregistered rights such as contracts, relationships, know-how, technology, and brand assets.
Contracts and relationships (eg. key agreements, exclusivity arrangements) may have particularly significant value in distressed situations and bear some further consideration. Despite restrictions against assignment, these assets may be a new key resource for a company looking for new opportunities or a source of capital for a distressed company. Under the US Bankruptcy Code and subject to approval, where a contract restricts or prohibits assignment, a debtor will generally have the right to assign the contract; such assignment is not predicated on curing defaults or assignee assurances of future performance. In Canada, a non-consensual assignment will require all defaults pre-filing to be cured. Further, the Court will have some consideration of the assignee's abilities in respect of future performance.
Cherry Bridges
The most significant trend in the Cayman Islands which will give rise to more opportunities for companies to be restructured instead simply being put into liquidation is the introduction of the Companies (Amendment) Act, 20211 which facilitates the efficient restructuring of distressed companies for the benefit of their stakeholders. i.e. a formal restructuring procedure for companies outside the traditional winding up process but under the supervision of a "restructuring officer" and the Grand Court of the Cayman Islands.
A company may petition the Court for the appointment of a restructuring officer on the grounds that it is or is likely to become unable to pay its debts and intends to present a compromise or arrangement to its creditors – a restructuring. Key points to note are:
- It will no longer be necessary for a winding up petition to be presented in order to facilitate a courtsupervised restructuring.
- An automatic stay will take effect upon the presentation of the Restructuring Petition which will prevent the continuation or commencement of any proceedings against the company without leave of the Court.
- The requirements for the appointment of a restructuring officer are otherwise the same as those for the appointment of a provisional liquidator and his/her powers are flexible and will be defined by the terms of the appointment order.
- There are protections in place to preserve and protect the rights of creditors e.g. a requirement for an inter partes hearing and a contributory or creditor may apply to the Court for the variation or a discharge of an order appointing the restructuring officers and secured creditors can enforce their security without the leave of the Court or reference to the restructuring officer and creditors may still present a winding up petition in respect of the Company, with leave of the Court.
David Ricardo Sotomonte Mujica
In order to tackle the crisis provoked by Covid-19 the national government, as well as introducing regulations to expedite the restructuring process (already mentioned), has incorporated several measures meant to ease distressed businesses. Among them are measures that are intended to provide support from the government to allow banks to renegotiate distressed businesses debt within certain conditions, reduce the tax debt of such business and provide economic support to cover salaries and other worker s benefits. More recently, because of the global supply crisis, measures were introduced to ́ reduce tariffs on the import of specific goods and reduce logistics costs.
All the measures have translated into attractive mechanisms for companies to face any issues, since they offer them a greater range of action and negotiation during insolvency proceedings, the conclusion of reorganization agreements in the short term, as well as a wide range of rescue and flexible mechanisms and tax benefits. It should be noted that the new 'recovery' mechanisms (NEAR and PRE) are presented as emergency tools that companies can access and, if not successful, still leave the door open to access the traditional processes of Law 1116 of 2006. This gives distressed businesses a wide margin of time to seek the best possible solution to their needs.
Consequently, today the national insolvency regime has been nurtured and strengthened by the new legal and monetary mechanisms that were adopted to overcome the economic crisis of companies because of the pandemic.
Yves-Marie Ravet
As mentioned above, business insolvencies in the first quarter of 2022 have increased by almost 35% compared to the first quarter of 2021.
This increase is explained by the end of the numerous state aids and the start of repayment of the "PGE".
The Ukrainian conflict is also impacting the cash flow of companies. The rise in the price of raw materials and energy, supply difficulties and inflation greatly amplify the risk of insolvencies for businesses already weakened by the covid crisis.
Nevertheless, the French government has recently set up a new "PGE" which aims to support companies economically affected by the war in Ukraine.
On the debtors' side, the watchword is anticipation. The earlier the company's difficulties are dealt with, the more likely its business will continue.
Businesses managers are therefore strongly advised not to hesitate to place themselves under the protection of amicable proceedings, as soon as difficulties arise. Businesses will thus benefit from the ideal framework for renegotiating their debts"
On the part of the buyers, the increase in the number of liquidations proceedings has led to an increase in the number of businesses that can be taken over in a judicial framework.
As the health crisis has led to a sharp reduction in bank lending, private funds have countered this reluctance of banks by investing massively in companies in need of liquidity".
Urs Breitsprecher
The takeover of a company in crisis opens up great opportunities for competitors and investors alike. However, such a distressed M&A transaction entails considerable risks: Financing and legal structuring are complex, due diligence for companies in crisis is time-consuming. At the same time, it offers the opportunity of a quick and attractively priced market entry in Germany as well as internationally.
Companies in financial difficulties can avoid various disadvantages through distressed M&A. On the sales side, there is an opportunity to avoid bankruptcies, dissolutions and damage to the company's image, as well as to preserve jobs. Such transactions can also create a solid basis for strategic realignments or far-reaching restructuring measures. The latter can be a benefit for both sides. Target companies are more willing to tackle changes due to the difficult situation and a better understanding of their necessity.
On the buying side, the opportunities are monetary and strategic. Buyers benefit from lower prices, quick access to a new market, first-time entry into a new segment or inorganic growth. Companies with liquid assets and a strong balance sheet can buy competitors out of the market. Sometimes companies are only up for sale because of the crisis.
Another way out of the crisis can be the participation of a new shareholder. This can be done, for example, by way of a capital increase through the issue of new shares (§§ 55 ff. GmbHG) or through the sale of existing shares for a small (symbolic) purchase price and the simultaneous obligation of the investor to make additional payments into the company's capital reserve (§ 272 (2) no. 4 HGB). In addition, limited repurchase or call options can be agreed to allow more flexibility for both parties, especially in the "adjustment phase". Even if the (old) shareholders thus give up part of their profit and control rights, this may be a fair price for averting the threat of insolvency and over-indebtedness and thus the insolvency of the company. The preservation of the company's reputation and customer base as well as the increase in creditworthiness for further bank financing leave the former shareholders in a better position in spite of dilution than in the case of the - otherwise often unavoidable - alternative of liquidation.
So a crisis is always a chance for the target and the buyer/ investor.
Gwynn Hopkins
We're finding that the current climate is opening up new opportunities, such as mergers with, or the acquisition of, competitors, as well as investing into new business lines. Another opportunity arising from distressed businesses is the chance to buy assets at discounted prices: hotels and commercial properties are of particular interest at the moment. And we're also seeing more forward and backward integration that is streamlining logistics chains.
But whether buying or investing, a thorough due diligence process by experienced professionals is essential. This helps to identify aspects of the asset not readily apparent and serves to provide valuable insights to assist in pre-acquisition negotiations and safeguard the buyer or investor's interests postacquisition.
We expect that sectors that could be of interest to distressed investors are those which are capital intensive/asset heavy or require high level of liquidity to fund working capital requirements, such as infrastructure, energy and resources, and manufacturing/distribution businesses (due to supply chain disruptions).
Clients are also looking to increase their lifelines by tapping into alternative debt sources, which increases opportunities for specialised distressed investment funds to curate debt packages that could be more appealing compared to the larger players.
Gautam Khurana, Sanjeev Ahuja
Our firm is in the fore front of advocacy for a large section of SME/MSME and assist them through a due diligence of their financials and their business models to keep them relevant in the dynamic environment.
The rise in cross border M&As: 1.3 billion consumer base and a 3 trillion economy are ripe for action in the corporate world. IBC and Covid, together is churning out the options by the day. Domino effect of defaults by big companies leading
to bankruptcies in the smaller segment has caught many unaware but has thrown options for M&A all around. Many target companies with operations stuck due to paucity of funds but having good underlying assets are available and someone sitting on cash is spoilt for choice. Aggregators can have a field day.
Funds buying assets: Assets have been picked up by many funds in the interim and aggregation is the name of the game for now, where these assets would be turned around with the changing times.
Companies selling assets to survive: Lot of non-core assets are being put on the block. Goodwill is being encashed and cash burns are being avoided. The mindset and the relationships in the credit industry is already seeing a paradigm shift when debtors in possession have given way to creditors in control regime with the advent of IBC.
Guidance and assistance on the IBC law by our firm has been valuable for the clients and has included.
How to apply the law to one's advantage by seeking moratorium against adverse legal proceedings,
Seeking a Pre-Pack arrangements for debt restructuring as provided in law,
Seeking haircuts to get rid of unsustainable debt and getting approved the new resolution plans from the lenders under the CIRP as provided in IBC.
Alessio Masala, Alberto Bruno
In Italy, the greatest opportunity for companies in crisis is to exploit the resolutions contained in the code of the business crisis. This provides for the possibility of contacting the OCC (organizations for the settlement of the business crisis), which recognizes certain types of entrepreneurs, the possibility of liquidating the debtor's assets and of selling the assets and ceasing the business activity. It also recognizes use of the minor agreement through which the entrepreneurial activity does not cease despite the sales of assets, along with a debt restructuring plan in which the intervention of the OCC and the court is required.
The current distressed business climate delivers some fundamental lessons: the need for international coordination for the definition and implementation of measures to combat the crisis is undoubtedly clear. International collaboration is also essential to mitigate the risks deriving from geopolitical tensions at a global level, accentuated by the Covid-19 crisis, the UK's exit from the EU and the current conflict in Ukraine.
In this sense, the company mergers and incorporations will be significant. It must be clear to entrepreneurs that "palliative" interventions (non-repayable contributions or subsidized finance) are not the solution to ensure the solidity of the company in the "new normal" post Covid-19 era.
It will be necessary to acknowledge that, especially for small and medium-sized enterprises, capital strengthening will be necessary through structural interventions. This can take place, if not through capital increases, then with aggregation actions that allow you to enhance your corporate interest, transforming it into a shareholding in companies larger in size.
Francisco Rodriguez-Nepote
Distressed companies met with a barrier for getting financing and fresh cash to continue their operations. However, a Debtor- in-Possession (DIP) financing is a useful tool to permit a debtor to get fresh cash and a creditor to lend money at a substantial interest rate, prioritizing ahead of other creditors.
The Insolvency Institute (IFECOM) has a link on its web page where debtors' bankrupt assets are listed to get the best purchaser at very competitive prices.
Finally, the 2014 amendment of the Bankruptcy Law permits debtors to sell assets that are not linked with the firm's operation, letting them survive a distress situation.
Ajibola Edwards
Cross-border M&As have significantly gained footing in Nigeria within the last couple of years as a tool for improving the viability of distressed companies with the primary focus being on acquisition. M&As are global corporate restructuring mechanisms geared at maximising profitability. Foreign companies are constantly taking advantage of M&As to partake in Nigeria's rapidly developing economy.
Whilst the primary legislation for M&As in Nigeria remains the Federal Competition and Consumer Protection Act 20196, and the Federal Competition and Consumer Protection Commission Merger Review Guidelines, the CAMA 2020 also serves as secondary legislation being the legal framework guiding companies and their operations in Nigeria. Other relevant legislations are the Investment and Securities Act (2017), the Rules and Regulations of the Securities and Exchange Commission (SEC), the Nigerian Stock Exchange Rulebook, and the Companies Regulations 2021.
Robert Lewandowski
If the debtor's restructuring involves the sale of the debtor's enterprise then the provision of the Polish bankruptcy law with regard to the so-called "pre-pack" may apply. As a result, the debtor or any of the creditors may apply to the court for an approval of the terms and conditions of the sale of the debtor's enterprise or its organised part to a given buyer.
The motion for the approval of the terms and conditions of the sale shall be accompanied by a proof of the payment of the tender guarantee to the amount of one tenth of the offered price and an estimate of the value of the enterprise or its organised part to be established by an independent expert enrolled onto the list of court experts. The court accepts the motion for approval of terms and conditions of the sale if the purchase price is higher than the amount possible to achieve within bankruptcy proceedings, less the costs of the proceedings and other liabilities of the insolvency estate that would have been incurred within such liquidation. To that end, "pre-pack" is a common method to purchase distressed entities in Poland at an attractive price.
Tham Wei Chern
Singapore's new insolvency laws came into effect in 2020, making it easier to restructure distressed companies.
The Singapore Insolvency, Restructuring and Dissolution Act, which is Singapore's omnibus insolvency legislation, has introduced Chapter 11-style mechanisms into Singapore's restructuring landscape to facilitate restructurings of distressed companies. In addition, Singapore has also adopted the UNCITRAL Model Law on Cross-Border Insolvency.
In addition, Singapore is also where many Asian and South- east Asian Companies are headquartered. Singapore therefore acts as a hub for M&A activity for companies operating in China, India and the entire South-East Asian region.
Singapore is therefore well placed as a venue in which wish to carry out cross-border restructurings of distressed companies.
There has already been a flurry of M&A activity in 2021, and it is expected that as distressed companies sell assets to survive, there will be an uptick in such activity going forward. In addition, companies with good fundamentals but which are facing cash flow issues will also be looking to raise funds from investors to tide themselves through this period.
Investors looking to acquire assets from distressed companies or investing in distressed companies should look carefully at the assets being acquired or the financial state of the distressed companies that are being invested in. Local law firms and insolvency practitioners can help to navigate local laws and regulations especially because distressed companies are usually close to or already insolvent. In such situations, a potential investor or purchaser must be careful to ensure that it is adequately protected when entering such transactions.
Balthasar Wicki
The international alignment of corporate tax structures and of financial markets supervisory regulations might possibly have led to a decrease in building up of new inter-group structures with Switzerland in the centre. Switzerland is still a very attractive jurisdiction due to its lean public administration, liberal employment law regime and still very low corporate taxes. But the consistent application of OECD transfer-pricing rules even in Switzerland has led to certain corrections. Switzerland is an economy mainly based on 'brain assets' – and, therefore, in our daily practice, we do not see an increase in pure asset-buying transaction. The continuation of operations and maintaining stability of key employees in a very challenging employment market requires mor long-term strategies.
Cash management and cash planning has become key. On the eve of a reversal of interest rates and based on own equity regulations, banks are tightening equity backing rules. So, liquidating non-essential assets and achieving a flexible, scalable costs structure, while still maintaining stability of key resources, seems to be a main concern of our clients and leads to respective transactional activities.
One trend we see in the market is that distressed Swiss businesses are increasingly thinking more openly and are also considering cross-border M&A as a restructuring measure.
Thomas Paoletti
The current economic instability caused by the Pandemic is unique in many respects because it happened at a time in world history when companies have become transnational giant corporations. As a result their finances are not confined to one single country or market, but are rather distributed around the globe, making insolvency and full financial collapse far more difficult than it once was. We believe that for this reason, in modern times, when a company wishes to acquire or merge with a competitor or simply another company, it is sometimes a complex process requiring multiple smaller acquisitions of individual assets.
In the economic climate of the post-Covid-19 world, we advise our clients to use this as an opportunity to grow and expand by acquiring assets from companies at risk of insolvency that can no longer afford to sustain said resources. In this way, our clients will augment their financial base while at the same time discharging the acquired companies of their "extra weight" that no longer serves them.
In the United Arab Emirates, there are several mechanisms that are designed to help distressed businesses achieve their restructuring and reorganization goals. However, the most important tool that we recommend to our clients regarding this particular issue is the special jurisdiction of the Common Law courts of the Dubai International Financial Centre and the Abu Dhabi Global Market; the reason for this is that these jurisdictions are perfectly adapted to help companies reach amicable settlements, which is the best option when you want to initiate a friendly M&A.
Nevin Sanli
Due to the pandemic, over the last couple of years we have seen an increase in businesses facing financial and economic challenges both in California and the United States overall. We believe this trend will continue for another couple of years or so. Many businesses will need to hire restructuring experts, valuation firms, bankruptcy attorneys, investment bankers, accountants, and other advisors to navigate through the Chapter 11 process. All these new costs must then be included in the reorganization plan.
Businesses in distress are vulnerable and competitors, and others in the eco-system, will try to recruit their best people, go after their clients, and amplify the chatter about their demise.
This will create additional pressure on the distressed business and will accelerate the downward spiral ultimately ending in complete destruction. Vulture buyers will circle around seeking to buy assets at significant discounts to fair market values. This will include intellectual property, machinery and equipment, inventory, and other properties. Opportunities will abound. Sometimes, when synergies can be realized, a financially healthy competitor will merge with the struggling business.
Private equity firms are also looking for struggling businesses and can sometimes pay relatively higher prices if revenues are still substantial (over $50 million) and there are brands, IP and other assets that can be exploited better without the liabilities.
Likewise, international buyers across all markets and industries will see fresh opportunities in these lame ducks. Their appetite is quite understandable because they are looking at expanding their presence in the U.S. but also bringing U.S. brands and products in some of their existing markets.
Thomas H Curran & Peter Antonelli
Regarding litigation matters involving distressed businesses, there has been an increasingly prevalence of litigation funding or non-recourse funding in the insolvency space. More and more litigants, both on the borrower/obligor side as well as the lender/creditor side are taking advantage of the additional fire power that a litigation funding partner can bring to bear on a drawn out, expensive litigation campaign.
In the debtor/borrower space, small to medium size businesses are taking advantage of a new provision of the Bankruptcy Code. The Small Business Reorganization act of 2019 added Subchapter V under Chapter 11 of the United States Bankruptcy Code to give businesses a faster, less burdensome and less expensive option for reorganization.
The new Subchapter V provides for continuity of company management and ownership structure, a shortened plan filing and confirmation procedure (90 days for filing) and the elimination of the requirement of a Disclosure Statement in most cases. This provision eliminates a disclosure process that has been likened to the prospectus issuance procedure in non- bankruptcy scenarios. Other provisions of the new Subchapter are the elimination of the Creditors Committee, the possibility of the plan of reorganization obtaining approval without creditor support and approval, and a specialized Trustee appointed to assist the parties in negotiating a swift implementation of a reorganization plan. This new Subchapter is particularly helpful to businesses, if they qualify, to jumpstart their post Covid-19 recovery/ reorganization in an efficient, cost effective and less intrusive manner than the traditional Chapter 11 reorganization process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
