Loan Workouts and Debt for Equity Swaps A Framework for Successful Corporate Rescues

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ISBN: 9780471893394 | 0471893390
Cover: Hardcover
Copyright: 7/10/2001

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The key to a successful loan workout is to identify the problems accurately and address them early. It is critical that the company's underlying business and financial problems are resolved and not merely the symptoms. Loan Workouts and Debt for Equity Swaps examines how a successful loan workout can be managed. It detail the processes and participants involved, whilst providing frameworks and practical step- by-step approaches that allow for a coherent and cohesive policy to give the best possible chance of success. The book assists in the ultimate aim of providing a firm base for the future health of the company involved and maximizing the lenders' returns. This work is not merely restricted to companies and banks involved in the process, but other important participants in loan workouts. Areas featured in the book are: ? What loan workouts are and why they are needed ? Non-performing loans related strategies, organization and systems ? Participants involved in loan workouts and their motivations ? Symptoms of corporate distress and corporate turnaround strategies ? Major steps involved in a typical loan workout transaction ? Special issues relating to debt for equity swap transactions ? A case study illustrating many of the issues covered in the book

Foreword

xiii

David Wilson Havelock

PART I: INTRODUCTION AND BACKGROUND

(26)

Introduction

(10)

The environment for loan workouts

(2)

Objectives of this book

(1)

Intended audience

(1)

Structure of the book

(3)

Terminology used

(1)

Acknowledgements

(3)

Loan workouts: what they are and why they are needed

(14)

Introduction

(1)

Background to statutory insolvency frameworks and loan workouts

(1)

The need for corporate recovery and rescue frameworks

(1)

Statutory and voluntary frameworks for corporate distress

(1)

Statutory insolvency frameworks

(4)

Voluntary rescue frameworks

(1)

The nature of loan workouts

(1)

The benefits and disadvantages of loan workouts

(2)

Factors affecting the effectiveness of loan workouts

(4)

PART II: STRATEGY, PARTIES AND THE PROCESS

(2)

SECTION A: LOAN WORKOUT STRATEGIES AND STRUCTURES

(32)

A framework for managing non-performing loans

(8)

Introduction

(1)

Elements of a non-performing loan strategy

(1)

The role of credit risk strategy

(1)

Prevention and control

(1)

Timely identification

(1)

Protective steps and remedial actions

(1)

The role of specialist teams

(1)

Communication channels and feedback loops

(1)

Impact of the bank's wider strategy

(2)

Organisation and systems relating to non-performing loans

(12)

Introduction

(1)

Positioning the loan workout unit

(3)

Responsibility and authority

(1)

Transfer of responsibility for cases

(1)

Loan workout unit structure and resources

(2)

Early warning systems

(2)

Problem loan classification

(1)

Asset management companies

(2)

Managing loan workout transactions

(10)

Introduction

(1)

Business philosophy and integrity

(4)

Transaction management

(2)

Controlling transaction-related costs

(4)

SECTION B: THE PARTICIPANTS

(38)

The company

(8)

Introduction

(1)

Company features conductive to loan workouts

(2)

Key stakeholders involved in a loan workout

(1)

Directors and management

(3)

Shareholders

(2)

Employees and trade unions

(1)

The banks

(10)

Introduction

(1)

The bank group

(1)

The co-ordinator

(4)

The steering committee

(2)

Facility agents and security trustees

(1)

Position of individual banks

(2)

Other key participants in loan workouts

(8)

Introduction

(1)

Factors limiting participation in loan workouts

(1)

Non-bank financial creditors

(2)

Debt traders and investors in distressed debt

(2)

Suppliers and other creditors

(1)

Preferential creditors

(1)

Customers

(1)

Governmental and other agencies

(1)

External advisors

(10)

Introduction

(1)

Reasons for engaging external advisors

(2)

Independent advisors

(1)

Reporting accountants

(3)

The company's external auditors

(1)

Legal advisors

(1)

Investment banking advisors

(1)

Other advisors and experts

(1)

SECTION C: THE LOAN WORKOUT PROCESS

(58)

A framework for executing loan workouts

101

(8)

Introduction

101

(1)

Loan workouts in context

101

(1)

Anatomy of a financial restructuring transaction

102

(5)

Implementing the framework

107

(1)

The moratorium, restructuring and refinancing

108

(1)

Turning around a business

109

(10)

Introduction

109

(1)

Internal causes of corporate decline

109

(3)

Operational control failures and fraud

112

(1)

External causes of corporate decline

112

(1)

Symptoms of corporate decline

112

(2)

Achieving short-term operational stability

114

(1)

Components of enterprise restructuring

115

(2)

Sequencing restructuring activities

117

(1)

Interaction between business restructuring and loan workouts

118

(1)

The information gathering and review process

119

(8)

Introduction

119

(1)

Initial internal appraisal

119

(2)

Obtaining information externally

121

(1)

Reports of reporting accountants

122

(4)

Other advisors' reports

126

(1)

Exploring loan workout options

127

(8)

Introduction

127

(1)

Review of debt workout options from the lenders' perspective

127

(1)

Short-term `exit' strategies

128

(2)

Medium-term `controlled exit' strategies

130

(2)

Long-term `financial restructuring' strategies

132

(3)

Evaluating restructuring options and developing proposals

135

(12)

Introduction

135

(1)

Types of risk in a loan workout

136

(3)

Assessing the risk of a financial restructuring proposal

139

(1)

Returns from loan workouts

140

(2)

Liquidation value

142

(1)

Evaluation

142

(2)

Developing financial restructuring proposals

144

(3)

Negotiating and completing transactions

147

(10)

Introduction

147

(1)

Ingredients of an effective negotiating process

147

(2)

Negotiating strategy

149

(1)

Bank lenders

150

(1)

Holders of bonds

151

(1)

Shareholders

152

(1)

Completing the transaction

152

(1)

Documentation and agreements

153

(1)

Loan workout information memorandum

154

(3)

PART III: THE MORATORIUM AND FINANCIAL RESTRUCTURING

157

(2)

SECTION A: THE MORATORIUM

159

(50)

Establishing a moratorium

161

(10)

Introduction

161

(1)

Causes of a moratorium

161

(1)

Principal features of a moratorium

162

(2)

Advantages and disadvantages of moratoriums

164

(1)

Underlying principles

165

(1)

Key provisions of moratorium agreements

166

(3)

Documentation structure

169

(2)

Financial creditors affected by a moratorium

171

(8)

Introduction

171

(1)

Determining who to include in a moratorium

171

(2)

The position of different financial creditors in a moratorium

173

(6)

The operation of facilities in a moratorium

179

(12)

Introduction

179

(1)

Determining commitment levels

179

(1)

Issues relating to different types of facility

180

(2)

On-going operation of facilities

182

(9)

The concept of loss-sharing

191

(8)

Introduction

191

(1)

The importance of loss-sharing

191

(1)

Definition and framework

192

(1)

Why is a loss-sharing arrangement necessary?

193

(1)

Loss-sharing provisions and documentation

194

(2)

Loss-sharing and different types of facilities

196

(1)

Sharing the reward as well as the risk

196

(1)

Loss-sharing provisions in a restructuring agreement

197

(2)

Multi-currency considerations

199

(10)

Introduction

199

(1)

Causes of currency-related complications

199

(1)

Limits and utilisation

200

(2)

Distributions and loss-sharing

202

(5)

Hedging

207

(2)

SECTION B: FINANCIAL RESTRUCTURING

209

(34)

Financial restructuring

211

(12)

Introduction

211

(1)

Objectives of a financial restructuring

211

(1)

Developing financial restructuring proposals

212

(1)

Key information needs

213

(2)

Entity priority and ringfence structures

215

(1)

New financing

216

(3)

Security-related issues

219

(4)

Inter-creditor provisions in a financial restructuring

223

(10)

Introduction

223

(1)

Priority rankings

223

(3)

Pre-enforcement distributions

226

(5)

Post-enforcement loss-sharing and indemnities

231

(1)

Decision-making and voting

231

(2)

Other terms and conditions

233

(10)

Introduction

233

(1)

Undertakings

233

(2)

Financial covenants

235

(4)

Term and commitment

239

(1)

Restrictions on assignment and transfer

240

(1)

Remuneration

240

(3)

SECTION C: DEBT FOR EQUITY SWAPS

243

(52)

Introduction to debt for equity swaps

245

(8)

Introduction

245

(1)

Definition

246

(1)

Advantages of debt for equity swaps

247

(1)

Disadvantages of debt for equity swaps

248

(1)

When is it appropriate?

249

(1)

Principal transaction parameters

250

(3)

Transaction approach

253

(10)

Introduction

253

(1)

The need for specialist advisors

253

(1)

Transaction-related considerations

254

(1)

Impact on information gathering and assessment

255

(1)

Assessing the appropriateness of debt for equity swaps

256

(1)

Evaluating debt for equity swap proposals

256

(2)

Negotiations

258

(3)

Exit-related considerations

261

(2)

Equity instruments

263

(16)

Introduction

263

(1)

Ordinary shares

264

(2)

Preference shares

266

(4)

Convertible debt instruments

270

(1)

Warrants

270

(1)

Other equity instruments

271

(1)

Structuring principles

272

(4)

Inter-creditor issues

276

(1)

Valuing equity instruments

276

(3)

Other transaction parameters

279

(10)

Introduction

279

(1)

Proportion of debt converted into equity

279

(6)

Proportion of equity for lenders

285

(4)

Other technical issues

289

(6)

Introduction

289

(1)

Accounting-related matters

289

(2)

Taxation

291

(1)

Selected legal and regulatory issues

291

(1)

Transaction mechanics

292

(1)

Swap of debts in subsidiaries

293

(2)

PART IV: CASE STUDY

295

(14)

Project Gloucester

297

(12)

Introduction

297

(1)

Background

297

(1)

Moratorium

298

(2)

Causes and impact of the financial crisis

300

(1)

Business restructuring

301

(1)

Financial restructuring

302

(1)

Debt restructuring

303

(2)

Debt for equity swap

305

(2)

Evaluation

307

(2)

Index

309

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Loan Workouts and Debt for Equity Swaps A Framework for Successful Corporate Rescues

Summary

Author Biography

Table of Contents

Supplemental Materials