Restructuring in the era of COVID-19

Peter GrayCo - Managing Partner, Al Dahbashi Gray

Keeping the Harbingers of Doom at Bay

By Roberto Cornetta

“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”[1]

The current pandemic has meant that some companies may be going insolvent rapidly, despite the efforts of many governments to stem the tide.

In such distressed situations, stakeholders (debtors and lenders) seek to protect their position and provide a stable platform to the company. However, such a crisis also presents opportunities. Indeed, as Churchill reportedly said, “never let a good crisis go to waste”. While businesses are facing financial difficulty, it is an opportune time to consider alternative business streams, potential reorganization and new markets. Consider already the number of manufacturers who have quickly converted to producing much-needed medical supplies.

The road from financial tension to a more severe, expensive and risky crisis can be fast and slippery. Therefore, the golden rule when there is global short liquidity is to act rapidly as soon as symptoms of a crisis emerge.

Debt restructuring is just one example. As with any complex problem, the key is to conduct a robust analysis of the causes of the distress (both external and internal factors), and to identify and explore all recovery options. In fact, the analysis may well demonstrate that the effects of COVID-19 have simply exposed pre-existing fractures. Note for example that the UK clothing brands, Oasis and Warehouse, have blamed the pandemic for going to into administration, when in fact they were in trouble before it began. At the same time, clothing chain, Next, has been overwhelmed with orders on reopening its online shopping facility and is seeing a recovering share price. Any plan for recovery must therefore take into account any underlying weaknesses and present sustainable solutions.

A comprehensive analysis should involve a consideration of factors such as:

  • Whether there is enough funding to keep operating while a solution is being developed and implemented
  • Whether to start a more aggressive program of collections
  • The most sustainable capital/debt structure
  • How to reconcile all stakeholder positions to implement the new debt/capital structure
  • How to ensure the business is supported through its recovery, e.g. with temporary cash in the form of privileged loans or third-party capital injection
  • Whether the business may take advantage of existing pre-insolvency rules
  • Negotiating with large suppliers regarding financing e.g. vendor finance, anticipated payment with discounts etc.
  • Negotiating payment terms to align with loan installments and customer payments

Additionally, while analyzing existing facility agreements with lenders and potential structuring, the following should be considered:

  • Applying for a moratorium at least until execution of the restructuring plan and the disbursement of new liquidity.
  • proposing more flexible covenants to reduce default risk – eg. in respect of debt to equity ratios, grace periods etc.
  • Exploring alternatives to shareholder guarantees, for example by channeling customer revenues directly to lenders, and/or by renegotiating interest rates.

ADG’s lawyers have previously advised numerous public and private companies and PE funds on restructuring measures, from debt restructuring to alternative capital raising, bond restructuring, separation of business units, sales of non-core businesses, and reorganization.

ADG works with a number of financial institutions, other lenders and borrowers, financial advisory firms, fund managers and others, in order to assist them to combat the effects on all stakeholders.

Our experience in this area includes construction, telecoms, medical and other sectors. We are able to provide strategic advice and assist with:

  • Devising action plans for the pre- and post-financial restructuring process
  • Litigation, debt recovery and enforcement strategies
  • Internal and external investigations
  • Litigation financing options

Should you require any assistance or simply wish to discuss options, please contact Roberto Cornetta at rco@adglegal.com.

Roberto Cornetta is a Partner in Al Dahbashi Grays’s Dubai office. Roberto teaches in distressed debt at LIUCC University, Milan. He has a track record of over 20 years advising companies in complex national and transnational debt restructuring. Roberto has also advised large corporations and banks on bond restructuring, securitization, de-listing and reorganization, and issues of director’s liability.

 [1] Ernest Hemingway’s character, Mike Campbell in “The Sun Also Rises”