Companies that find themselves in significant financial trouble are unable to pay their creditors when amounts become due. As part of a turnaround plan, many require a financial restructuring that seeks to compromise the financial claims of certain creditors.
We are currently assisting several clients with such a process. These Canadian clients have decided to attempt their financial restructuring on an informal basis instead of seeking the protections and restructuring mechanisms of the BIA or CCAA. We see more and more companies exploring informal restructuring options largely because, in many situations, the professional costs related to formal procedures have become prohibitive.
A powerful tool of a formal procedure is that it makes the restructuring process fair and manageable by eliminating individual creditor negotiations. Certainly there is give and take developing the final proposal to the creditor class. But, in the end, the creditors as a class decide to accept the deal or not.
Informal restructurings can be unmanageable, and therefore impossible, unless individual negotiations and deals are similarly removed from the equation. To do so requires incredible discipline by the company.
Our approach to this problem involves:
i) developing a credible business plan, including comprehensive financial projections. We spend a lot of time and effort seeking the buy-in of creditors to the plan.
ii) establishing guiding principles for the restructuring. For example, it is important to a current client of ours that shareholders not benefit from the process and, specifically, that their proposal pay 100% of the amount due to creditors. The proposal is therefore focused on scheduling payments, rather than discounting the amount.
iii) grouping creditors generally in accordance with their legal rights, taking into account the realities of on-going business needs.
The real work in the informal restructuring is to communicate the above points to creditors and to gain their agreement that the process is being rationally and fairly handled. If successful, the proposal itself simply falls out of the financial projection and the temptation to negotiate special one-on-one deals is largely removed.
Hiring the right professionals to assist with the informal restructuring is critical. The professionals must provide the credibility required for creditors to believe in the business plan and the integrity of the process.
Posted by Scott Sinclair, Range Corporate Advisors
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