A standstill agreement is a temporary contract that freezes debt collection actions, giving companies breathing room to restructure their finances without facing immediate legal action from creditors. Lenders agree not to take enforcement action, such as demanding repayment, suing, or forcing insolvency, for a set period of time.
Think of it as hitting the "pause button" on debt payments while everyone figures out a better solution. It doesn’t solve the problem, but it buys everyone time to think and negotiate. In
debt & corporate restructuring and
distressed debt scenarios, time can be the most valuable asset.
Let's explore how it’s used in real-life restructuring scenarios.
What is a Standstill Agreement? The Basics
Let's start with the fundamentals. When a company faces financial difficulties, creditors (the people or institutions owed money) naturally want their money back. Fast.
Companies can hit financial turbulence for many reasons: falling sales, rising interest rates, supply chain problems, or unexpected global events (remember the pandemic?). When lenders get nervous, they might want to pull the plug fast. But fast action often destroys value.
A standstill agreement exists to give breathing room:
- For the company, it gains time to stabilise operations, raise capital, or negotiate a restructuring.
- For the lenders, they avoid pushing the company into insolvency too early, which might reduce the amount they eventually recover.
In other words, the agreement aligns incentives. Nobody wins if the business collapses prematurely.
These legal contracts temporarily prevent creditors from taking aggressive collection actions like:
- Filing lawsuits
- Seizing assets
- Accelerating loan payments
- Demanding immediate repayment
Why would creditors agree to this? Simple economics. Getting 70 cents on the dollar later is often better than getting nothing today because a company went bankrupt.
Key Features of a Standstill Agreement
Every agreement contains several critical elements that protect both sides of the deal.
Time Limits
Most standstill agreements last between 30 and 180 days, though they can be extended if negotiations are progressing well. This isn't a permanent solution, but a temporary ceasefire.
Coverage Scope
The agreement specifies exactly which debts are covered and which creditors must participate. Not all creditors need to sign on, but typically, you need support from holders of at least 75% of the debt to make it work effectively;
supermajority action is generally required to bind all lenders to an agreement.
Permitted Actions
While creditors can't pursue aggressive collection, companies usually must continue making interest payments and provide regular financial updates to creditors. It's not a free pass; it's a structured pause.
Information Sharing
Companies typically agree to share detailed financial information, including cash flow statements, restructuring plans, and progress updates. Transparency is key to maintaining creditor trust.
So, while it’s a pause, it’s not a free-for-all. Both sides are tied to rules.
Example 1: Retail Chain Restructuring
Let's look at how this works in practice. Imagine a mid-sized retail chain with 200 stores, facing declining sales and mounting debt.
The Situation:
- Total debt: $500 million
- Monthly operating losses: $15 million
- Immediate debt payments due: $75 million
- Available cash: $30 million
Without a standstill agreement, creditors would likely force the retail chain into bankruptcy immediately. But the company's management believes they can turn things around by closing unprofitable stores and renegotiating leases.
The Standstill Solution: They negotiate a 120-day standstill agreement with creditors representing 85% of its debt. During this period:
- Creditors agree not to accelerate loan payments
- The company continues paying interest only
- Management closes 50 underperforming stores
- They renegotiate leases on remaining locations
- Monthly losses drop to $5 million
After four months, the company presents a viable restructuring plan that converts some debt to equity and extends payment terms. Creditors recover more money than they would have in bankruptcy, and the company survives.
Lenders see a better chance of recovering more of their money. Everyone gets a shot at a workable long-term fix.
Example 2: Energy Company Workout
Consider an oil and gas company hit by falling commodity prices.
The Challenge:
- Debt obligations: $2 billion
- Quarterly interest payments: $40 million
- Projected cash flow: Negative for the next 18 months
- Asset value: $1.8 billion (but only if operating)
The Standstill Strategy: The energy company secured a 180-day standstill agreement with bank lenders and bondholders. The key terms included:
- Continued interest payments at 75% of the original rate
- Monthly financial reporting requirements
- Asset sale restrictions without creditor approval
- New borrowing limits of $100 million for working capital
During the standstill period, commodity prices recovered partially, and they successfully:
- Sold non-core assets for $400 million
- Renegotiated supplier contracts
- Implemented cost-cutting measures, saving $60 million annually
- Developed a five-year business plan showing positive cash flow
The result? A consensual restructuring that paid creditors 90 cents on the dollar over five years, compared to an estimated 45 cents in a bankruptcy liquidation.
The Benefits: Why Standstill Agreements Work
For Companies
Breathing room is the obvious benefit, but there's more:
- Time to develop realistic restructuring plans
- Ability to maintain business operations
- Opportunity to negotiate better terms
- Prevention of asset fire sales
- Maintained employee morale and customer confidence
For Creditors
The benefits aren't one-sided:
- Higher recovery rates than bankruptcy
- Continued interest payments during negotiations
- Input into restructuring plans
- Preserved business relationships
- Lower legal and administrative costs
Common Misconceptions About Standstill Agreements
Here are some misconceptions you need to know:
"It's Just Delaying the Inevitable": Not necessarily. Many companies use standstill periods to install genuine operational improvements and market recoveries. Success rates vary, but studies show that companies with properly negotiated standstill agreements have typical restructuring success rates of 60-70%.
"Creditors Always Lose Money": Actually, creditor recovery rates in successful standstill-led restructurings can average 75-85% compared to 30-50% in bankruptcy liquidations.
Studies in some European jurisdictions cite a restructuring success rate of around 70% and higher average recoveries versus insolvency, though statistics are not universal. Sometimes patience pays better than pressure.
"Only Big Companies Can Use Them": While large corporations make headlines, standstill agreements work for mid-market companies too. The key is having enough debt and creditors to make coordination worthwhile – typically at least $50 million in debt with multiple lenders.
Key Success Factors
Not every standstill agreement leads to success. Research shows several critical factors:
Strong Management Team: Companies with experienced restructuring management have 40% higher success rates. Sometimes, bringing in interim executives with turnaround experience makes the difference.
Realistic Assessment: Overly optimistic projections destroy credibility. Successful standstills are based on conservative, achievable milestones that management consistently meets or exceeds.
Broad Creditor Support: Agreements with less than 70% creditor participation often fail because holdout creditors can still pursue disruptive legal action.
Clear Communication: Regular, transparent updates build trust. Companies that provide weekly or bi-weekly updates during standstill periods show higher success rates.
Standstill Agreement Limitations: How to Avoid Them
The "False Hope" Trap
Some companies use standstill agreements to delay inevitable bankruptcy without making real changes. This wastes everyone's time and money. The solution? Set concrete, measurable milestones and stick to them.
Creditor Fatigue
Extended negotiations can exhaust creditor patience. Most successful standstills either resolve within the initial term or show substantial progress by the halfway point.
Operational Deterioration
While management focuses on financial restructuring, business operations can suffer. Successful companies maintain strong operational leadership separate from restructuring teams.
Legal Considerations and Documentation
Standstill agreements are complex legal documents requiring careful attention.
What happens if someone violates the agreement? Clear consequences and cure periods prevent minor disputes from derailing the entire process.
Multi-jurisdictional companies need agreements that work across different legal systems. This often requires coordination between local and international counsel.
Financial information shared during standstill periods is typically confidential. Proper non-disclosure agreements protect sensitive business data.
The Broader Impact on Stakeholders
Standstill agreements don't just affect companies and creditors. They impact:
Employees: Job security improves when companies avoid bankruptcy, but uncertainty remains during negotiations. Clear communication helps maintain morale.
Suppliers and Customers: Trade creditors often continue normal business relationships during standstill periods, preserving valuable commercial relationships.
Shareholders: Equity holders typically see their stakes diluted or eliminated in restructurings, but standstill agreements may preserve some value compared to bankruptcy.
Market Trends and Future Outlook
The use of standstill agreements has evolved significantly:
- Increased Sophistication: Modern standstill agreements include more detailed operational covenants and milestone requirements than historical versions.
- Shorter Timeframes: Average standstill periods have decreased from 9-12 months in the 1990s to 3-6 months today as markets move faster.
- Greater Creditor Participation: Institutional investors now routinely participate in standstill agreements, bringing professional negotiation skills and realistic expectations.
The Strategic Value of Standstill Agreements: When They Make Sense
Not every financially distressed company should pursue a standstill agreement. They work best when:
- A viable business model exists despite temporary financial problems
- Multiple creditor classes require coordination
- Management has a credible turnaround plan with specific milestones
- Market conditions suggest potential recovery
- Asset values exceed liquidation value by a significant margin
Standstill agreements represent one of the most practical tools in corporate restructuring. They provide time, reduce costs, and often lead to better outcomes for everyone involved. While they're not magic solutions, they offer distressed companies a genuine opportunity to recover and creditors a path to better returns.
The key to success lies in realistic assessment, strong execution, and transparent communication. Companies that approach standstill agreements as part of a comprehensive turnaround strategy – not just a delaying tactic – consistently achieve better results.
Understanding how to draft a standstill agreement is just the beginning. The complex world of corporate restructuring requires deep expertise in legal frameworks, financial analysis, negotiation tactics, and strategic planning. Whether you're advising distressed companies, representing creditors, or managing workout situations, specialised knowledge makes the difference between success and failure.
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FAQ
What is another name for a standstill agreement?
Another name for a standstill agreement is a
forbearance agreement. Both terms describe a temporary arrangement where lenders agree not to enforce their rights - such as demanding repayment or initiating insolvency proceedings - for a defined period. The aim is to give the borrower breathing room to stabilise finances and negotiate a longer-term restructuring plan.
However, the terms are used interchangeably in the US and UK; some legal practitioners make subtle distinctions:
In strictest legal usage, a forbearance agreement sometimes refers to the lender unilaterally not exercising rights for a period, while a standstill agreement may require explicit commitments from both parties (e.g., no asset sales by debtor, no enforcement by lender).