Advanced Debt Restructuring

These can be summarised by continued high inflation and the fall in global real incomes, continued supply disruptions, rising international interest rates, falling trade and the falling value of local currency exchange rates versus the US dollar. This course has been designed for Corporate Bankers, Credit Risk Officers and Debt Restructuring experts the light of rising corporate failure in the bank’s countries of operation, resulting from these economic and financial difficulties.  

This course has been designed to take into consideration DEG’s unique mandate as a development bank in its key emerging markets of operation and therefore considers what the bank can undertake in terms of debt restructuring (and what it can’t) often in unclear or uncertain circumstances. It also considers actions that the bank can take in countries where the legal framework for restructuring is often not as developed as its own home market. 

Session 1 - Introduction to Debt Restructuring – Debt Restructuring principles

• Overview of the current severe economic climate and its impact on corporate clients in the light of high inflation and surging global interest rates
• The impact of risk commodity prices, inflation and global interest rates on DEG’s principal markets in Africa, Asia and Latin America.
• Review of the current position of the leveraged loan market and the rising tide of problem loans and corporate insolvencies since 2020
• An analysis of why companies fail and the different stages of the crisis that companies can go through on the road to failure
• An analysis of different reasons for restructuring (not only because of default)
• The danger of ‘covenant light’ loans and the inability of banks to take control of problem loans; why thorough due diligence and monitoring is the key to avoiding problem loans
• Applying John Argenti’s theory to due diligence and monitoring; identifying defects and mistakes in the client and taking action to correct them.

Workshop – Advanced discussion of different alternative scenarios in dealing with loans in default and covenant breaches from case study examples. Using the case study of the collapse of the international contractor, Carillion and other high-profile corporate failures to learn how things can go wrong.

Session 2 - Early Warning Signals of potential distress – Key leading factors of distress

• Review of key financial EWS prevalent across a number of different industries
• Danger levels of different financial covenants in different industries
• EWS derived from the financial statements
• Identification of the manipulation of the financial statements
• The liquidity crisis is the final stage of a company collapse
• Poor liquidity and EWS finance of poor working capital management
• Management activities and over trading
• Assessing management planning for working capital management
• Using univariate and multivariate frameworks to identify financial distress
• Application of the Z Score to distressed scenarios to identify potential failure
• Review of the International Finance Corporation’s (IFC’s) key EWS categories (Operating, Business, Financial, Investment and Reporting EWS)
• How other IFIs including the European Bank for Reconstruction and Development (EBRD) deal with problem loans and categorise distressed debt.
• Identification of Leading EWS and the importance of taking action early once a problem has been spotted
• The application of the GNPESTEL model to external risk analysis in the context of the global economy in 2023
• Introduction to Management risk (trustworthiness as well as capability) and its impact on corporate recovery
• Interrogating problem management and understanding gaps and areas for improvement in their capabilities as part of the debt restructuring process
• The role, power and limitations of the lender in restoring management effectiveness
• Strategic risk and its impact on the problem client

Workshop – We will review two distressed debt companies operating in the DEG’s countries of operation to identify EWS of distress. The main emphasis will be focusing on assessing leading EWS. We will also review a case study where management has been overtrading and have not identified the depth of their liquidity problem.  

Session 3 – When the company defaults; what actions can the banker take

• Reviewing classic trigger events leading to pre-emptive restructuring
• The importance of understanding whether the problem loan can be ‘worked out’ as a going concern and belief in the recovery strategy
• How to assess whether the problem loan client can be made viable or not
• Assessing when to ‘pull the trigger’ on the problem client
• The importance of avoiding ‘Extend and Pretend’
• Introduction to ‘Going Concern Solutions’ and why these are preferable to liquidation if the client is potentially viable over the medium term
• Assessing potential courses of action given DEG’s management in development banking in its countries of operation
• A review of debt restructuring policy and methodology at the IFC and EBRD.
• Use and application of a problem loan decision tree to assess potential recovery strategies and the action that the banker can take

Workshop – The delegates in their project groups will work through the case study of a client company that is in technical default (but not material default) and is showing increasing signs of financial distress. The delegates will be required to provide a solution to the problem and identify which courses of action they would need to take with client management in order to prevent the problem loan from defaulting.

Session 4 – Review of different Debt Restructuring Options and frameworks aimed at maximising the recovery of DEG’s exposure

• Reviewing different types of problem loan workout and corporate recovery
• Assessing the two main elements of corporate restructuring, namely financial restructuring company and organisational restructuring
• Understanding when financial restructuring is not enough and the need to solve the root cause of the problem through the operational restructuring
• When the problem loan is only potentially viable, why undertaking the operational restructuring is an essential first step before the financial restructuring can be completed.
• Emergency action is required to stabilise the problem loan client and prevent its financial collapse
• When and who should provide emergency funding to save the going concern in the immediate stages after default
• Review and application of the IFC’s restructuring framework to identify the favoured strategy for the problem loan working (going concern versus divestment)
• Key Questions that the banker needs to ask of the problem to assess the choice of the recovery strategy
• The overriding importance of trusting management to engage and cooperate with the bank during the restructuring process
• What to do in the event of management not being cooperative
• The advantages of ‘in court’ and ‘out of court’ divestment/settlement of the problem loan
• Review of the increasing use of debt sale as an exit route, its advantages and disadvantages
• How to deal with management during the corporate restructuring process
• Application of the Butler Matrix to assess options for dealing with the distressed company’s management

Workshop – The delegates in their project groups will analyse and provide solutions for another problem loan case study. The group will apply the IFC framework to the case study to assess which potential restructuring/recovery strategy which best fit the bank’s aim of maximising its existing loan exposure. They will then use Butler’s Matrix to assess what are the best options to deal with management during the restructuring process, in order to protect the bank’s interests.

Session 5 – Restructuring the problem and assess the Serviceable and Non Serviceable elements of the outstanding exposure

• The process of assessing the recovery strategy proposed by management
• The importance of fundamental credibility and feasibility of the recovery strategy
• The importance of assessing the forecast free cash flows (and DSCR) of the recovery strategy with management in detail
• Assessing the income-generating ability of the loan and reviewing it in the context of the potential financial restructuring within the bank’s
• Calculating the total serviceable amount of the loan that can be repaid through the recovery-free cash flows
• Assessing what recovery strategies can be implemented for the unserviceable elements of the loan
  • Debt to equity swaps, debt to asset swaps, debt haircut, PIK, etc.

Workshop – Delegates will review an applied debt restructuring case study of a company problem loan in the hotel sector and how the financing bank dealt with the serviceable and non-serviceable elements of the outstanding exposure of the problem loan. We will then assess the recovery strategy and resulting financial forecasts of a new case study of the problem loan to assess the serviceable and non-serviceable elements of the loan. The delegates in their project teams will be required to provide solutions for both elements of the restructured loan, including how DEG might deal with the non-serviceable element of the loan.

Session 6 – Divestment of the Problem loan – In court and out-of-court recovery methodology

• A review of the advantages and disadvantages of in-court and out-of-court settlement in debt restructuring
• The concept of the automatic stay and how it can protect the interest of the creditor
• The importance of the ranking of claims in the debt restructuring process
• Different methods of corporate recovery from Receivership, Administration and Insolvency
• When creditors can use the principle of ‘cram down’ of minority lenders across different jurisdictions.
• Duties of managers and directors during the restructuring process and how management can be treated across a wide range of European jurisdictions
• Personal liability of directors
• The ranking and claims of creditors and how we need to assess the outstanding exposure of other creditors in assessing the bank’s exposure recovery
• Time limits for filing claims in key jurisdictions
• The importance of cooperation with other bilateral lenders and the avoidance of unilateral dent recovery by other lenders of syndicate partners
• Introduction to Standstill Agreements and controlling the banking syndicate
• The popularity and effectiveness of Company Voluntary Agreements
• Examples of successful international CVAs in recent years
• The use and effectiveness of Pre-packaged Insolvencies (Pre-packs) in certain jurisdictions.

Case Study Workshop – During this session, the attendees will review a range of case study scenarios including International CVAs and review the potential application of the different recovery methodologies discussed during the session. The delegates in their project groups will also assess how they need to engage with other creditors and assess the drafting of a standstill agreement for the problem loan restructuring.

Session 7 - Review of different restructuring legislation across key jurisdictions and their influence on the jurisdictions of a number of DEG’s countries of operation.

Workshop – This session will follow immediately after session 6 building on the legal concepts covered. During this session we will review the different applications of legal concepts introduced in session 6 that are active in a wide range of European and North American jurisdictions, a number of which have influenced bankruptcy law in DEG’s countries of operation. We will also review these legal concepts in the context of key jurisdictions in Africa and Asia.

Session 8 - Implementing the Restructuring process – The five-stage framework

• Reviewing the importance of managing the restructuring process
• Review of a key five-stage framework to implement a successful restructuring process.
• Understanding different stakeholder interests and how to manage them as part of the process
• The case for and against a moratorium / restructuring of the problem loan.
• Review of stage 1 of the process – acquisition of data to understand the depth of the problem facing the defaulted client and the strength of the bank’s security and guarantees.
• Review of a data checklist to ensure that the banking team has sufficient knowledge to begin to draft the strategy for debt recovery
• Review of the company’s financial position and any recovery financial projections to assess the potential sustainability of future cash flows and debt repayment through the going concern.
• A review of the use and application of the Standstill Agreement as part of the restructuring process.
• What should be undertaken during the Standstill period
• Review of the content of a Standstill Agreement entered into by the creditors
• Review of the management process (Steering Committee process) implemented as part of the Standstill.

Applied Restructuring Case Study – The delegates in their project groups will review a major new case study in the African real estate sector. The attendees working in their project teams, will review the position problem loan and draft a list of questions and information requirements to understand the potential viability of the problem loan, the actions that need to be taken to stabilise and improve the company’s performance over the longer term and to understand the position of security that the bank can fall back on as a potential secondary source of repayment.  They will also draft a standstill Agreement

Session 9 – Assessing the potential viability of the company and devising the recovery plan

• Assessment of the potential viability of the problem loan and the recovery strategy and resulting forecast cash flows (Stages 2 and 3 of the restructuring framework).
• The use and application of the Primary Assessment of the potential viability of the problem loan – the advantages and practical application of the ‘Walk Through’.
• A review of the content and scope of the walk through and assessment of parties suitable for its undertaking and delivery
• Examples of successful ‘walk throughs’ used as part of restructuring
• Introduction to the Secondary Viability assessment and the role and importance of the Independent Business Review
• The use and application of the IBR
• The importance of Independence in terms of the delivery of the IBR
• Parties and examples of IBRs and the scope of the work undertaken
• Why the IBR is an essential part of the Operating Restructuring
• Creating the Scope of Works for the IBR by the banking team.
• Structuring the new restructured debt facility and undertaking sensitivity analysis to identify the most realistic repayment amount (Serviceable element of the debt) that the Bank can recover.

Operating Restructuring workshop: During this workshop, the delegates will devise a scope of works for both the Preliminary Viability Assessment (including the walkthrough) and the Secondary Viability Assessment (The IBR) applied to the African Real Estate case study introduced in Session 9 above.

Session 10 – Creation of the restructured loan, conclusion of options for the Unserviceable element of the loan (Stage 4) and assessment of the Least Cost Option for the Restructuring process (Stage 5)

• Application of sensitivity analysis and working with management to create the new restructuring loan
• The inclusion of elements of the client’s recovery strategy into the conditions of the new loan agreement
• The use of covenanted performance milestones and operating ratios, as well as revised financial ratios to control the recovery plan and strategy going forward
• Using stage five of the recovery strategy to compare the selected recovery strategy with other potential lower-cost options and reviewing the checklist of areas of assessment as part of this process.
• Negotiations with the client and pricing of the restructured loan.

Final Case Study Workshop – Using the case study, the attendees working in their project teams, will provide a complete restructuring/workout solution to the problem loan on the basis of the information covered during the course. They will review the sensitivity of the forecast financial projections in the excel model and propose a schedule for the restructured loan. The team will also include terms of a Standstill Agreement, if required and will present their restructuring solutions. They will also provide any alternative lower cost solutions that might be an alternative to the going concern solution identified.