Keep Calm and Follow the (Insol) Rules

This week Insol International – which represents more than 40 national associations and more than 10,000 restructuring professionals – released an updated Statement of Principles for a Global Approach to Multi-Creditor Workouts.

The new release reflects the contributions of Australian workout bankers: Jacinta Nielsen, Gwyn Morgan, Ian Copp and Tim Williams.

The SoP have their genesis in the so-called ‘London Rules.’  Ironically, as Pen Kent, former Executive Director of the Bank of England has explained, at first there were no written rules.  Instead the Bank of England promulgated an ‘unwritten, flexible framework’ with divergence addressed by ‘fireside chats.’

Pen Kent described the four central tenets as:

• banks should remain supportive on hearing that a company to which they have an exposure is in financial difficulty. In practice, this means that they keep their facilities in place and do not appoint receivers;
• decisions about a company’s longer term future should only be made on the basis of comprehensive information, which is shared among all the banks and other parties to a workout;
• banks work together to reach a collective view on whether and on what terms a company could be given a financial lifeline; and,
• the seniority of claims continues to be recognised, but there has to be an element of ‘shared pain’ i.e. equal treatment for all creditors of a single category.

Notwithstanding the Bank of England’s original intention to avoid written rules, with BoE endorsement, Insol issued the first SoP in October 2000.

The 2016 update does not make major change to the 2000 version:  the most significant amendment is an addition to the second principle “Conflicts of interest in the creditor group should be identified early and dealt with appropriately.”

It must be said that the apparent simplicity of that statement belies the practical extent of the challenge.  Today’s multi-creditor workout can involve parties whose focus is a loan-to-own strategy, which may require an actual or likely default.

There are those who say that a loan-to-own restructuring leads to a more rapid and more economically efficient operational turnaround, and that equity holders who facilitate that are entitled to a commensurate economic return.  My purpose is not to argue one way or the other, but rather to recognise that there is the potential for two mutually exclusive strategies to be in play, and that consequently, resolving such conflict may well be easier said than done!

The 50 page Statement of Principles for a Global Approach to Multi-Creditor Workouts II is available here, the principles themselves are:

FIRST PRINCIPLE: Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared to co-operate with each other to give sufficient (though limited) time (a “Standstill Period”) to the debtor for information about the debtor to be obtained and evaluated and for proposals for resolving the debtor’s financial difficulties to be formulated and assessed, unless such a course is inappropriate in a particular case.

SECOND PRINCIPLE: During the Standstill Period, all relevant creditors should agree to refrain from taking any steps to enforce their claims against or (otherwise than by disposal of their debt to a third party) to reduce their exposure to the debtor but are entitled to expect that during the Standstill Period their position relative to other creditors and each other will not be prejudiced. Conflicts of interest in the creditor group should be identified early and dealt with appropriately.

THIRD PRINCIPLE: During the Standstill Period, the debtor should not take any action which might adversely affect the prospective return to relevant creditors (either collectively or individually) as compared with the position at the Standstill Commencement Date.

FOURTH PRINCIPLE: The interests of relevant creditors are best served by co-ordinating their response to a debtor in financial difficulty. Such co-ordination will be facilitated by the selection of one or more representative co-ordination committees and by the appointment of professional advisers to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole.

FIFTH PRINCIPLE: During the Standstill Period, the debtor should provide, and allow relevant creditors and/or their professional advisers reasonable and timely access to, all relevant information relating to its assets, liabilities, business and prospects, in order to enable proper evaluation to be made of its financial position and any proposals to be made to relevant creditors.

SIXTH PRINCIPLE: Proposals for resolving the financial difficulties of the debtor and, so far as practicable, arrangements between relevant creditors relating to any standstill should reflect applicable law and the relative positions of relevant creditors at the Standstill Commencement Date.

SEVENTH PRINCIPLE: Information obtained for the purposes of the process concerning the assets, liabilities and business of the debtor and any proposals for resolving its difficulties should be made available to all relevant creditors and should, unless already publicly available, be treated as confidential.

EIGHTH PRINCIPLE: If additional funding is provided during the Standstill Period or under any rescue or restructuring proposals, the repayment of such additional funding should, so far as practicable, be accorded priority status as compared to other indebtedness or claims of relevant creditors.