Avoiding the “i word”

29 September 2017

Alan Tilley, Chairman of Bryan Mansell & Tilley LLP, discusses the trends in the restructuring profession and the move away from insolvency into growth.

Consensual restructuring continues to gain ground as the “go to process” for over leveraged and distressed business.

Half year 2017 statistics from UK and USA on insolvencies and Chapter 11’s show a continuing downward trend from an already low base in these countries. What activity there is focuses on the usual suspects; oil and gas, shipping and retail, but the absence of corporate restructuring in formal process in services, IT and general business sectors points to something deeper than the economy. Trends in the restructuring profession and the move away from insolvency into growth in turnaround and solvent restructuring practices is proof if it is needed that change to legal frameworks to encourage consensual restructuring is working. Change is also happening in Germany where insolvency specialists, mainly lawyers by training, are migrating back into corporate law. Further change in German insolvency law is awaited to conform to the recent EU Business Insolvency Directive which requires member states to introduce a consensual restructuring regime. Expect this to happen after the September national elections. German insolvencies will to continue to fall.

Evidence may be anecdotal as there are no statistics recording consensual restructurings. Also, there is no bright line at which a debt renegotiation becomes a distressed consensual restructuring. It is difficult to see that there will be ever be an accurate number. But as banks redress their balance sheets, both political and commercial pressures are moving them to seek change “under the radar” and away from headline grabbing insolvency. It takes time to change an ingrained process where at the first sign of distress a workout banker would pick up the phone to an insolvency firm but progressively banks are getting more accustomed to avoiding the value destructive “i word”. But, redressing balance sheets only is not a long-term solution for a non-performing company. Saving companies and preserving stakeholder value needs attention to cash flow, profit and loss accounts and operations. Experienced management guidance if not management change is required to achieve this. It is here that Turnaround management becomes more than just financial management and broader business skills are required.

Whereas in the USA where the Chapter 11 process introduced a new breed of Turnaround managers with operational experience as CRO’s the same is happening in Europe. Insolvency professionals, used to working in a strict legal environment, must adapt to a more commercial environment and absorb broader management skills. Some are fighting a rear-guard battle to keep control of debt moratorium processes. A case in point is delay to new legislation in UK where we continue to wait the outcome of the UK Government’s “Consultation on the Insolvency Framework”. Opinion was divided between the Insolvency community and the Turnaround community on control of moratoriums. At first it seems the insolvency profession is winning the debate. Notwithstanding Brexit however, the direction of travel being taken by the new EU Business Insolvency Directive highlights the need for a non-insolvency tainted process in the UK. Let’s hope the government takes the more enlightened business approach and embraces that flow. Live companies are worth more than dead companies and nothing is going to change that.

Alan Tilley is Chairman at Bryan Mansell & Tilley LLP and a contributor to our popular title European Debt Restructuring Handbook.