Thames Water Costs Under Scrutiny in UK Appeal Court
The embattled British utility, Thames Water, remains
in a state of suspense as the English Court of Appeal has reserved its judgment
on the contentious issue of costs. The ongoing dispute stems from an appeal of
its plan confirmation, with the court noting that the costs applications could
be seen as "eye-wateringly excessive." A particularly stark comment
from the bench highlighted the broader sentiment: "It might be said that
everybody’s costs are excessive." This ruling is keenly awaited, as it
could set a precedent for the permissibility of costs in large-scale corporate
restructurings, particularly for critical national infrastructure.
Asia's
Property Developers Push Forward with Restructurings
Shifting focus to Asia, the property sector continues
to be a hotbed of restructuring activity. Today's round-up indicates
significant progress for five major Chinese developers. Logan Group, Times
China Holdings, CIFI Holdings, and China SCE Group are all advancing their
multi-billion-dollar restructurings, navigating complex negotiations both
onshore and offshore. This indicates a concerted effort to stabilize a sector
that has faced unprecedented headwinds.
In a separate, yet equally significant development,
Hong Kong developer New World Development has successfully completed an
"unprecedented" refinancing deal. While details of the refinancing
are still emerging, its description as "unprecedented" suggests an
innovative approach and a crucial step towards de-risking its substantial debt
pile, potentially paving the way for other developers to follow suit.
Europe
Asks: Is the Debtor-in-Possession Here to Stay?
Broadening the lens to Europe, legal scholar Bob
Wessels has summarised recent research concerning the position of the
Debtor-in-Possession (DIP)[1].
Once a concept more prevalent in US bankruptcy law, the DIP model – where the
existing management retains control of the company during restructuring,
supervised by the court or a supervisor – is now active in all EU Member
States. Wessels's research delves into the enduring question: Is the DIP here
to stay? The widespread adoption across the EU indicates a growing consensus on
its efficacy in promoting corporate rescue, but ongoing analysis continues to
refine its application and long-term implications.
Del
Monte Granted Interim DIP Access Amidst Lender Objections
In a critical development for the packaged food
manufacturer, a New Jersey court has granted BVI-incorporated Del Monte interim
access to two debtor-in-possession (DIP) facilities. This crucial decision came
despite notable objections from minority first-lien lenders. These lenders
argued that Del Monte should have negotiated "harder" on the terms of
the financing, highlighting the often-contentious nature of bankruptcy
proceedings and the differing objectives of various creditor groups. The
interim access is vital for Del Monte's immediate operational stability as it
navigates its financial restructuring.
Lowell
Completes Consensual Recapitalization Advised by Willkie and Kirkland
Across the Atlantic, England-headquartered debt
collection group Lowell has successfully completed a significant consensual
recapitalization. This complex financial engineering saw a portion of the
company's substantial £1.6 billion notes converted into payment-in-kind (PIK)
notes, a mechanism often used in debt restructurings to defer cash interest payments.
The recapitalization also crucially extended the maturities of the debt by
three years, providing Lowell with a longer runway to achieve its financial
objectives. The intricate deal was advised by prominent legal firms Willkie and
Kirkland, emphasizing the high-level expertise required for such large-scale
corporate financial overhauls.
These recent developments – from strategic talent
acquisition in the legal industry to pivotal court decisions influencing
corporate solvency and major debt overhauls – collectively paint a picture of
an active and adaptive global business environment.
Zambia's
Landmark Debt Deal: A Blueprint for Global Restructuring in a Shifting
Landscape
One year ago, Zambia embarked on a journey into
uncharted financial territory, becoming the first nation to successfully
restructure its US$3 billion Eurobond debt under the G20’s Common Framework for
Debt Relief. What was described by advisors as "painful,
undoubtedly," has since proven to be a pivotal and robust process, setting
a precedent for future sovereign debt negotiations in an increasingly complex
global economy.
The Zambian deal was not merely about debt reduction;
it was a masterclass in innovative financial engineering and diplomatic
trust-building. Crucially, the agreement saw the innovative use of
"step-up bonds," a mechanism designed to adjust future payments based
on the nation's economic performance, offering both creditors and the debtor
flexibility. Perhaps even more significantly, the process necessitated building
trust and consensus with new, influential players at the negotiating table –
specifically China and India, whose roles as major creditors are growing
globally. This collaborative spirit is a critical takeaway for future
multi-lateral debt resolutions.
The
Evolving World of Restructuring
Zambia's experience, while unique in its sovereign
scale, mirrors broader trends and challenges unfolding across the global
restructuring landscape. As James Leda, managing director at KRyS Global USA,
highlights, the evolution of insolvency regimes is continuous, profoundly
impacted by the rising cost of bankruptcy and the increasing prevalence of
litigation finance. Leda foresees a future where practice leaders with "skin in the
game" will transform into the "portfolio managers of the
future," indicating a more hands-on, financially vested approach to
navigating complex corporate insolvencies. This shift underscores a growing
need for practitioners to not just advise, but to actively manage outcomes in
an environment where financial stakes are higher than ever.
Beyond the Billable Hour: The
Rise of the "Portfolio Manager" in Corporate Insolvency
The world of corporate
distress is undergoing a profound transformation. As global economies grapple
with unprecedented complexity, supply chain disruptions, soaring inflation, and
a looming debt crisis, the traditional advisory model for navigating corporate
insolvencies is increasingly being challenged. A new breed of practice leader
is emerging – one with "skin in the game," poised to become the
"portfolio managers of the future."
This isn't just about evolving
job titles; it's a fundamental shift in mindset, risk appetite, and strategic
engagement within the professional services firms that guide companies through
their darkest hours.
The Limitations of Pure Advisory
For decades, law firms,
accounting firms, and restructuring consultancies have operated on a predominantly
hourly-fee or fixed-fee basis. Their role, while critical, has been one of
providing expert advice, legal counsel, and strategic guidance. While their
reputation hinges on successful outcomes, their direct financial exposure to
the success or failure of the turnaround itself has been limited.
However, the nature of modern
insolvencies demands more. They are often less about simple liquidation and
more about complex restructuring, strategic asset management, and the intricate
dance of preserving value while navigating a labyrinth of creditors,
stakeholders, and market forces. In this environment, the traditional
"outsider" status of the advisor can sometimes fall short of the
deep, vested commitment required.
"Skin in the Game": A Deeper Alignment
"Skin in the game"
fundamentally means that the practice leader – and by extension, their firm –
has a direct financial interest in the outcome of the insolvency or
restructuring. This isn't just about earning a fee; it's about shared risk and shared
reward.
This can manifest in several
ways:
1.
Performance-Based Fees: Moving beyond the billable hour to success-based
fees, where a significant portion of compensation is tied directly to achieving
specific milestones (e.g., successful debt restructuring, asset sale at a
certain valuation, profitable exit from insolvency).
2.
Equity Participation: Taking a minority equity stake in the
restructured entity, allowing the firm to benefit directly from the future
success and value creation they helped engineer.
3.
Co-Investment: Partnering with distressed asset funds, creditors, or even new
investors by contributing capital alongside their professional services,
thereby becoming a direct investor in the turnaround.
4.
Warranties or Options: Receiving warrants or options that become
valuable if the enterprise recovers, incentivizing long-term oversight and
value enhancement.
This tangible stake fosters an
unparalleled alignment of interests with creditors, existing shareholders
(where applicable), and the revitalized company. Every decision is viewed
through the lens of long-term value creation and risk mitigation, rather than
just the immediate deliverable.
The "Portfolio Manager" Role Decoded
Metaphorically, the practice
leader operating with "skin in the game" transforms into a "portfolio
manager" because they are effectively managing a portfolio of distressed
assets (the companies in distress). Their responsibilities expand beyond legal
or financial advice to encompass:
- Strategic Investment Sizing: Assessing the viability of a turnaround,
effectively determining if it's an "asset worth investing in"
with their own firm's capital or performance-based risk.
- Active Value Creation: Moving beyond merely advising, they become
more directly involved in operational improvements, strategic
decision-making, and navigating complex negotiations to maximize asset
value.
- Risk-Adjusted Return Focus: Every proposed solution is evaluated not
just for its legal soundness but for its potential to deliver the best
risk-adjusted return for all stakeholders, including their firm's vested
interest.
- Capital Allocation & Optimisation: Advising on and often participating in the
optimal allocation of new capital or the restructuring of existing debt to
ensure the company's long-term viability.
- Exit Strategy Expertise: From the outset, considering the eventual
"exit" – whether it's a sale, merger, or successful return to
market – and structuring the restructuring for maximum realization.
This holistic approach demands
a blend of traditional legal and financial expertise with strong commercial
acumen, investment banking sensibilities, and a deep understanding of market
dynamics.
Benefits of the New Paradigm
The transition to a
"portfolio manager" model offers substantial benefits for all
parties:
- For the Distressed Companies: Access to deeply committed experts who are
financially incentivized to find the most innovative and value-accretive
solutions, often leading to better survival rates and stronger recoveries.
- For Creditors: Increased confidence in the restructuring
process, knowing that the advisors are fully aligned with maximizing their
recovery.
- For Professional Services Firms: Opportunities for significantly higher
returns on successful engagements, differentiating themselves in a
competitive market, and attracting top-tier talent motivated by direct
participation in value creation.
- For the Economy: More efficient resolution of corporate
distress, preserving jobs, intellectual property, and economic value that
might otherwise be lost in traditional liquidations.
Challenges and the Road Ahead
This transformation is not
without its hurdles. Regulatory frameworks, particularly around conflicts of
interest for legal and accounting professionals, will need to adapt. Firms will
need to develop new internal capital allocation strategies, risk assessment
models, and cultural shifts to embrace an investor mindset. Attracting and
retaining professionals who possess both deep technical expertise and
entrepreneurial "skin in the game" inclinations will be key.
Despite these challenges, the
trajectory is clear. As corporate insolvencies grow in complexity and financial
stakes, the era of the purely detached advisor is waning. The future belongs to
practice leaders who are not just strategists and counsel, but also shrewd
"portfolio managers," directly invested in turning corporate distress
into long-term value. Their commitment, backed by their own capital, will be
the crucible in which the next generation of successful turnarounds are forged.
[1] A debtor
in possession or DIP in United States bankruptcy law is a person or
corporation who has filed a bankruptcy petition, but remains in possession of
property upon which a creditor has a lien or similar security interest. A debtor becomes the debtor in
possession after filing the bankruptcy petition.[1][2][3] A corporation
which continues to operate its business under Chapter 11 bankruptcy proceedings is a debtor in
possession. Under certain circumstances, the debtor in possession may be able
to keep the property by paying the creditor the fair market value, as opposed
to the contract price. For example, where the
property is a personal vehicle which has depreciated since the time of
the purchase, and which the debtor needs to find or continue employment to pay
off his debts, the debtor may pay the creditor for the fair market value of the
car to keep it.
https://en.wikipedia.org/wiki/Debtor_in_possession