Finance Leaders Journal
July 2011
Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present and future needs. Alternate reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis or major change in the business such as bankruptcy, repositioning, or buyout. Restructuring may also be described as corporate restructuring, debt restructuring and financial restructuring - Definition
Formal and informal
In Ireland corporate restructuring falls into two categories – Formal and Informal.
In Ireland formal restructuring tends to mean examinerships, however in theory receiverships and liquidations can also be used to affect a restructuring. Due to the lack of legislation to support a pre-pack approach which is common in the UK, most receiverships and liquidations are due to a business failure situation, rather than a procedure in restructuring. It is therefore unfortunate that in Ireland in recent times the definition of restructuring has been more theory than practice.
In 2011 the number of examinerships has fallen to 8, down from 37 in 2009 and 34 in 2008, which is an indicator that corporate restructuring is not in a very healthy state. There are a number of reasons for this including
- lack of risk appetite and, as a consequence, a lack of private equity money to recapitalise businesses;
- an abnormal banking system;
- emphasis has been on Balance Sheet restructuring and less on dealing with P&L issues; and
- an archaic personal bankruptcy system.
While it is impossible to quantify the number of informal restructurings, due to the fact that there is no record of an informal restructuring, the same issues facing formal restructurings apply to informal restructurings with the added complication that it is very difficult to get all creditors (including Revenue) to agree to restructuring terms which is required for an informal arrangement to succeed.
The issues identified above may not all be evident in any one particular assignment, and on their own, can sometimes be overcome, however when they come together it can stifle any chance of restructuring.
The involvement of banks
There is nothing anyone can do in the current climate to encourage private equity to seek greater returns by investing in company capital rather than safer deposit accounts. However, when coupled with the state of the banking system, this lack of available capital is a real hindrance to corporate restructuring.
The banking climate that has existed over the last number of years may at long last be at the beginning of the end. Over the last number of years the Irish business community has lost a substantial bank in the SME market and the banking needs have had to be assumed, in the main, by the two remaining native banks and one UK bank. At the same time these banks were going through their own difficulties and due to their capital shortages were not in a position to provide sufficient banking finance to the market. As a consequence, banks reserved their capital for their own customers and were not prepared to “take another bank out”. This substantially reduced the ability to restructure a business as it was highly likely that the company’s current bank would be the bankers post-restructuring and a condition of this continued support would be that debt would not be written off.
The effect of this was that a number of restructures in recent years fixed the Balance Sheet of troubled companies by removing historical trade debt (trade creditors). However, not enough emphasis may have been placed on ensuring that the company’s ongoing trading position was sufficient to pay future debts. Not being in a position to refinance the bank debt, may well have left situations that the debt level remains too high, and coupled with a likelihood that interest rates are set to rise in the coming months, the restructured company may well not be in a position to deal with the interest charge, thereby causing problems into the future.
It is not all doom and gloom in this area, as it would appear that at least the future of the Irish banking system has been secured through the two pillar philosophy. The banks themselves have gone through various forms of restructuring and we are now seeing situations (albeit on a limited basis) that the two key components for restructuring are at least available in the market place – namely, a bank willing to take less than par value on the loan and another bank willing to provide the finance at the written down amount. It is still at an early stage but should this process become more common, it will represent a more normal banking environment and lead to an increase in successful corporate recovery activity.
Legislative shortfalls
Strangely because of a mainly unique situation that occurred in Ireland during the Celtic Tiger era, it is very difficult to complete a successful corporate restructure due to the lack of personal debt legislation.
An unusual banking practice became the norm in Ireland, which differed from most of our European neighbours, and that was the seeking and obtaining of unlimited guarantees for bank facilities to limited liability companies – the cornerstone of any entrepreneurial society. The result of this phenomena is that while the corporate restructuring exercise can deal with a write down in the corporate debt, the business owner will still be liable under his personal guarantees.
The current situation
In addition to the companies that have gone through formal restructuring, the problem of our legislative inability to deal with personal debt could cause significant problems in the future to companies that are currently profitable.
Ireland created a significant number of successful entrepreneurs over the last 20 years (by entrepreneur I mean somebody who built a trading business) who, unlike builder developers created a product or service. Unfortunately, a large number of these otherwise successful individuals were tempted with the prospect of easy money from property development and involved themselves in partnerships and co-ownerships with people they never met. As a consequence they signed up to joint and several guarantees on bank borrowings which in some cases run to the tens of millions. They find themselves now in a position that they have debt levels not envisaged when signing up to these “investment opportunities”.
This personal debt is affecting the core trading of thousands of SME’s up and down the country. Directors are understandably worried about debts which they will never be able to discharge and this is affecting how they manage their trading businesses. Stress affects people in different ways but what is clear is that they are less likely to be in a position to grow their business and employment opportunities if they are faced with an un-resolvable debt position. The personal debt problems of directors will influence decision-making in a negative way and result in companies that would have been successful needing some form of corporate restructuring in the future.
Prevention is far better than cure, and a comprehensive reform of the personal insolvency regime is urgently required to resolve this issue. The law reform commission produced a draft bill incorporating their findings and it would significantly improve restructuring options if these recommendations were adopted.
Michael McAteer is a partner at Grant Thornton
Email michael.mcateer@ie.gt.com