Insolvency and Corporate Reorganisation Survey …Kicking the can down the road In both the US and UK, the equity cure trend has been also been kicking matters further down the road

INSOLVENCY AND CORPORATE REORGANISATION SURVEY 2014

Lead contributors: John Houghton, Howard Lam and Mitchell Seider

Insolvency and Corporate Reorganisation Survey 2014

Survey ParticiPantS

AustriA BrAzil CroAtiA Cyprus

CzeCh repuBliC FrAnCe GermAny GreeCe

honG KonG indonesiA irelAnd mexiCo

norwAy philippines russiA spAin

south KoreA switzerlAnd united KinGdom united stAtes

honG KonG new zeAlAnd europe united stAtes

Macesic & Partners

INTRODUCTION

IFLR SURVEY | INSOLVENCY AND CORPORATE REORGANISATION 2014 1

Opportunities to test the international laws and procedures used to implement going-concern reorganisations are of course linked to the number of opportuni-ties within the global restructuring and workout market. To set the scene, we will

offer an overview of the trends in the global restructuring market, starting with the macro-economic backdrop.

Frenetic issuanceIn 2013, the US and UK saw a high demand for loans and bonds in an issuer-friendly lever-aged finance market. Global leveraged finance totalled $2.25 trillion in 2013, up 32% on the $1.7 trillion raised in 2012, and the highest volume on record. Borrowers have been turning in particular to the high yield market to refinance and repay their debt, with high-yield (HY) issuance running at a crazy pace. For example European HY volume reached a record $123 billion, up 55% on 2012 ($79.2 billion). In the US, September 2013 was the biggest month in history for the HY bond markets, at $49 billion, although overall, HY volume by US is-suers decreased 5% year-on-year to $259.9 billion from the annual record high of $274.8 billion in 2012. In other words, less fullsome restructuring and more balance sheet re-jigging. In Asia ex-Japan, HY volume also hit a record high of $33.3 billion in 2013.

Kicking the can down the roadIn both the US and UK, the equity cure trend has been also been kicking matters further down the road. Both in sponsor deals and in leveraged loans, and with liquidity flooding the loan markets, equity cures are becoming more prevalent again, albeit often in limited forms. We also see the re-emergence of (quasi) covenant-lite deals, which ultimately means fewer triggers for restructurings, thereby depriving creditors of control, arguably when they need it the most. Moreover, in the UK, companies are continuing to avail themselves of schemes of arrangement (intended more to be used to implement debt-to-equity type restructurings) to effect simple amend-and-extends, and recently even a pseudo-standstill to continue restruc-turing negotiations.

What is the result of demand outstripping supply, ongoing improvement in terms, and therefore a relentless trend of re-financing, re-pricing and amending? You end up with a plethora of so-called zombie companies, those which solely service debt, have no spare cash to grow, and which are not properly restructured to right-size their balance sheets. According to research commissioned by Reuters, in 2013 in the UK, there were an estimated 227,000 zombie companies with a combined negative equity of £70 billion ($118 billion).

Companies in the Asia-Pacific region did not suffer from the same gluttony of debt pre-crisis. However, as a response to the global financial crisis, stimulus policies in the region have flooded the regional bond and loan markets with liquidity. Over-capacity in certain sectors and the slowdown of GDP growth across the region, meant that companies are operating in a more challenging environment. In the last two years, some companies have been very active in tapping into the liquidity while they can, which drove increases in both loan and bond vol-umes. More recently, the flood of liquidity has somewhat receded, and it is becoming more apparent that weaker companies are already experiencing liquidity issues. The exceptionally low default rates in the past few years is unlikely to continue,

Asian businesses have also become more global in their operations, and there are many

A snapshot of global restructuringJohn Houghton, Howard Lam and Mitchell Seider of Latham & Watkins introduce the Insolvency and Corporate Reorganisation Survey, highlighting several trends in restructuring markets around the world

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INTRODUCTION

IFLR SURVEY | INSOLVENCY AND CORPORATE REORGANISATION 20142

more cases where Asian restructurings are implemented through a com-bination of procedures in different jurisdictions, including the use of UK schemes, US chapter 11 and 15, along with local insolvency and rescue procedures.

Turning to China, the largest economy in the region, robust GDP growth was critical to solving China’s bad debt problems in the 1990s. However, now that we see China’s GDP growth rate at its lowest since the early 2000s and China’s biggest banks more than doubling the level of bad loans they wrote off last year, it is questionable whether high-speed eco-nomic growth propelled by credit growth is sustainable. Indeed, following

China’s first bond default of Shanghai Chaori Solar this March, it has been suggested that the Chinese policy-makers may be willing to tolerate default by some Chinese companies, which had been reliant on the implicit gov-ernment support to access loan and bond markets.

Then there is the question of the infamous Wall of Maturity, with around $3.2 trillion of European corporate debt maturing from now until the end of 2017, US speculative grade companies having approximately $645 billion of debt scheduled to mature in the next five years and China’s aggregate debt levels having risen in the past decade to a total of 270% of GDP in 2013. In Europe and in the US, the peak year for maturing debt is in 2017; some question whether that is another false dawn as in 2012/13, when the top of the wall was consistently taken off by the high yield market the closer the wave got to the peak.

The opportunitiesSo where does this leave us in terms of restructuring opportunities? With-out a doubt, Europe is offering more opportunities than the US, and we are faced with an increasing number of alternative investors (including from the US) looking to deploy their loan-to-own strategies or seeking simple re-fi lending opportunities in Europe. For example, the inevitable shrinking of the Eurozone banking system will open up opportunities for distressed investors, with more than 350% of Europe’s GDP represented by banking assets (compared to about 100% in the US). We also see a con-tinuing trend of non-performing loan portfolio acquisitions from banks, particularly in Germany, Spain and Italy. Although you will continue to see companies availing themselves of more creditor-friendly UK and US restructuring proceedings, continental European insolvency laws have un-dergone and are still undergoing potentially game-changing amendments, mostly in support of moving away from value-destructive liquidation pro-cedures towards a fundamentally more effective rescue culture. However, even in Europe there is too much money chasing too few opportunities

and prices remain high.

In the US, the improving economy, decreasing debt levels and a positive financing environment are keeping the amount of distressed assets low. In-vestors believe that interest rates will have the most influence on distressed asset valuations, low interest rates having helped distressed companies and forced potential buyers to raise offers. Balance-sheet restructurings are among the top targets for those purchasing distressed companies and op-portunities will increase as companies seek to divest non-core assets.

In Asia-Pacific, and China in particular, the restructuring market is un-doubtedly picking up, particularly in certain sectors where there is over-capacity (such as the solar and shipping industries). A growing trend is the engagement of turnaround professionals. Hurdles around structural subordination and heavy government intervention, however, will always colour the picture and impact investors’ risk appetites.

The search for predictability and transparencyWhat is undoubtedly clear is that investors worldwide seek predictability and transparency in the jurisdictions that they wish to invest in, particu-larly in the scenario we are focusing on: the reorganisation of a surviving, going concern. This is especially true in light of the increase in capital market activity and in the complexity and sophistication of cross-border financial documentation, along with prevailing high-entry barriers: pre-cisely the backdrop for the difficult questions asked at a European level on whether there is scope to harmonise. For now, we turn to shedding some light on the key tools and procedures which can be used to implement a going-concern reorganisation.

The guide examines several crucial factors. It will consider reorganisa-tion techniques, and what thresholds and voting requirements will be re-quired in each jurisdiction in order to use those tools.

The guide will consider the importance of protection for the company and its directors. Laws should ideally support directors whilst in the zone of insolvency, not force them to file prematurely for fear of personal or criminal liability. From the debtor company’s perspective, this guide com-pares and contrasts jurisdictions with debtor-in-possession protections ver-sus regimes where third parties run the company with the protection of a moratorium against creditor action (such as UK administrators).

Integral to any developed restructuring process is the ability to cram down junior creditors (or, to look at it from the perspective of some inves-tors, what is the risk of being crammed down in this jurisdiction?) and the crucial issue of who controls the plan. These issues are examined on a comparative basis in this guide.

Finally, the guide will examine the opportunities in each of the jurisdic-tions for new money to be injected post-petition and upon exiting the restructuring process. It will ask whether new money will be available and if so, what priority it will enjoy. Further, who can provide such new money in practice?

All of these questions, and more, are posed and answered in this IFLR guide. We hope you enjoy it.

“European insolvency laws have undergone and are still undergoing potentially game-changing amendments”

INTRODUCTION


John HoughtonLatham & WatkinsT: +44 20 7710 1847E: [email protected]: www.lw.com

About the authorJohn Houghton is the global co-chair of the insolvency practice and head of the European restructuring, insolvency and workouts practice at Latham & Watkins. He specialises in advising creditors, sponsors, corporates and insolvency practitioners on all areas of international restructurings, insolvency and general corporate recovery. He also advises parties seeking to invest funds into existing insolvencies and restructurings. Houghton has been, and remains, involved in some of the most high-profile and complex cross-border corporate and financial restructurings over the past years. He is a member of R3 (the insolvency professional body), the Insolvency Lawyers Association, INSOL Europe and is a fellow of the Association of Business Recovery Professionals.

Mitchell SeiderLatham & WatkinsT: +1 212 906 1200E: [email protected]: www.lw.com

About the authorMitchell Seider is a partner in the New York office of Latham & Watkins. He is global co-chair of the firm’s restructuring, insolvency and workouts practice and a member of the Latin America practice. He focuses on business reorganisations and financial restructurings, with experience representing secured lenders, bond holders, creditors’ committees, debtors in Chapter 11 cases and workouts. Seider is admitted before various federal courts, including the United States Court of Appeals for the Fifth Circuit. He is the former chairman of the Professional Ethics Subcommittee of the ABA’s Business Bankruptcy Committee. He has been recognised for his work in corporate restructuring by The Legal 500 US, Chambers USA, Chambers Global and several other prestigious publications.

Howard LamLatham & WatkinsT: +852 2912 2570E: [email protected]: www.lw.com

About the authorHoward Lam is a partner in the Hong Kong office of Latham & Watkins and chair of the Hong Kong finance department. Lam advises clients on complex banking finance and debt restructuring transactions across Asia. Lam has practiced in both Hong Kong and London and has gained experience in a broad range of banking finance and restructuring matters, including leveraged acquisition financings, onshore/offshore syndicated loans, China outbound financings, margin financings, debt capital market issuance, bank/bondholders lead debt restructurings and liquidations.

CONTENTS


ContentsSurvey responsesEurope

Austria 20Gottfried Gassner and Emanuel Welten Binder Grösswang

Croatia 22Ivana Manovelo and Anita KrizmanicMacesic & Partners

Cyprus 24Elias Neocleous and Maria KyriacouAndreas Neocleous & Co

Czech Republic 27Robert Klenka and Pavel TesaríkBBH

France 29Rod Cork, Allen & Overy and Marc Santoni, Santoni & Associés

Germany 34Andreas Ziegenhagen and Dirk SchoeneDentons

Greece 36Catherine M Karatzas and Aggeliki TsatsiKaratzas & Partners

Ireland 38John O’Riordan and Jamie EnsorDillon Eustace

Norway 41Stine Snertingdalen and Ingrid TronshaugKvale Advokatfi rma

Russia 44Logan Wright and Vladimir BarbolinClifford Chance

Spain 46Rossanna D’Onza and Laura CamareroBaker & McKenzie

Expert analysis

Cross-jurisdictional analysisGlobal implementation table 17Europe risk rating map 19Americas risk rating map 55Asia Pacifi c risk rating map 63

Hong Kong Monetary Authority

Looking beyond borders6

Reserve Bank of New Zealand

Resolving banks rapidly

9

CONTENTS


Switzerland 48Alexander Vogel and Marcel LustenbergerMeyerlustenberger Lachenal

United Kingdom 52John HoughtonLatham & Watkins

Americas

Brazil 56Thomas Benes Felsberg and Paulo Fernando Campana Filho, Felsberg Advogados

Mexico 58Rodrigo CastelazoCreel García-Cuéllar Aiza y Enriquez

United States 61Mitchell SeiderLatham & Watkins

Asia-Pacifi c

Hong Kong 64Eleanor LamLatham & Watkins

Indonesia 67Ibrahim SenenDNC Advocates At Work

Philippines 69Rafael A Morales and Ronald Mark C LlenoSyCip Salazar Hernandez & Gatmaitan

South Korea 71Sang Goo Han and Yoori ChoiYoon & Yang

Survey responses

KPMG

A work in progress

12

Lazard

An all-American process15

EXPERT ANALYSIS HONG KONG


In January the Hong Kong Monetary Authority (HKMA), the city state’s banking regulator was part of a group of regulators that released a consulta-tion on establishing a resolution regime for financial institutions to comply with the Financial Stability Board’s (FSB) Key Attributes of Effective Reso-lution Regimes for Financial Institutions (Key Attributes).

Here, Karen Kemp, executive director (banking policy) of the HKMA discusses why Hong Kong needs a bank resolution regime and the chal-lenges of cross-border bank resolution.

Why are the government and regulators only now considering establishing a resolution regime for financial institutions? The public consultation exercise launched on January 7 by the Financial Services and the Treasury Bureau (FSTB) in conjunction with the HKMA, the Securities and Futures Commission (SFC) and the Insurance Author-ity (IA) is for legislative reform to establish a cross-sector resolution regime for financial institutions in Hong Kong. The authorities consider that such a regime is needed to make the local financial system more resilient to shocks, drawing on lessons learned from the experience of other jurisdic-tions during the recent global financial crisis.

From 2007 onwards, a series of jurisdictions found themselves in the unenviable position of having to use unprecedented amounts of public

money to rescue financial institutions – both banks and non-banks – to avoid dire consequences for financial stability, the wider economy and so-ciety more generally, which would have followed had these institutions instead failed and entered into liquidation. It is clearly not desirable that taxpayers be called upon to subsidise the shareholders and creditors of fail-ing financial institutions.

Before the crisis, very few jurisdictions had in place what are now con-sidered adequate arrangements for achieving the orderly resolution of non-viable financial institutions without having to resort to the use of public funds. Some, Hong Kong included, had a range of supervisory interven-

“It is clearly not desirable that taxpayers be called upon to subsidise the shareholders and creditors of failing financial institutions”

Karen Kemp of the Hong Kong Monetary Authority discusses Hong Kong’s January consultation on establishing a resolution regime for financial institutions in the special administrative region

Looking beyond borders

EXPERT ANALYSISHONG KONG


tion powers to deal with troubled financial institutions, but these did not provide the full range of powers necessary to deal with large, complex systemically important financial institutions (Sifis) as swiftly as required under crisis conditions.

Following the crisis, significant work has gone into identifying the es-sential features of effective resolution regimes, which can provide robust alternatives to liquidation or public bail-outs. This work culminated in the setting of new international standards in 2011; namely the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions. Now that these standards have been agreed, and a timeline set for their imple-mentation, the authorities in Hong Kong consider it a priority to imple-ment them locally.

What are the priorities in establishing a resolution regime in Hong Kong?The authorities are keen to ensure that the local resolution regime has all of the features now considered essential for orderly resolution, that is all of the Key Attributes, but also that it takes local factors sufficiently into account. The authorities believe it important to ensure that the full menu of resolution options identified in the Key Attributes is available, as this provides the necessary flexibility to deal with different types of financial institutions and circumstances. At the same time, the need for appropriate checks and balances – in particular a robust governance framework and adequate safeguards – is clear.

Given Hong Kong’s status as an international financial centre hosting a majority of the global systemically important financial institutions (G-Sifis) identified by the FSB, it is important that the local regime is effective

in a cross-border context. The authorities are carefully considering how to ensure that the local regime is able to support a group-wide resolution of a cross-border financial institution with operations in Hong Kong in cases where that will contain the risks posed locally and not disadvantage local creditors. At the same time it is important that the Hong Kong authorities retain discretion to act independently where those conditions are not met.

How will the proposed resolution regime extend to the Hong Kong operations of foreign financial institutions? In line with the Key Attributes, it is proposed that the local regime would extend to cover the Hong Kong operations of foreign financial institutions, whether those are subsidiaries or branches. As noted, this could allow the resolution authority in Hong Kong to support a group-wide resolution of a financial institution or to act independently to carry out a local resolu-tion if necessary. Resolution planning, carried out in advance between key jurisdictions, will help to determine the likely optimal approach in the case of individual financial institutions.

How will the proposed resolution regime differ from existing liquidation arrangements in Hong Kong? Might a resolution regime be developed in tandem with a standard corporate rescue regime?A key motivation for establishing a resolution regime in Hong Kong is that in cases where a failing financial institution plays a critical role in the provi-sion of financial services, or otherwise poses a threat to financial stability, it would be very costly to allow it to enter into liquidation. In liquida-tion, a failed financial institution would close for business to allow for the realisation of assets and distribution of the proceeds to creditors; but that also means that the provision of any financial services relied upon to a sig-nificant degree by individuals and companies would suddenly end. In the case of banks, for example, sudden withdrawal of payments services could cause hardship for those relying on the bank to receive income (including salaries) and to make payments for day-to-day living expenses. In contrast, resolution is specifically designed to allow the authorities to take prompt action to stabilise parts – or all – of a failing financial institution’s business so that any critical financial services can be continued.

That being said, the use of existing liquidation arrangements will con-tinue to be appropriate in cases where the risks presented by a failing finan-cial institution are lower. In deploying the regime, it is proposed that the resolution authority should be obliged to ensure that outcomes for affected parties are no worse than they would have been under liquidation and so the resolution regime will make reference to a number of aspects of existing liquidation arrangements, including the creditor hierarchy.

Karen KempExecutive director (banking policy), Hong Kong Monetary Authority

About the authorKaren Kemp, executive director (banking policy) has been employed by the HKMA since 1995. She was a deputy general counsel in the Office of the General Counsel prior to being appointed to her current post in 2008. Kemp also served as deputy chief executive officer of Exchange Fund Investment Limited from 1999 to 2003. Kemp is a solicitor qualified to practise in Hong Kong and in England & Wales. Before joining the HKMA, Kemp was employed by Lovells in London and Hong Kong.

“The authorities believe it important to ensure that the full menu of resolution options identified in the Key Attributes is available”

EXPERT ANALYSIS HONG KONG


Recognising their particular characteristics and the regulatory regimes applicable to them, financial institutions are excluded from the proposed corporate rescue procedure for Hong Kong.

How are the authorities working with their counterparts in Asia-Pacific and globally to ensure the harmonisation of resolution regimes?A key motivation for the FSB in developing the Key Attributes was to bring about convergence in the resolution regimes of FSB member jurisdictions on a set of common standards. This is a necessary first step in ensuring that cross-border financial institutions can be resolved in an orderly manner. Hong Kong, through its membership in the FSB, has been involved in the process of developing, refining and ensuring the consistent implementation of the Key Attributes. A number of other Asian jurisdictions are also members of the FSB and have taken steps to implement the Key Attributes. Additionally, the FSB’s Regional Consultative Group for Asia provides a forum for authorities in the Asia-Pacific region, including non-FSB members, to discuss international financial stability issues, including resolution, and how these may affect the region.

How will national resolution regimes work in tandem when needed to deal with the failure of a cross-border financial institution? Are there any aspects of resolution regimes established elsewhere (eg local prudential standards) that concern you? This is one of the most challenging aspects of resolution as regimes are na-tional, while some financial institutions operate highly-integrated business models across multiple jurisdictions. Therefore, in addition to ensuring that national regimes converge on common standards, the Key Attributes also say that it should be technically possible to use them in conjunction

with one another. International resolution planning work for global sys-temically important banks (G-Sibs) has identified a need to do more, how-ever, to ensure that this is the case and that home and host authorities are likely to take coordinated and cooperative approaches to resolution in practice.

As long as there remains uncertainty about how home and host authori-ties will work together to effectively resolve a cross-border financial insti-tution, it is natural that individual jurisdictions will seek to put in place measures that could allow them to act independently. Ultimately, however, a segmented approach to resolution could – given the highly integrated na-ture of many cross-border financial institutions – make it harder to secure continuity of critical financial services and financial stability. It could also prove considerably more value destructive and therefore costly to creditors and other parties, across home and host jurisdictions when compared to a coordinated group-wide approach.

“International resolution planning work for global sys temically important banks (G-Sibs) has identified a need to do more”

EXPERT ANALYSISBANK RESOLUTION

9

Resolving banks rapidlyGrant Spencer, deputy governor of the Reserve Bank of New Zealand, explains why the Open Bank Resolution might be a model for other jurisdictions considering resolution plans

The Open Bank Resolution (OBR) is just one of the tools the Reserve Bank of New Zealand (RBNZ) has developed to resolve banks. But it works faster than most, and was designed so that the recapitalised bank is able to open the next day.

Although its development was prompted by the 1997 Asian financial crisis rather than the 2008 global financial crisis (GFC), many of its requirements are in line with the Financial

Stability Board’s (FSB) key attributes. It is a model for others considering resolution regimes, especially smaller jurisdictions and those that do not have deposit insurance.

RBNZ deputy governor Grant Spencer speaks with IFLR about how the OBR was developed and New Zealand’s place in the global banking system.

The OBR seems unique compared to living wills and other reorganisation schemes proposed by other jurisdictions. How was the OBR conceptualised and why is it so different from other regimes proposed globally?The OBR might have some features that are different to resolution re-gimes found in other jurisdictions, but I wouldn’t emphasise those dif-ferences. I don’t see it as a unique regime.

“I’m not aware of other countries where this sort of pre-positioning has been put in place”


EXPERT ANALYSIS BANK RESOLUTION


We began developing the OBR following the Asian fi nancial crisis, so we probably started earlier than many other countries. But relative to what’s now happening around the world, it’s very much in line with the FSB key attributes that have been set out for an effective resolution regime. Those attributes focus on having a smooth resolution of the fi nancial institution while minimising damage to the fi nancial sector and not causing a signifi -cant impost on the public purse.

However, looking at other countries that are developing schemes of this nature, there is quite a lot of emphasis on processes like living wills which are more in the nature of recovery plans than resolution plans. The OBR is a resolution plan: it’s very much about distributing losses in a rapid man-ner which will allow the doors of a bank to be opened as quickly as pos-sible – the morning after by design – to allow key functions of the bank to continue, in particular its participation in the payment system.

Ahead of a potential resolution, there might be various schemes in place to bolster a bank’s capital position, such as selling off parts of the bank or triggering bail-in instruments. Living wills are consistent with this type of recovery regime.

The rapid and effi cient process that OBR seeks to achieve has similar characteristics to that established by the US’ Federal Deposit Insurance Corporation (FDIC), which has for years achieved open resolutions in short periods – typically a weekend – following a failure, in many cases imposing losses on creditors as well as owners. We’ve seen a similar ap-proach in Denmark during the GFC, where the government was willing to distribute losses to the creditors of failed banks rather than undertake

government bailouts. The Canadian bridge bank system also has a lot of similarities, using a bail-in mechanism to achieve open resolution.

The unique aspect of OBR is around its pre-positioning. We have re-quired banks to make changes to their IT systems that will allow an OBR process to be undertaken very quickly. In a typical situation, funds will be frozen overnight, and the affected bank will quickly set up parallel ac-counts for every customer and every product. They will shift the amounts required under the haircut to the new accounts which remains frozen, while the funds in the existing accounts will be released, and covered by a government guarantee, the following morning.

Once the statutory manager has communicated to the bank manage-ment what the haircut rate is then it can be applied very quickly through the bank’s systems as a result of the pre-positioning.

The objective is to distribute losses overnight so that the bank’s doors can be opened again the next day. I’m not aware of other countries where

“We have emphasised that this is one of the tools in our toolkit”

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EXPERT ANALYSISBANK RESOLUTION


this sort of pre-positioning has been put in place, although there are cer-tainly schemes where losses are allocated to creditors in preference to a bail-out.

Is the OBR uniquely suited for New Zealand’s market or might it serve as another option for jurisdictions looking to create new bank resolution regimes or add new tools?We have emphasised that this is one of the tools in our toolkit. It’s not a foregone conclusion that we will use OBR in every resolution instance. Instead we want the government and the Minister of Finance to have the ability to distribute losses to creditors and not be forced into a corner, as some governments were during the GFC.

I would not say that the OBR is unique to our circumstances in New Zealand. Every country looking to put together a resolution regime con-sistent with FSB principles and with rapid implementation might look at our pre-positioning model.

However, we do have a reasonably vanilla banking system. Pre-position-ing for a large, complex global bank is obviously going to be more difficult and more costly than prepositioning for a broad-service commercial bank – such as we have in New Zealand. I am not sure how much more compli-cated it would become, but I imagine that it would still be possible.

How is RBNZ working with regulators globally on the issue of bank resolution, particularly in the resolution of global systemically important financial institutions (G-Sifis)? Do you expect further developments in this space?We certainly expect further developments globally. Most countries are still working on recovery and resolution frameworks and there’s still a fair way

to go. We have discussed this with the Australian authorities in the context of our Trans-Tasman Banking Council, which comprises the two central banks, the Australian Prudential Regulatory Authority and the Australian and New Zealand Treasuries. We have also discussed joint responses for al-ternative distress scenarios, including where the resolutions could be joint or standalone.

Internationally, we are not members of either the Basel Committee or the FSB, but we do participate in consultative group that link in to these bodies. When failure resolution is discussed, it is clear most countries are aware of OBR. We have presented OBR at international forums, but being a small country, we are obviously on the fringes of global policy develop-ments. Our links to the Australian regulators and to our central bank col-leagues in EMEAP are our main focus.

What are the most significant risks remaining in the global banking sector?The post-GFC reforms have worked to improve the resilience of the global banking system and to improve the failure management regimes that can help make financial shocks less costly and disruptive.

But there are still a lot of risks lurking in the global financial system, and crises and failures will no doubt continue to happen in the future. Right now, huge amounts of liquidity continue to be injected into the global sys-tem with interest rates being held at extremely low levels. Such conditions might be conducive to the generation of new asset bubbles. I am not saying there are asset bubbles at present, but that risk increases the longer such policies are maintained. Further, levels of debt globally are still very high for governments and households in many countries. That is an environ-ment that can generate imbalances and potential future crises.

Grant SpencerDeputy Governor, Reserve Bank of New Zealand

About the authorGrant Spencer began his role as Deputy Governor and Head of Financial Stability of the Reserve Bank of New Zealand (RBNZ) in April 2007. He received his BA in Economics and Information Science from Victoria University and an MSc in Econometrics and Mathematical Economics from the London School of Economics and Political Science.

He was RBNZ’s Assistant Governor and Head of Economics from 2004 to 2007. From 1995 to 2003, he worked for the Australia and New Zealand Banking Group, and became the bank’s New Zealand head of strategy and business development in 2003. He has also served as a non-executive director of the New Zealand Institute of Economic Research, vice president of the New Zealand Association of Economists and a Council member of the New Zealand Corporate Treasurers Association.

EXPERT ANALYSIS EUROPEAN RESTRUCTURING


A work in progressKPMG partner and INSOL board member Richard Heis considers Europe and UK insolvency developments and looks closely at global bank resolution

The implementation of bank resolution regulations remains the most signifi cant concern for insolvency practitioners globally. But efforts to harmonise the insolvency regime in the EU through the Euro-

pean Insolvency Regulation (EIR) may provide a model for other regions looking to coordinate their own laws and proceedings.

Richard Heis of KPMG discusses recent EIR developments, as well as what’s needed to implement global bank resolution regimes.

What is the state of UK and European insolvency proceedings and what are the key developments expected over the next year?The insolvency regime in the UK is, thankfully, quite stable, although over recent years there have been a number of consultations on the Company Voluntary Arrangement (CVA) regime and so forth. So far those have fallen away. Therefore I’m not expecting major changes to the mainstream UK regime.

That being said, the landscape relating to fi nancial institution insolven-cies has changed hugely and the new mechanism coming into the UK and a lot of other countries is bail-in. The bail-in resolution tool will be added to the existing suite of stabilisation options for fi nancial institutions, and will result in enormous changes to the way that certain fi nancial institu-tions are rescued.

In Europe, there are also a number of very country-specifi c issues. Al-though there is a desire to harmonise the insolvency regime within the EU

through the EIR, it seems that the most realistic outcome is coordination, simply because the legal regimes are so different between countries and that is not going to change any time soon. But there have been a number of ex-amples of essentially foreign companies coming to the UK to be resolved. Some of the countries that have seen restructurings move to the UK, such as Italy, Germany, Spain and Ireland, have taken steps to change their re-gimes. Generally these changes have been positive but have not completely stemmed the fl ow of insolvencies to the UK as there are still some areas where the UK regime is better at achieving company rescues.

What are your goals as a board director of INSOL? My goals are the same as those of INSOL, which are to encourage inter-national cooperation. However I have a few personal priorities: I’m the administrator of MF Global UK and various other fi nancial companies,

“The question is what process will get you from point A to point B”

EXPERT ANALYSISEUROPEAN RESTRUCTURING


and there are a number of cases in which the behaviour of central counter-parties (CCPs) and the insolvency practitioners in different countries has been quite different. This is an area where good practice can be shared.

How might proposed amendments to the EIR provide a useful model for other regions considering multijurisdictional restructurings?The amendments to the EIR continue the work of the existing regime. The EIR currently does work, and provides an opportunity for insolvency practitioners in the different Europe-an countries to cooperate with each other. The amendments allow for local requirements to be followed, such as the very different labour entitlements for employees be-tween the UK, Germany and France, and generally allows for finding ways to deal with issues on a broadly con-sistent basis so that, eg, employees will be dealt with in a similar way. It provides for cooperation between different legal regimes but does not provide much additional certainty on issues such as “centre of main interest”.

Fundamentally the EIR is not a uni-fying system in which (say) insolvency in Portugal, Spain or the UK is dealt with in the same way; allowances are made for certain areas of local law in countries that have been affected, and it is hard to see how this would change.

For example, a Portuguese employee of a UK-based company will be treated differently from a UK-based employee of a Portuguese company. In terms of the overall management of the insolvency involving the court,

insolvency practitioners and directors, that process isn’t the same either. However, the EIR provides a broadly workable methodology for bridging the individual systems.

Is forum shopping a concern for restructuring practitioners? What are some considerations when choosing a forum, and which regimes are considered most favorable?I don’t think this is a concern because it adds flexibility. In a restructuring,

the analysis starts with the company’s existing situation, and then looks at a restructured company in particu-

lar with a right-sized capital structure. The ques-tion is what process will get you from point A

to point B. If that process does not exist, is too uncertain or simply cannot be done

within the home jurisdiction, then you look at other ways of doing it.

The UK has generally been a beneficiary of this because we have a flexible group of procedures and a well-established and well-under-stood legal regime.

There are two types of situations in the UK: one where the centre of

main interest (COMI) is shifted and the company is redesignated as a UK

company, which is required, for example, in order to implement a CVA. But for a scheme

of arrangement, you don’t actually have to have the company’s centre of operations in the UK. Instead it can

be done when, for example, there are UK-law governed loan docu-ments. The law relating to schemes continues to evolve, for example, a stay on creditor action pending a scheme was recently granted by the UK Court.

Richard HeisKPMG

About the authorRichard Heis joined KPMG in 1993 and became a partner in 1997. From 1983 to 1990 he worked in the FS audit function in KPMG, specialising in large retail banks. He specialises in financial sector insolvencies, complex cross-border assignments and all forms of restructuring and insolvency. Heis has lectured on complex financial instruments and had a two-year secondment at HSBC.

His formal appointments have included Marconi, Japan Leasing, Winchester Commodities, Seligmann Harris, Barings Bank, the New Millennium Experience Company, Greycoat, Refco Capital Markets Limited, Schefenacker, Torex Retail and various SIV, CLO and CDO appointments in the form of Mainsail II, Coltrane CDO and G-Square 2006-2.

Recently he has been working on Teathers, the stockbroker administration, and Millennium Global Emerging Credit Limited, the liquidation of a large hedge fund. Heis was appointed building society special administrator of Dunfermline Building Society in the first use of the Special Resolution Regime introduced by the Banking Act 2009. Heis was appointed Special Administrator of MF Global (UK) in the first use of the UK Special Administration Regime for Investment Banks.

EXPERT ANALYSIS EUROPEAN RESTRUCTURING


But corporate forum shopping isn’t very common. While there has been a steady trickle of forum shopping for the last ten years, it’s not the stream that some had feared. In my view, it tends to happen only because it’s the best way of implementing a restructuring rather than for any other reason.

The resolution of financial institutions has been a key issue. What are some of the concerns that might arise for global financial institutions as jurisdictions implement their own regulations regarding resolution and prudential requirements? Bail-in is the big issue. Bail-in legislation is a hugely powerful tool that can affect sovereign credit ratings: an implied state guarantee of financial institutions is a drain on a country’s rating. Ireland is an example of how bad it can be when a banking problem is exported into being a full-scale sovereign debt problem. In another example, in Cyprus, bail-in legislation was enacted on an urgent basis to achieve the emergency rescue of the Cy-priot banks.

But to complete a proper bail-in, appropriate loss-absorbing capital is needed so that there is a sufficient amount capable of being bailed in to stabilise a bank without resorting to nationalization or insolvency.

Although existing resolution regimes work reasonably well for simpler institutions, such as building societies with a monoline business of retail deposit-taking and lending, they would be far less successful for multi-faceted commercial banks involved in a range of activities including in-vestment banking. Bail-in is a way to resolve those banks that doesn’t

cause enormous loss to taxpayers and needless disruption to the financial system.

The different steps taken under the aegis of the G20 are immensely complicated. Most of the larger jurisdictions are G20 members, and a number of other non-G20 countries are also trying to emulate its resolu-tion framework in a reasonably consistent way.

However if there were to be a multijurisdictional banking collapse, there’s no avoiding the fact that governments will seek to protect their own people and institutions. Perhaps the key tests of the new international regime are the extent to which jurisdictional tensions and land grabs can be minimized. The international regime is meant to mitigate those so that overall, it lessens the value lost and the desire to grab a big portion of a smaller pie is replaced by the desire to have a reasonable portion of a bigger pie. I will believe it when I see it!

“Bail-in legislation is a hugely powerful tool that can affect sovereign credit ratings”

EXPERT ANALYSISUS MARKET TRENDS


An all-American processDavid Kurtz, global head of Lazard’s restructuring practice, refl ects on US market trends and why the US remains the choice destination for forum shoppers

The US bankruptcy and restructuring regime is widely considered the most sophisticated and reliable in the world. US and foreign companies alike use its Chapter 11 regime, while those that re-

structure elsewhere often look to receive Chapter 15 recognition for their proceedings.

David Kurtz of Lazard discusses the country’s recent restructuring and bankruptcy dealfl ow, as well as what to expect from international compa-nies’ use of Chapter 11 and Chapter 15.

What is the state of US bankruptcy and restructuring proceedings and what are the key developments expected over the next year?Things can change very quickly – as we’ve seen before – but based on ev-erything we know at the moment, my best guesstimate of the 2014 restruc-turing market is that it will look a lot like the 2013 restructuring market.

There’s no reason to believe that the volume of activity will pick up, but there is still a pipeline of opportunities out there with companies that are potentially restructuring candidates.

At the moment we are primarily advising companies lacking liquidity. They can’t refi nance their bank debt because of organic problems in their business or an industry dealing with its own challenges, rather than macro conditions.

There is no macroeconomic force that is pushing companies in the di-rection of restructurings as in, for example, 2008 and 2009 when the credit markets were completely shut down. It’s the opposite right now as credit markets are very liquid.

If you look at a list of the signifi cant restructurings and bankruptcies over the course of the last couple of years, each has its own story behind it.

How do you expect the US’s quantitative easing taper to affect restructuring and bankruptcies? More broadly, how might this impact companies globally?The volume of deals in the restructuring and bankruptcy businesses is in-

“At the moment we are primarily advising companies lacking liquidity”

EXPERT ANALYSIS US MARKET TRENDS


versely correlated to the strength of the credit markets: the stronger and more liquid the credit markets, the weaker the restructuring business.

If credit is plentiful and available on attractive terms, companies have an easier time refinancing their way out of their problems than they would in a tighter market. From the macro perspective, the issue is whether the credit markets are stable and liquid. We haven’t seen anything that leads us to believe that there is a radical tightening at the near-term horizon.

It’s been reported that there have been more 363 sales than traditional Chapter 11 bankruptcies. Why is this happening and how has this changed the restructuring and insolvency space?Typically when you see a 363 sale, you’re dealing with a company that does not have the ability to reorganise on its own terms. That’s usually because there is a lack of liquidity from either a credit perspective or from the eq-uity perspective that’s able to support the reorganization of the company, which is why it must be sold.

Usually you’d much rather sell the company yourself from a platform of stability, rather than a position of weakness in a bankruptcy case. Many are sale candidates after emerging from bankruptcy, and they attract a better price once they’re fixed.

When companies are sold in bankruptcy, my first reaction that this is a company that, for whatever reason, was not able to reorganise itself under Chapter 11 on a standalone basis and instead its pathway was through a sale.

Forum shopping has been a trend, particularly as various companies look to have their restructuring and insolvency processes recognised under the US’ Chapter 15. Has the US been the choice destination for foreign companies looking to restructure, and do you expect this to continue?Forum shopping has been around forever. Choosing the forum that the lawyer believes will be most favourable to a company accomplishing its objectives is an important part of the lawyering process.

We see domestic forum shopping here in the US, where you’re deciding whether to file in New York versus Delaware versus Chicago, and that’s always been an element of restructurings. Now we see it on a more inter-national basis.

The reason that there is often a preference for filing under the US Bank-ruptcy Code’s Chapter 11 is a function of the expertise of the courts, espe-cially the extent to which the legal process and case law around Chapter 11 has developed with definition and certainty.

There is a general favourability towards reorganisation that is inherent in US bankruptcy laws, and not necessarily in the laws of other jurisdic-tions. However other jurisdictions are updating their regimes to look like Chapter 11 – at least on the surface.

Chapter 11 is the more predictable regime, and therefore it’s the most user-friendly place to be. It allows a company to deal with challenges and access US bankruptcy laws to accomplish its objectives, even when its prin-cipal business operations are outside of the US. Lawyers almost always con-sider whether a company can file under Chapter 11 before a US court.

Practitioners – financial as well as legal – have also become much more comfortable with Chapter 15. The law around Chapter 15 has become much better developed.

Some countries have updated their restructuring laws to parallel the Chapter 11 process as we know it, and where that has happened, it is pos-sible do to a Chapter 15 to deal with US creditors and invoke its benefits to augment a case primarily filed in another jurisdiction.

That really shows the globalisation of businesses, as large companies now have significant business operations in multiple jurisdictions around the world. There are countries that have user-friendly reorganisation statutes filing Chapter 15 to support their own proceedings, and we’ve seen more of those cases. I have every reason to believe that trend will continue.

David KurtzHead of global restructuring and a vice chairman of US investment banking, Lazard

About the authorDavid Kurtz is head of global restructuring and a vice chairman of US investment banking at Lazard. He joined Lazard as a managing director in the firm’s restructuring group in 2002 from Skadden Arps Slate Meagher & Flom, where he was a senior partner. Kurtz has over 30 years of restructuring experience and is a frequent lecturer on bankruptcy and reorganisation related topics. He is a fellow of the American College of Bankruptcy (and former member of the board of directors) and was named as the Bankruptcy Dealmaker of the Year 2001 by the American Lawyer magazine.

“Other jurisdictions are updating their regimes to look like Chapter 11 – at least on the surface”


CROSS-JURISDICTIONAL ANALYSIS

Key

Generally favourable to creditors

Neutral or neither favourable to creditors or debtors

Generally favourable to debtors

Creditors’ rights

Debtors’ rights

Contracts and subordination

Au

tom

atic

sta

ys

Ad

min

istr

ato

r

Re

org

anis

atio

n p

lan

Vo

tin

g r

eq

uir

em

en

ts

Cra

m-d

ow

ns

Po

st-p

eti

tio

n f

inan

cin

g

Ass

et

sale

s

Exe

cu

tory

co

ntr

acts

Co

ntr

actu

al s

ub

ord

inat

ion

AustriaBinder Grösswang

BrazilFelsberg Advogados

CroatiaMacesic & Partners

CyprusAndreas Neocleous & Co

Czech RepublicBBH

FranceAllen & Overy

GermanyDentons

GreeceKaratzas & Partners

Hong KongLatham & Watkins

IndonesiaDNC Advocates At Work

IrelandDillon Eustace

MexicoCreel García-Cuéllar Aiza y Enriquez

NorwayKvale Advokatfirma

PhilippinesSyCip Salazar Hernandez & Gatmaitan

RussiaClifford Chance

South KoreaYoon & Yang

SpainBaker & McKenzie

SwitzerlandMeyerlustenberger Lachenal

UKLatham & Watkins

USLatham & Watkins

NA

NA

CREDITORS’ DEBTORS’ CONTRACTS & RIGHTS RIGHTS SUBORDINATION

Documents

Insolvency and Corporate Reorganisation Survey …Kicking the can down the road In both the US and UK, the equity cure trend has been also been kicking matters further down the road