T.R.I. - Corporate Restructuring

foreign let me start first to say I'm very excited to be part of in moderating this panel with the group of esteemed professionals colleagues and definitely people who are currently making a lot of change in the market today topic as Lily was saying is about corporate restructuring and converting pitfalls into opportunities quite a wide topic so I think the best thing is to do is maybe to break it down and to break this topic into three areas and we start addressing I guess the corporate restructuring understanding actually more the development we're seeing actually in the market and then we're going to be talking more on the challenges faced by the corporates but as well when it comes to the restructuring process and insolvency process as well and we're going to end it with a bright note on the opportunities that we're seeing actually in the market and we're going to hear from all of our panelists coming from various background um so let's start with the corporate restructuring I guess and the market we set this in a little bit a lot of us have been in the region for a very long time and I think it's good to understand how have the restructuring and insolvency markets change in the last 10 years Matthew I'm looking at you you've been in the region for a very long time so you can give us more insight and your point of view I guess share share your view on the market thanks for that um yeah I've been in the region doing restructurings for a decade um so I saw the back end of the global financial crisis and what it did to the region and then seeing the slump and now seeing a little bit more of activity coming through I think there have been three uh three sort of Mega Trends if you can call it that of what's been happening in the market the first one is legislative reform which has been plenty sort of most most countries in the region have done something from a legislative point of view and that includes adgm difc but also Saudi Kuwait everywhere the list goes on um and most of that reform has been sort of positive drift towards a uh what you might call a westernized Model A Sort of data and possession type model um which I think is is favorable from a really structuring point of view um and uh so that's the first sort of Mega Trend I think the second one is the runners and Riders have changed um so when I arrived it was pretty much a big four magic circle environment and uh and it's now not you know the big four is still active but the boutiques have arrived and the smaller law firms have arrived and with that change there has been a shift towards the chief restructuring officer as a concept which again I think is is a is a really good good Development I've done a couple of those and they're pretty sort of scary situations but they're good fun as well and I think the third big trend is the is the capital providers so when I first got here the market was dominated by the Western Banks um the Barclays and lawyers and rbs's um they packed up and pretty much went home following the the global financial crisis and the local banks sort of took over and then they merged so a lot a lot fewer Banks and then more recently the secondary that market people like Dominic have arrived and that's that's creating an interesting series of opportunities as well so yeah I think what what you can see in the secondary Market at the moment is that um Ferris the foreign Banks were based here and now increasingly local banks to um are increasingly ProActive at selling portfolios of non-performing exposures um in Europe which is we call um region for hidera you know we are a primarily European investor this is by now a pretty common pattern across all the key jurisdictions and here we are starting to go through a couple of very large transactions between Dubai and Abu Dhabi where a portfolios are being are being sold which is a great Trend right ultimately it allows people like us to come in and to follow some of these often enforcement-focused processes for a number of years to come which may not necessarily make sense to a workout Department of a bank but may make a lot of sense to us having a very long-term capital and because I guess um is it the same trial we're seeing regionally let's say this is the UAE we've been talking about it what about KSA a lot of people are talking about as well the KFC Market is that the same Trend we're seeing in terms of the yeah absolutely I think I think you know what you're seeing in terms of you know both just the process I think it's important to remember you know I've been probably the same time multi maybe a year or two more but you know it's a very it's still a very new restructuring Market compared to many markets which you've seen these for decades so in that short journey of 10 12 years since the big restructuring started kicking off here it's still a very new market but I think the very fact that I think we've made so much progress we're talking about new money Solutions you know we're talking about Banks getting organized you know uh even bilateral Banks you know that we're seeing on on cases you know getting organized and getting restructurings done uh you know bankruptcy codes that are being set up um and I think today you know it's not uncommon to see you know back to Dom's comment you know about the solution I think one of the previous panels we're talking about from an amend extend to kind of thinking certainly something more stable and and the last thing on this movie is that is you know um there used to be a taboo around the process before but I suppose as the market is maturing I think a lot of things a lot of people are using that as a implementation mechanism which is I think it's a sign of majority in this market I would say I think it is indeed evolving and people are realizing the amending extent is clearly not a permanent solution and one needs to try and find a permanent solution I don't think we're at a market stage where we're seeing lots of debt for equities that's definitely not the case will it happen over time potentially to find a more permanent solution to restructurings perhaps obviously there are issues particularly in Saudi Arabia Selma restricts the banks from taking Equity so they're more complexities over there over here from a legislative perspective uh it's a little bit easier I think one reasonably recent development which is quite helpful in getting restructurings executed is the provision of new money in restructuring context so that borrowers can actually negotiate restructurings on a stable platform not on a burning platform and particularly dip financing so debtor and possession financing um we've got one reason precedent in adgm another one on Shore as well and I think that is a very helpful element to restructurings I think some of the key things which you know will be negotiated and not reasonably new over here um you know beyond just deviating from the absolute priority model and and putting a super senior paper in place I think the concept of elevation rights is a relatively New Concept to a lot of the banks over here and people are getting their heads around it equally equitization being part of that new money in-depth financings so they're reasonably New Concepts that maybe Dom can talk about yeah absolutely I mean um I think having participated in both the nmc and the kbbo restructuring so new money was provided in different contexts of course right in the nmca DGM context was in the context of the docker um in the kbboe HG context it was in the context of an onshore Court ruling back in December last year ratifying the provision of super senior new money untested grounds in both cases right but ultimately very positive very positive experiences and huge breakthroughs in our College jurisdictions in other words whenever we spend time in many of the Europe's 28 jurisdictions these types of mechanisms new money elevation slash rollap and then equitization are very common right that has become the bread and butter of insolvencies ultimately a lot then comes down to the fairness of the distribution of these instruments and the appropriate mechanisms to ensure that everyone can participate over a certain period of time otherwise of course that that can be a little bit more difficult but ultimately as long as you have a court supervised Pro process with court trustees who approach it with fairness then there shouldn't be any any issues there we're not as far as seeing kind of appealing exchanges here outside of Court processes I'm sure that will come eventually we see a lot of that in the United States we see some of that in Europe but I would say that the dip like provision here under both the onshore law and the offshore law is incredibly important to watch going going forward ultimately in many of these situations you find lenders who have to provide funding into a situation which is complex mode process perspective as well as from an operational turnaround perspective so that has to be appropriately rewarded and the combination of elevation and equitization can form the basis of that appropriate compensation for the risk that's being taken yeah thank you I think a lot of things has been mentioned on the market definitely it's a reflection about the changes that we're seeing in the market the material the the more complexities that we're seeing the maturity of the market which is which is definitely great to have um maybe I want to maybe let's dig down a bit on the corporate side and I'll start maybe with you vikas and if you can tell us I guess on the main challenges that corporates are facing um from what you're seeing I guess in the market that's a very good point right so I mean if you think about the commentary that comes out about the fact that this region is somehow also shelter because of obviously you know where the price of oil is um and of course we have because we're back to dollar and most of these economies but if you think about the some of the underground evidence you know clearly I think most companies are facing cost escalations right I mean the reality is how many of them are able to pass that on is unclear but but clearly that's a challenge um you know globally is above Talent you know it's becoming more expensive to get good talent to track talent I think that's clearly a challenge because we're back to the dollar we also have an interest rate Rising environment you know interest rates up three and a half percentage uh since the beginning of the year um and then if you think about the geopolitics around us so many of the markets which were typically markets for many of the got you know corporates are now shut and that's just what it is and then you know finally you know having a back to dollars is fantastic but also it impacts certain industries so if you think about you know sectoral we're clearly Contracting has struggled for a while Healthcare Healthcare maybe I've seen a number of restructurings uh trade variable but if you think about some of the sectors have have been you know getting a fill up because of say the Qatar World Cup should be it retail FMB uh Hospitality but you know the reality is things can may have moved quickly so come q1 Q2 next year things could look a bit different and I think when you know when we as advisors think about these situations you know the golden rules has got to be as corporates um starts seeing signs the earlier they go into a discussion uh the more options they retain uh clearly if they're seeing you know sales stagnating or cost increasing or cash flows becoming a challenge it's good to start having those conversations because you know something that could be a reset or refi could easily go into restructuring and remotely but not completely exceptionally go into insolvency and I think that's kind of um so I think our our general view is that there's a very good set of advice now on the ground there's obviously a lot of solutions what Dom does there are advisors who are specialized on both lend aside copper side but I think getting that help early um is is useful because options are much more early stage yes indeed um and I guess again the corporates are going through some challenges we always say okay you have to entertain like you have to start proactively get into restructuring process um but there are challenges in a restructuring process as well uh and maybe Matthew I see you're not doing so and maybe if you could tell us what are you thinking what is kind of the main challenge that you can if you are to pick I guess one one May challenge an infrastructuring process if I could only choose one of the the alignment of stakeholders um uh which uh sort of touches on a couple of others as well one of which is Trust and the lack of trust and genuinely uh what's right or justifiable lack of trust in many cases for some of the restructurings in this part of the world um and so uh getting alignment between uh stakeholders who could be secured versus unsecured could be uh National Banks versus local banks if you see what I mean but also as between the the sponsors and the and the banks and this this part of the world is is is challenging from an alignment point of view this is that the second one as I say was trust the third one is liquidity because almost always a process will take a long period of time and almost always there's going to be a liquidity requirement along the way and whilst we've made big progress in the region in terms of mechanisms which can Aid uh bringing in deep financing for example it's still a long way to go in terms of the the practices in the market um so yeah I think I think the the big one would be alignment of stakeholders if I just maybe add to that I think so the one other concept just going back to Matthew's comment on alignment is is the fact that stands still as a concept the concept is still you know relatively innocent here so you have a lot of informal stencils that exist in this market and and I think that's kind of where that alignment piece becomes even more critical because you know you are trying to get a fairly complex restructuring with a high level of complex stakeholders uh so so there is a high level of of activity that happens around or restructuring because of some of those processes non-existent and I think the reality is you know when I look at my colleagues on on over here um you know we have to be also trying to get alignment you know to ensure that behind the scenes there's a lot of informal activity going on to get all of these stakeholders Marching In The Same Direction it feels many times you're taking two steps forward three steps back pretty much on a on and I'm looking at Naveen because there's something you know we had a conversation this morning so it feels that way but um but I think as we see some of these processes getting more formalized be it things like stencil I think I'm hoping that that helps bring a little bit more alignment than probably is today but I think there are some basic ingredients to any restructuring which if you're able to include those in the pot you're going a long way including starting early having a curcum having a standstill in place having a common information platform if you have these very basic ingredients you're already at a very good starting position and unfortunately in a lot of situations this is not just a UAE comment but more generally in a lot of situations these things are often started too late because borrowers think that actually will get a refinancing even if it's in the 11th hour and a sub-optimal terms but I I'll keep pushing that row rather than engaging on a restructuring and I think moving to having parallel processes is going to be critical thinking about the fact that we are clearly operating in more volatile market conditions we have a poly crisis we'll always have a poly crisis now whether it's supply side sharks or higher inflation or higher base rates yes the GCC to some degree is more insulated given where the oil price is but we need to be cognizing that we'll it will be impacted by some degree to but from the from the global recession so I think for any borrower with a maturity which is sort of 18 24 months out that's really where you need to start thinking about commencing a process a parallel process whether it be engaging with your incumbent banks for an amended extent approaching other Banks and approaching funds as well and you know people like Dom and others are are you know playing over here or actually have offices on the ground so it's uh I think I think it's an important pool of capital to be talking to I think that's that's spot on and I think in the context of the onshore bankruptcy processes in the UAE the stakeholder alignment is even more important right because ultimately in these processes the shareholders or the debtors will be the one who will have to sign off on any restructuring plan solution that will be put in front of the court and then eventually up for a vault so clearly there's a need for a great degree of stakeholder alignment in the adgm the situation is a bit different and the beauty of the dough carve that we saw on an MC and the other Frameworks used with an adgm is that you have great cram down mechanisms and ultimately much more streamlined restructuring processes and hopefully that's the path that the onshore insolvency framework over time also follows because ultimately yes you always need to align your stakeholders but there are certain limits to it because ultimately the process can drag on for months and months right with erosion of value along the way I think the beauty of the situation is that we have an increasing number of advisors on the ground or with great expertise and we also have an increasing number of people I guess you know fidela is currently in the process of launching our adgm office and we'll have 10 to 12 colleagues here and all of them will be very focused on this region and working with the with our advisor friends here on making many of these stories a success I think banks are also part of the solution and getting comfortable with having a fund in the cap stack whether it's a second lien a fund coming in with a second lane as opposed to just taking out the banks entirely but a second lane or dip financing that type of rescue financing is absolutely critical to be able to either avoid a formal restructuring or or provide the required financing in order to be able to exit a restructuring successfully yeah and I would I would highlight the importance of fairness in all of this right so for example in the context of kbbl ehg where we provided the new money in December we made sure that there was a period of six months that followed after we provided the new money that allowed the banks to decide whether they want to be a part of the new money solution or not ultimately they have longer decision-making processes some of them need Sharia compliant documentation and you have to accommodate all of that and be respectful of that right it's an important feature of any solution here thank you this is quite um I think quite interesting to and we start talking about about the opportunities I guess we're seeing actually in the market is there other maybe Matthew Vegas nvine and Dom other opportunities where you're seeing were like there are challenges as we said but they are there is a bright future we're seeing it it's definitely the market is developing so where do you see really the main the main opportunities I feel like you have something in your mind uh look from from an opportunity I mean for me all of these challenges are ultimately opportunities right you know SV data we work probably in as I mentioned nearly 30 different jurisdictions going through complex restructuring processes in every single one of them and every single one of these jurisdictions whether you look at the UAE or it's France or Germany or the Netherlands every single one of them is going for a constant process of evolution right there are mistakes being made lessons are being learned and there's this feedback loop which allows for the processes to become better and better and now you can see that a lot of this is happening here even on the in on the onshore side of things you know the competence of the of the judges uh who rule on bankruptcy cases is exponentially higher than it used to be um the proficiency of the trustees is improving at the fast pace the insolvency code is constantly evolving even from the 2016 iteration we've seen a couple of amendments which have been incredibly helpful including on the new money provision side so you know there's this constant Evolution open-mindedness here we feel to ultimately improve these processes which I think is a great opportunity for us all if I just maybe take a sector view so you know clearly you know while many parts of the world are struggling you know we are very fortunate because of everything that my my co-panelists have said around was fueling growth here so clearly Contracting taking that as a sector example there's a lot of demand coming in right I mean some of the Giga projects some of the developments in Abu Dhabi there's a lot of activity happening and I think what we also seeing an opportunity right now for some of these large contractors to go and clear off some of the challenges they've had in the past so that they can get for the liquidity to continue working on these projects and I think that is also creating a a massive amount of activity in a restructuring Market but going back to my other comment you know the earlier these things are dealt with the more options people have on the table and the best restructuring environment is one that deals with these topics early and not let Legacy matters continue for 10-12 years we've seen those as well right so I think that's kind of the the key recipe I think so we do taking construction is an interesting example there are fantastic opportunities in that sector right but many of the players the incumbent players have have stranded balance sheets broken balance sheets that that that really are some way away from being resolved um and therefore there's a fantastic opportunity for the upstarts if you see what I mean the new entrance into traditional markets it's not just construction to do many others one of the key things I see as well at the moment is that kovid finally caught up with us in this region or I think it's globally that the businesses shrank during the the coveted time they they produce working capital whilst they're shrinking and now markets are beginning to sort of be more accessible they're going to work in capital um and that's a real that's a real opportunity for providers of working capital if I was living in in Dom's uh issues I'd be very excited by this this region and that issue at the moment I think there's some unique structures which are which are which which people have come up with for these types of situations so you take the Contracting uh sector there's a situation in Saudi Arabia now where uh lenders and the company have negotiated and agreed a Perpetual structure which for a business of this nature where it's extremely challenging to come up with a business plan um that may well indeed be the right solution over here so I think it's great to see people thinking more creatively about these structures for sure I mean the receivables finance inventory financing we see a lot of these structures being being deployed across the region actually not just in the UAE in the last few quarters and we're very excited about those opportunities perfect I think look we're running I think a bit out of time but maybe I'll ask one final question a single advice you could give to corporates given there is a risk of recession a lot of people are talking about it whether it's happening or not we never know but what is a single piece of advice that you could you could give actually to corporate so navigate the upcoming period um I'll let you maybe whether the storm hits Us in the way that the global economy is hit by the storm or not I don't know I doubt it it probably won't be as bad here as elsewhere but there'll certainly be some wind and some some rain so start looking at your portfolio of Assets in a way that identifies those which need to be waterproofed effectively for the storm I mean if if you uh take that further I mean given that we could be potentially getting into cycle where there could be significant growth coming right I mean going back to to Matthew's comment that the earlier and the quicker they are prepared um the more they focus on the core and probably even look at divesting something that's non-core um and and the earlier they're having conversations with banks you know as partners with with new money I think the the earlier they do that the better they will be to capture that opportunity that's that's coming I agree with all the points and I would just add contingency planning via understanding your documentation is important so understanding what your baskets are are you actually able to dispose of assets what can you use the proceeds for can you do a selling lease back can you prime existing lenders understanding what you can do if things get more complex and you can't and you can't refi I think it's critical to to start doing that yeah I think the businesses should be encouraged to hire legal and financial advisors very early in the process it will definitely make the lives easier going forward and they're welcome to give Fidel a call as early as possible to thank you thank you very much I hope everyone enjoyed this panel as much as I did uh thank you panelists thank you very much [Applause]