Financial Restructuring

Nadyn Saleh Associate

Al Markaz Law Firm

Financial DistressFinancial distress is the condition where the company’s liquidation of total assets is less than the total value of creditor claims.

When a company recognizes that it is in financial distress, it is vital that it responds immediately by taking corrective measures to enhance efficiency and control costs.

Options available to a company in financial distress

Economic deterioration and financial problems encountered may eventually threaten the further existence of a company and its capacity to meet liabilities towards creditors. This inevitably leads to bankruptcy or forced liquidation

An alternative to bankruptcy or forced liquidation is restructuring, which is a process of implementing fundamental changes aimed at improving the firm’s capital structure, thereby increasing the value of the company for creditors and/or shareholders, and improving relations with stakeholders.

Corporate RestructuringCorporate restructuring entails any fundamental change in a company's business or financial structure, designed to increase the company's value to shareholders or creditors.

Managerial Restructuring: encompasses changes in the firm’s top management

Operational Restructuring: aims at improving efficiency, controlling costs and coping with the changing business environment. This includes revenue growth strategies, cost-cutting or employee layoff

Financial Restructuring: changes to the firm’s capital structure

Asset Restructuring: changes in business configuration through acquisition and divestitures

Stakeholders

CompanyShareholders

Management

Employees

CreditorsBanks

Suppliers MediaLocal Community

UnionsGovernment

Companies that have undergone financial restructuring

Ezz Steel (Egypt)

Global Investment House (Kuwait)

Hewlett Packard (HP)

Google

Ezz SteelIn January 2015, Ezz Steel, Egypt's largest steelmaker, entered into a restructuring arrangement with two major banks, National Bank of Egypt and Arab African International Bank, to help restructure its debt worth EGP 1.7 billion ($236 million.

Ezz Steel operates four plants in Egypt and controls more than half the country's steel market.

Like other heavy industries in Egypt, its profitability had suffered in recent years from weak exports and a chronic gas shortage as the Egyptian government diverted supplies toward electricity production to ease regular blackouts.

Ezz Steel

Restructuring The company signed a long-term financing agreement with the two banks that entails repaying the loan in quarterly installments over seven years starting in 2015.

The deal with National Bank of Egypt and Arab African International Bank is part of its plan to restructure the company's credit facilities by repaying some of its existing debt.

Global Investment House (Kuwait)Restructuring MethodOn December 10th 2009, Global entered into formal restructuring agreements with all of its financiers to restructure its debt worth $1.7 billion. Under the plan, Global separated its core fee business from other parts of the company which were spun off into two special purpose vehicles (SPV).

One holds company assets, along with debt, worth $1.3 billion.

The other took part in a capital increase for the parent company, in which Global offered 122.2 million Kuwaiti dinars ($429 million) of new shares to creditors, leaving them owning 70 percent of the investment firm.

The plan was completed in July 2014.

Hewlett Packard

Hewlett Packard Co.Hewlett Packard Enterprises HP Inc.High Technology Computers and

Printers

Some Aspects of the RestructuringThe split aimed to provide each new company with the independence, focus, financial resources and flexibility they need to adapt quickly to market and customer dynamics, while generating long-term value for shareholders.

Both entities will operate as independent, publicly-traded companies. Each business contributes about half of HP's revenue and profit.

Restructuring also entailed cutting approximately 30,000 jobs.

HP shareholders would own a stake in both businesses through a tax-free transaction next year.

Google

Calio Ads Fiber Nest

Search Apps Maps Capital

Life Sciences Ventures Google

X

YouTube

GoogleAlphabet

GoogleSome aspects of the restructureSome aspect of Google that typical consumers interact with, such as Android and Youtube, are staying a part of Google.

Other companies that are not directly related to main internet products are becoming directly owned by Alphabet

All shares of Google will automatically convert into corresponding shares of Alphabet, which will continue to trade.

The structure aims to increase transparency and give greater clarity into how Google invests in various ventures, including driverless cars, high-speed Internet service and health-related technologies.

Case Study: Kuwaiti Investment Company Restructuring

BackgroundOldCo. is a Shariah-compliant Kuwaiti shareholding company founded in October 1994 that invests in a multiple businesses with diversified activities. This entailed OldCo. receiving financing facilities from a number of creditors of different magnitudes, ranging from individuals to major financial institutions. As a result of the financial crisis of 2008, OldCo. was unable to service its debt in accordance with its obligations in the respective facility agreements. OldCo. sought to restructure its debt under the Kuwaiti Financial Stability Law (FSL), which grants a stay of legal proceedings to companies in financial distress as a means of granting them more favourable conditions to repay their debts. In 2011, the FSL court approved OldCo.’s debt restructuring plan

Case Study: Kuwaiti Investment Co.STAKEHOLDERS

• Recognise that investors want to see near term asset sales

• Management alone lack ability to deliver asset monetisations given that shareholders control the Company

• Currently have the best knowledge on the asset base

• Lack of incentives to monetise the asset base

MANAGEMENT

• Lack of information makes it difficult to assess options and manage credit

• General mistrust of existing management but recognition that they have the best current

• knowledge of the asset base• Desire to have control to drive their

own destiny but they lack the means to assert control today

• Unwilling to take a haircut on claims• Belief that in investors hands, the

asset portfolio would achieve higher recoveries

• Large investor base may make achieving unanimous consent very challenging

CREDITORS

• Believe if the Company was given the right timeframe, the asset base could be monetised to service creditors’ claims and achieve equity recovery

• Limited incentive to sell assets

• Desire to have amortisation relief /

• maturity extension to maximise option value on the portfolio

SHAREHOLDERS

Options available to OldCo. under Kuwaiti Law

BankruptcyIn the event that bankruptcy procedures are initiated against OldCo., a fire sale of assets would likely result in material investor impairment well below book value, and the recovery prospects for most creditors would be materially impaired. In addition, the process is significantly long and may take up to 10 years to complete. The company executives and board of directors may also be liable for causing (or were in a position of responsibility) at the time of financial distress.

LiquidationOldCo. may seek to dissolve the company under Chapter 4 of the Kuwaiti Company Law. All debt maturity dates are waived as of the date of announcing the company’s liquidation, and creditors are notified by way of an official announcement and invited to file their claims.

However, liquidation proceedings do not come with a stay of legal proceedings, leaving the company vulnerable to extensive litigation and the possibility of a bankruptcy claim.

Options available to OldCo. under Kuwaiti Law

Financial Stability LawOldCo. may seek to restructure its debt under the Kuwaiti Financial Stability Law (FSL), which grants a stay of legal proceedings to companies in financial distress as a means of granting them more favourable conditions to repay their debts.

Schemes of ArrangementOldCo. may seek to restructure its debt under schemes of arrangement (Chapter 4 of the Kuwaiti Commercial Law) which takes place under the court’s supervision and a schemes supervisor. This requires the consent of at least 66.7% of debt holders. Upon the court’s acceptance of the application to schemes of arrangement, a stay of legal proceedings is put in place.

Options available to OldCo. under Kuwaiti Law

Case Study: Kuwaiti Investment Co.OldCo.

(Debtor)

AssetsOldCo. Holding

Existing Claims

Jersey Holding

Project Holding (SPV)

OldCo. Holding

Subsidiary

Participating Creditors

Remaining Assets

Transferable Assets

Investors Holding

Aspects of the RestructuringStructural EnhancementCreditors’ claims are transferred to the newly incorporated Project Holding, with a clearer balance sheet. This alleviates some of the pressure off OldCo., and provides structural enhancement to participating creditors.

The Structure aims to carefully balance OldCo, creditors and other stakeholder objectives fairly. The objectives included: • Provide a clear path to decision making on assets monetization • Enable more creditor oversight • Incentivise deleveraging and monetisation of the portfolio• Align interests of key stakeholders• Treat all creditors fairly and equally

Aspects of the RestructuringCreditor ControlCreditors are given co-management and control rights via board of directors and creditor committee through the shared board governance over Project Holding Co.

In an event of default, creditors have a more direct route to enforce security.

Creditors may also create creditors monitory committee which gives a higher degree of control (subject to authorities granted) and strengthens governance, monitoring and transparency.

Aspects of the RestructuringImproved Asset Monetization ProspectsWith greater stakeholder alignment, there would be less perceived distress around OldCo and there will likely be greater ability to monetize the asset portfolio.

Restructured claims allows for more flexible conditions to maximize asset value.

Final words.. Financial restructuring has opened a door to a spectrum of solutions to companies, not only in financial distress, but may merely be seeking growth or the fulfilment of other objectives.