A Middle East Point of View | Winter 2012 | 13

There has been a significant amount ofrestructuring activity in the Gulf recently,accompanied by a change in the approach ofmany local banks to lending. Against thisbackdrop, a number of differences haveemerged in the approaches to, and resultsfrom, restructuring processes in Europe andthe Middle East.

Bridging the Gulf Restructuring approaches in the Middle East… and what they mean to you

Restructuring

Europe has been through many cycles of boom and bustand the approach to restructuring has been developedand augmented over time, both in terms of the mindsetof stakeholders – both companies and banks – and interms of legal frameworks. Restructuring is viewed as anormal part of a business life cycle, the result ofentrepreneurial risk-taking. It is without stigma and isnot necessarily seen as the ‘fault’ of management.

In the Middle East, the idea of restructuring is fairly new. The phenomenal growth in the local economiesover the past few years has introduced businesses – andsometimes governments – to the major internationaldebt markets and that has brought with it exposure toglobal macroeconomic trends. The most recent globalfinancial crisis signaled the first instance that manybusinesses and lenders in the region have had to face up to the idea that their businesses may not keepgrowing and that their debts may not be repaid in full and on time.

With respect to the legal frameworks, many MiddleEastern jurisdictions had not previously considered thepossibility that businesses would fail, or be unable torepay debts, meaning that the appropriate legislativeframeworks had not, until recently, been put in place.This leads to an uncertain environment for banks withregards to their contingency and enforcement options,should consensual discussions with a struggling businessnot bear fruit.

The environment for restructuring in the region is lessmature than it is in Europe and the United States, forexample, where the Insolvency Act in the U.K. andChapter 11 in the U.S. are well-established covenantsthat offer a degree of comfort that a predictable legaloutcome can be expected. Comfort in the lender’ssecurity position gives them and the company a basefrom which to negotiate.

Lessons to learn from recent restructuringsA key lesson learnt so far from restructuring activityaround the region is certainly the need to act early.Companies and/or lenders can be in a state of denialabout the situation their businesses face and as a resultchoose not to act until it’s too late.

14 | Winter 2012 | A Middle East Point of View

Restructuring is viewed as a normalpart of a business life cycle, the resultof entrepreneurial risk-taking. It iswithout stigma and is not necessarilyseen as the ‘fault’ of management

A Middle East Point of View | Winter 2012 | 15

A case in point is Dubai World, which, in November2009, caused shockwaves throughout the financialworld with the surprise announcement that it could notpay the Nakheel Sukuk amortization of $3.5bn due inDecember 2009. Aidan Birkett, ex-head of Deloitte U.K.Corporate Finance, was immediately appointed as ChiefRestructuring Officer (CRO) for the group, however,there remained insufficient time to pull together thecrisis management plan required. The announcementwas a revelation to the lending and led to a collapse ofconfidence in the region.

The importance of anticipating where and whenproblems may arise, preparing for restructuring andcommunicating with the lenders cannot be overstated.The primary focus should be having a robust and

sensible business plan, supported by a proper set ofprocesses and systems in the business. It is key toadequately forecast cash flow and covenant complianceto be able to foresee any problems with plenty of timeto react appropriately. The mantra in restructuring: cash is king.

A key lesson learnt so far fromrestructuring activity around the regionis certainly the need to act early.

Healthy Underperforming Stressed Distressed Crisis / Insolvent

Early warning signs of underperformance

Early action by management as underperformance identified quickly

Company runs out of cash. Serious threat of business failure

Underperformance not addrssed adequately by management

Covenants breached, banks commencerestructuring discussions

Time

Busi

ness

per

form

ance

Forecast

Underperformance – identified late

Covenant pressure

Cash crisis

Underperformance – identified early

Healthy Underperforming Stressed Distressed Crisis / Insolvent

Restructuring

Restructuring is usually required where the continued underperformance of a once healthybusiness leads to a fall in shareholder value and severe and sustained pressure on debtcovenants and liquidity that creates a fundamental uncertainty as to the future of a business.

16 | Winter 2012 | A Middle East Point of View

The importance of getting the business plan rightLenders can tell immediately when a business plan is not well thought through, achievable, or sufficientlydetailed, portraying the management as lacking incredibility. Lenders may, as a result, opt out ofsupporting that given business. An ill-thought outbusiness plan changes the banks’ approach to anynegotiations and may impair their view of themanagement team.

One of the main considerations in a business plan is itsfeasibility. There is little credibility in a business that isseen to struggle in a declining market that is showingno signs of recovery while predicting double-digitgrowth for the next few years, especially if this is what isrequired to deliver full repayment of the debt. Lenderswill not be keen to refinance a clearly unachievable plan,unless it is to improve their security position when theydo finally enforce over the business.

It is of course necessary to strike a balance. If a businessplan shows no ambition or growth, it is unlikely to gain favor from a bank. Banks look for a combination of growth and realism, ambition and pragmatism. Thismay often lead to a business having two business plans – a ’banking’ case and an ‘equity’ case. The firstwould be fairly prudent and something that a businesswill happily set covenants against, whereas the secondwould be used for different reasons, such asincentivizing management.

Fina

ncia

l per

form

ance

Management’s projections

Time

Historical actuals

Business plan projections

Deterioration of trading conditions

It is key to adequately forecast cashflow and covenant compliance tobe able to foresee any problemswith plenty of time to reactappropriately. The mantra inrestructuring: cash is king

A Middle East Point of View | Winter 2012 | 17

Something else to remember about the business plan isthat it cannot be just a financial model, compiled onceduring the refinancing process, then locked away in acupboard. It must be updated and revised on a periodicbasis. It is also vital that a suitable managementstructure is put in place. This management team mustthen develop a plan that activates the financial modeland sets a clear path to achieving the financials through day-to-day actions. Finally, the management team mustbe able to adequately measure performance against the plan through management and financial reporting of both forward - and backward - looking keyperformance indicators. ConclusionsIt is vital not to attach a stigma to restructuring. It canbe a perfectly normal course of business for healthycompanies in struggling markets, or for those saddledby their owners with inappropriate capital structures.Ignoring the problem will inevitably create another andresult in a worse outcome.

Prior to this, it is necessary to know if trouble is comingyour way, so having a robust and regular businessplanning and forecasting process in place is key.

When it comes to communications with lenders,corporates will do well to recognize that there is a moveaway from the previous standard of lending based onname, with numerous bilateral facilities. In distressedsituations it may be the case that a business faces acollective group of lenders rather than individual lenders and may not be dealing with their previousrelationship manager. A robust, measured approach tonegotiations must therefore be adopted involvingsignificant preparation.

It is clear that the type of restructuring solutions reachedin the region will continue to develop. The ‘extend andpretend’ answers that we’ve seen in the past, where theterms of facilities are simply lengthened, will no longeraddress the key problems many businesses face, nor willthey necessarily offer the best solution. To enhancebusiness value and ensure continuity, a sustainable focuson rectifying internal business performance, rather thanrelying on friendly banks, is crucial.

by David Stark, managing director, RestructuringAdvisory Services, Deloitte Corporate Finance Limited

To enhance business value andensure continuity, a sustainablefocus on rectifying internal businessperformance, rather than relying onfriendly banks, is crucial

Restructuring