Special Situations
Is it a cash problem or a business problem?
Lauterbrunnen Valley · Bernese Oberland
The shape of the practice
The first question decides everything that follows, and the time to answer it is short. We act both for those who need to reorganise and for those considering an acquisition, with the proviso that we are never on both sides of the same transaction
Typical engagements
- Economic and financial viability report
- Liability restructuring
- Negotiation with creditors
- Acquisition of distressed assets
- Assessment of reorganisation plans
- Sale of a separate business unit (UPI)
The diagnosis
A cash problem is solved with time and with structure. A business problem is not solved with money, and treating one as the other is the costliest mistake in this practice
Liability reorganisation
Renegotiation with creditors, maturity extension, conversion and design of the structure the business can actually sustain, not the one it would like to sustain
The viability report
Economic and financial viability report supporting a judicial reorganisation (recuperação judicial) filing, with well-founded projections and stated assumptions
Acquisition of a distressed asset
On the buyer's side, due diligence must be done in weeks, and that changes what can be verified. An acquisition within judicial reorganisation offers protection against successor liability that an acquisition outside it does not
The process
How the work runs, phase by phase
Reorganisation
For those who need to restructure
A process whose first deliverable is the diagnosis, and whose first decision concerns time
Diagnosis in two questions
Is it a cash problem or a business problem, and how much cash runway remains. Together, the two answers define the range of alternatives available
Short-term cash flow
Construction of the thirteen-week cash flow, the instrument that separates an informed decision from a decision made in panic
Creditor map
Survey of liabilities by nature, security and maturity, identifying who has the power to accelerate and who has the incentive to negotiate
Alternatives
Comparison between out-of-court renegotiation, court-supervised out-of-court reorganisation, judicial reorganisation and asset sale. Each has a different cost, timeline and effect on the controlling shareholder
Negotiation
Management of discussions with creditors, with a proposal grounded in actual capacity to pay rather than in wishful thinking
Report and plan
Preparation of the economic and financial viability report and support for the plan, with stated assumptions and projections the business can sustain
Special situations acquisitions
For those considering an acquisition
A short-timeline process, in which discipline over what can be verified decides the outcome
Screening
Rapid identification of what is for sale and why. A distressed asset has a seller under time pressure, and time is the main source of discount
Asset diagnosis
Separating what is a capital structure problem, which the acquisition solves, from what is a business problem, which it does not
Acquisition structure
Comparison between acquiring quotas, assets or a separate business unit within judicial reorganisation, which offers protection against successor liability that the other routes do not
Due diligence under time pressure
Definition of what can be verified in weeks and what will remain as assumed risk, with explicit pricing of that risk
Offer and execution
An offer designed for the applicable procedure, and management through to court ratification or closing
The questions that start the work
How much cash runway remains?
It determines whether there is room to negotiate or whether the decision has already been made by default
Can the business sustain the restructured debt?
A plan that does not add up is a plan that will be breached
What happens to the shareholder?
Reorganisation saves the company and often wipes out the controlling shareholder
The order of payment
Who receives what if the company is liquidated
Every reorganisation plan is compared, in each creditor’s mind, with what they would receive in bankruptcy. The statutory order of payment sets that floor, and haircut, tenor and grace period are negotiated from there
The procedures
Four routes, with different cost, timing and effect on the controlling shareholder
| Private workout | Out-of-court reorganisation | Judicial reorganisation | Bankruptcy | |
|---|---|---|---|---|
| Who is bound | Only those who sign | All creditors of the classes covered, once the quorum is met | All affected creditors, including those who voted against | All creditors, in statutory order |
| Quorum | Unanimity of those involved | More than half of the claims of each class covered | Approval by class at a creditors’ meeting, with possible cram down | No vote |
| Stay of enforcement | None | Available once one third of the claims have joined | 180 days, extendable once for the same period | Permanent |
| Publicity | Confidential | Public from the filing for court approval | Public, with a court-appointed administrator | Public |
| Controlling shareholder | Keeps management | Keeps management | Keeps management, under court supervision | Removed from management |
| Typical timing | Weeks to months | Three to six months | One to three years to closure | Years |
The reorganisation toolkit
What the law allows and few use well
DIP financing
New money during the reorganisation, ranking ahead of pre-filing claims and secured on assets, including by a second-ranking lien. It keeps the business running while the plan is negotiated
Isolated production unit
Sale of part of the business under the plan, free of labour, tax and other liabilities for the buyer. It is the structure that makes it possible to sell what works
Cram down
Court approval of the plan even if one class rejects it, provided the statutory alternative quorums are met and there is no unequal treatment within the dissenting class
Creditors’ plan
Once the debtor’s plan is rejected, creditors may present their own, including debt-for-equity conversion. It is a risk the controlling shareholder must price from day one
Substantive consolidation
Treating a corporate group as a single debtor where assets are commingled or businesses interdependent. It changes which assets answer for each debt
Tax settlement
Negotiation of tax liabilities with discounts on fines and interest and a long payment term, a practical condition for reorganising companies with significant tax debt
The signals that come first
The problem shows up in working capital months before it shows up on the balance sheet
Supplier terms stretching
The company starts funding cash through its suppliers, the most expensive credit and the first to run out
Growing receivables financing
Credit sales turned into cash at a discount, month after month
Ratios near the limit
Leverage and coverage closing in on covenants, with a waiver request on the horizon
Taxes in arrears
Tax stops being paid before payroll and the bank, because it is the creditor slowest to collect
Inventory rising without sales
Working capital locked in stock that does not turn, funded by short-term debt
Turnover in finance
A change of CFO, auditor or main bank in quick succession
The other practices
Mergers & Acquisitions
Sale and purchase of equity interests, from process design to signing of the definitive agreement
Explore the practiceDebt Capital Markets
Structuring of financing, from bilateral bank credit to capital markets issuance
Explore the practiceIPO & Tender Offers
Initial public offerings, follow-on offerings and tender offers, including delisting tender offers
Explore the practiceSpeak with the responsible partner
There is no screening. The conversation begins and ends with the person running the transaction