Insolvency & Restructuring

Banks establish principles for restructurings in Austria

Newly established principles provide guidance for the cooperation between all involved banks in extra-judicial restructurings.

The context

In times of finan­cial tur­bu­lences such as those wit­nessed over the past few years, tak­ing a sound and com­pre­hen­sive approach to address­ing a company’s cri­sis appears vital to pre­serv­ing the company’s exis­tence, safe­guard­ing jobs, and cir­cum­vent­ing neg­a­tive con­se­quences for the affect­ed busi­ness loca­tion. In this con­text, extra-judi­cial restruc­tur­ings, which take place before and aim to avoid the open­ing of insol­ven­cy pro­ceed­ings, have gained enor­mous momen­tum.

As the major cred­i­tors, banks play a cru­cial role in all restruc­tur­ing pro­ceed­ings. The extra-judi­cial restruc­tur­ings of the past few years have shown that reli­able coop­er­a­tion amongst cred­i­tors when they are work­ing with finan­cial­ly trou­bled com­pa­nies is cru­cial in min­i­miz­ing dam­ages for all par­tic­i­pants. A suc­cess­ful reor­ga­ni­za­tion not only pro­tects banks and oth­er cred­i­tors, but also avoids con­sid­er­able neg­a­tive con­se­quences for the broad­er econ­o­my and soci­ety.

How­ev­er, the prac­tice of man­i­fold restruc­tur­ing pro­ceed­ings in recent years has demon­strat­ed that indi­vid­ual inter­ests are often placed above joint inter­ests.

This regret­table ten­den­cy called for rec­ti­fi­ca­tion: Togeth­er with three lead­ing Aus­tri­an bank­ing groups (Raif­feisen Bank Inter­na­tion­al, Erste Group Bank, and Uni­Cred­it Bank Aus­tria), Schoen­herr devel­oped an inno­v­a­tive restruc­tur­ing guide for Aus­tria which was pub­lished in Sep­tem­ber 2013.1 This guide con­tains eight non-bind­ing prin­ci­ples that aim to coor­di­nate the steps tak­en by bank­ing insti­tu­tions in restruc­tur­ing pro­ceed­ings and there­by ren­der the pro­ceed­ings pre­dictable and prof­itable for all stake­hold­ers involved.

Fur­ther­more, the guide’s two annex­es con­tain valu­able advice for the par­tic­u­lar­i­ties relat­ed with the trade cred­it insur­ance and leas­ing sec­tors.

The principles

Out­line

The prin­ci­ples apply to the first “Stand­still Peri­od”, which is the short peri­od of time in which a company’s capac­i­ty to be restruc­tured is assessed by its cred­i­tors. The main focus of the guide’s prin­ci­ples lies on those restruc­tur­ings that have a total vol­ume exceed­ing EUR 30 mln and involve at least three banks. The prin­ci­ples explic­it­ly do not pre­sume to antic­i­pate the self-depen­dent deci­sions of all stake­hold­ers involved. Rather, they express a com­mon under­stand­ing that con­struc­tive and reli­able coop­er­a­tion in extra-judi­cial restruc­tur­ings might be able to pre­serve val­ues on both the debtor’s and the cred­i­tors’ side.

One exam­ple

Prin­ci­ple No. 1: In the Stand­still Peri­od, all cred­i­tors should coop­er­ate and pro­vide the debtor enough time to obtain and eval­u­ate infor­ma­tion about its eco­nom­ic sta­tus, and to for­mu­late and assess pro­pos­als for restruc­tur­ing mea­sures.“2

Imple­ment­ing this prin­ci­ple involves banks being released from bank secre­cy reg­u­la­tions in order to enable a direct exchange of infor­ma­tion. In a next step, a bank­ing meet­ing is arranged at which the debtor reveals its real eco­nom­ic sit­u­a­tion. The same infor­ma­tion is pro­vid­ed to all stake­hold­ers at a sub­se­quent All Lenders’ Meet­ing. There, the Stand­still Peri­od is agreed upon, and the start of the peri­od, its dura­tion and mile­stones with­in the peri­od are fixed. The mile­stones refer to the dates on which the debtor is oblig­ed to man­date exter­nal advi­sors and present a writ­ten restruc­tur­ing con­cept. The restruc­tur­ing concept’s eco­nom­ic and legal require­ments are to be estab­lished dur­ing the Stand­still Peri­od in mutu­al coop­er­a­tion among the debtor, the cred­i­tors, and the advi­sors. The concept’s sub­stance must be suf­fi­cient for the cred­i­tors to reach a care­ful deci­sion on whether to sup­port the restruc­tur­ing plan. In this con­text, the stake­hold­ers must addi­tion­al­ly decide if a prog­no­sis for the company’s con­tin­ued exis­tence will be pre­pared in order to facil­i­tate the cred­i­tors’ deci­sion.

Conclusion

The prin­ci­ples reflect the ambi­tion to secure the cred­i­tors’ finan­cial posi­tion with­out dis­ad­van­tag­ing any sin­gle cred­i­tor. On the oth­er hand, the cred­i­tors shall, in a mutu­al­ly coor­di­nat­ed effort, demon­strate a will­ing­ness to help the com­pa­ny over­come its cri­sis. This sup­port might be gen­er­at­ed by extend­ing due lia­bil­i­ties or by grant­i­ng addi­tion­al bridge loans.

How­ev­er, the cor­ner­stone to a suc­cess­ful restruc­tur­ing is coop­er­a­tion: An ini­tia­tive by a sin­gle bank that leaves the oth­ers behind will not trig­ger the expect­ed improve­ment. A coor­di­nat­ed approach towards restruc­tur­ing pro­ceed­ings will not only enhance the debtor’s chance for a suc­cess­ful recov­er­ing, but also strength­en the posi­tion of all banks involved.

Unques­tion­ably, legal advice, for both the com­pa­ny and the banks, is strong­ly rec­om­mend­ed to cal­cu­late and min­i­mize all poten­tial risks asso­ci­at­ed with restruc­tur­ing pro­ce­dures. The insol­ven­cy & restruc­tur­ing team at Schoen­herr has a very strong record in this area.

Extra-judicial restructurings, which take place before and aim to avoid the opening of insolvency proceedings, have gained enormous momentum.

1
The Eng­lish ver­sion of the guide is avail­able at http://www.schoenherr.eu/news-publications/publications/guidelines-for-restructuring-in-austria; the Ger­man ver­sion is avail­able at http://www.schoenherr.eu/news-publications/press_releases_pdfs/schoenherr_restructuring-guide
2
See also the “State­ment of Prin­ci­ples” of INSOL Inter­na­tion­al.