Category: Safe Harbour

Should you use a tender process to find your next bank?

On By Geoff GreenIn Finance, Loan workouts, Safe Harbour, TurnaroundsLeave a comment

To tender, or not?

A business borrower puts their banking “out to tender” by delivering an information pack to multiple banks at the same time.  If all runs to plan, they receive multiple finance offers, and select the offer that best suits their needs.

A tender process can deliver a great outcome – but there’s the risk that it doesn’t. 

What happens if you don’t get any offers? 

A failed tender doesn’t stop a borrower from trying again – but my experience is that it becomes harder to obtain finance after a failed tender process.  That’s why my advice is to consider each situation on its merits. 

Are you “hot”?

The starting point in assessing whether or not to run a tender process is to assemble the information that you will need to provide to lenders:

  1. A clear understanding of the debt size and structure that you want.
  2. Historical financials that either reflect a stable three-year period of profitability, or demonstrate a clear trajectory to strong and increasing profits.
  3. Year-to-date management accounts which confirm the direction shown in the annual accounts.
  4. “Three-way” projections – integrated projections which set out projected cashflow, profit and loss and balance sheet.
  5. Tax office lodgements up to date, with no unaddressed arrears.
  6. Capacity to offer security. Obviously, real estate security is well-regarded, but it is not essential.

The next stage is to assess whether multiple lenders are likely to be interested in the deal.

Lenders will have clear boundaries around the types of deals they can do, and won’t do, usually defined by reference to financial ratios such as the Loan to Valuation ratio and the Interest Cover ratio (their “risk appetite”).

Your debt adviser should be able to tell you about the financial ratios that are critical for your structure and industry, and tell you which lenders are likely to be interested in your deal.

If multiple lenders will be interested, then a tender is probably the way to go.  

What if you are not?

What’s wrong with putting your banking out to tender, to just “have a crack” and see what response you get?

Bankers have increasing demands on their time, and they are pretty pragmatic about how they use it.

A tender means that they do all of a normal credit assessment work – but risk missing out on the deal altogether.

They may let the opportunity pass if they have better options to pursue – and if it requires extra work because it is on the edge of their risk appetite, they almost certainly do!

Second time lucky?

Of course, you can go back to a banker that passed on a deal the first time round, and ask her or him to re-consider – but they will probably assume that no other lender liked the deal (or why would you be talking to them?) – and that is a tough position to start from.

It is often better to approach a single banker who will be more prepared to invest time if she or he knows that they will be the only one looking at the transaction.  If they pass on the deal, they will provide feedback and a perspective that allows you to tweak your approach to the next lender.

How do you recover from a failed tender?

Tenders fail for a variety of reasons:

  • A history of financial underperformance that needs a careful explanation.
  • Projections that look unrealistic, or slapdash.
  • Risks that haven’t been explained or effectively mitigated.

You need to critically examine the information provided to the lenders.  An experienced debt adviser should be able to identify any issues and help you to understand whether it is fixable.  From there you can assess whether to re-visit the same bankers with better information, or whether you need to approach new bankers with “fresh eyes” and no memory of the original presentation.

 

The impact of draft anti-phoenix measures on restructuring and corporate turnaround

On By Geoff GreenIn Safe Harbour, TurnaroundsLeave a comment

‘Phoenixing’ – the process by which the assets of an insolvent company are transferred to another company so that creditors miss out – is a significant problem in Australia.  On budget night the government announced several headline anti-phoenix measures, with greater detail provided last week through the release of draft legislation for consultation.  Although the measures are aimed at those who act unscrupulously, they have a wider ambit, and there is the potential for them to have a broader impact if they do become law.

Overview of the measures

There is more detail here but in summary, the key concept is a ‘Creditor Defeating Disposition’ (‘CDD’).  A CDD is a transaction entered into either:

  • when the company was insolvent; or
  • in the twelve months prior to the company entering formal insolvency administration;

which prevents, hinders or significantly delays the property of a company from becoming available for the benefit of creditors.

If there is a CDD:

  • Officers whose conduct resulted in a CDD will commit an offence.
  • Those involved in ‘procuring, inciting, inducing or encouraging’ a company to engage in a CDD will commit an offence
  • Both ASIC and the Courts will have power to make orders to reverse the transaction to recover the property.

A CDD will not be voidable if the sale was for market value consideration, or was entered into by a liquidator, under a deed of company arrangement or scheme of arrangement, or as part of a Safe Harbour restructuring plan.

Market value

‘Market value’ sounds like an objective measure but in the absence of a public sale process it will be assessed retrospectively.  By comparison, the duty of care imposed upon receivers requires them to conduct an effective sale process but it does not mandate an outcome.

Safe Harbour is a defence

Specific protection for transactions entered into by liquidators and deed administrators is obvious and as expected.  A similar exemption for companies in Safe Harbour (more detail here) is a sensible and consistent policy alignment.

Application to transactions with third parties

Many would think of a phoenix transaction as a sale to a related party, but significantly it seems that the draft legislation has the potential to apply to sales to third parties, if the proceeds of sale are ‘diverted.’

The type of transaction described in an extract from hypothetical email from a CFO to a CEO highlights some of the real world issues:

We have a received an unsolicited offer for our New Zealand operations.  The offer is less than I think we would get if we took the business to market but that would take another six months, and a sale now would leave us one less headache to manage, so I recommend that we accept….

If those sales proceeds are used to pay the trade creditors of the New Zealand business, and the Australian business collapses a month later with employees unpaid, should that transaction amount to a CDD which can be reversed?  Is that email the ‘smoking gun’ which might expose directors and advisers to the transaction to the risk of prosecution?

Potential purchasers who believe a vendor to be under financial pressure may be concerned about whether they can take clear and irreversible title to business assets, or whether there may be a risk of later claw back.  Such a purchaser has a theoretical access to the general good faith defence that is available to purchasers without ‘knowledge of insolvency’, but they may need to think carefully about when exactly a suspicion about financial stress might amount to ‘knowledge of insolvency.’   Some potential acquirers may decide they need more information, or details of how the funds will be dispersed, and some may decide that it is safer to walk away and wait for a formal insolvency to deliver clear title.

Conclusion

Measures to address the serious problem of phoenixing are appropriate, and alignment with Safe Harbour measures is commendable. However, phoenixing by its very definition involves transaction with related parties. Extending the ambit of anti-phoenix measures so that they also apply to transactions with third parties risks the ability of stressed companies to promptly execute genuine sales, and should be implemented with great care.  If anti-phoenix measures need to be applied beyond those currently defined as ‘related parties,’ perhaps a better approach might be to broaden that definition.

Safe Harbour Restructuring Plans: Would the Carillion turnaround plan pass muster?

On By Geoff GreenIn Loan workouts, Safe Harbour, Turnarounds1 Comment

The investigation in the UK  into the collapse of Carillion Plc by a House of Commons select committee provides rare public access to the restructuring plan for a large company.  Would the plan meet the requirements of Australia’s Safe Harbour regime?

The Collapse of Carillion

Carillion was a UK-headquartered construction company with worldwide operations employing 43,000 staff.  It was placed into liquidation on 15 January 2018 following the UK government’s refusal to provide emergency funding,

With only £29 million in cash and creditors of more than £4.6 billion the position was so dire that – according to the select committee report – the company was forced into liquidation because it could not find a administrator prepared to take on the job in light of uncertainty about whether there was enough money to cover their costs.

Investigations into the conduct of the directors and auditors by the Insolvency Service, Financial Reporting Council, Financial Conduct Authority, and the Pensions Regulator are underway.  In addition, the House of Commons Work and Pensions Committee launched an inquiry within a fortnight of the collapse.

As discussed here, the 16 May committee report (available here) is scathing in its criticism of directors, auditors, and regulators.  The Inquiry has also made public a large number of documents which would not ordinarily be available – most notably including the 100 page turnaround plan.

Australia’s Safe Harbour regime

Australia’s severe insolvent trading laws make company directors personally liable for debts incurred when a company is insolvent.

By comparison the UK’s ‘wrongful trading’ regime imposes liability if directors ‘knew, or ought to have concluded that there was no reasonable prospect of avoiding insolvent liquidation’ and did not take ‘every step with a view to minimising the potential loss to the company’s creditors.’

The Australian Safe Harbour regime provides company directors with protection against insolvent trading claims but only if their conduct and actions, and the conduct of the company, meet minimum standards.

Would the Carillion plan meet the Australian Safe Harbour requirements?

The plan does articulate an appropriate objective that is clearly a better outcome than liquidation, and it does identify the use of a big 4 accounting firm as an appropriately qualified adviser.

However the plan is silent about any steps the directors had taken to conclude that they are properly informed about the financial position of the company, or that they proposed to take to stay informed.  The document identifies a number of actions that have been taken, but it doesn’t really set out a future action plan, identify those responsible for each action, or set milestone dates.

Those omissions may not be fatal – perhaps there were other documents that provide appropriate detail.  The biggest difficulty that the directors would have in meeting the Australian criteria is that the forecasts in the plan exclude employee pension contributions from the company budgets, and paying employee entitlements ‘as they fall due’ is a key requirement of the Australian regime.

Too little, too late

Of course the Carillion turnaround plan was never designed to meet the Australian requirements, so it’s not a huge surprise that it doesn’t.  But nonetheless, that ‘failure’ highlights that it is essential for directors seeking to access safe harbour to ensure that they have a plan that is fit for that purpose.

In the case of Carillion, history shows that the plan was too little, too late: the company was in liquidation within a fortnight of the plan being finalised.

Surfstitch: Avoiding wipeout?

On By Geoff GreenIn Continuous Disclosure, Loan workouts, Safe Harbour2 Comments
ASX listed Surfstitch Ltd was placed into voluntary administration by its directors on 24 August 2017, less than four weeks before the safe harbour reforms came into effect on 18 September.

The Australian Financial Review has reported the administrators’ conclusion that the company was in fact solvent when the appointment was made.  At first glance it seems surprising that administrators were appointed to a solvent company, but the threshold question is whether:

“in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time”

It is the directors’ opinion at the time that matters, not the conclusions drawn later with the benefit of hindsight – and solvency is not always clear even with the benefit of hindsight.

According to an ABC interview, however one of the directors was not satisfied that Surfstitch was insolvent, and abstained from the vote for administration.  This highlights the practical problems that directors face, and underscores one of the advantages that safe harbour now offers: the opportunity to more carefully assess and understand the financial position of the company.

On 4 April creditors will choose between two rival deed of company arrangement proposals.  One proposal will see the business sold in return for three-year convertible notes issued by the purchaser, the other will see a debt for equity restructure and later relisting.  Trade creditors and employees will be paid in cash under both proposals.Update: on 4 April the creditors accepted the three year convertible note proposal, putting their faith in a valuation uplift over that period.

First published here on

Secret Harbour?

On By Geoff GreenIn Continuous Disclosure, Safe HarbourLeave a comment
Must a listed company disclose that it has taken steps to ‘enter’ the Safe Harbour regime?

Doing so would almost certainly result in the withdrawal of trade credit facilities and thereby cause a liquidity crisis.  But the ASX listing rules impose a quite rigorous continuous disclosure regime, requiring disclosure regardless of the damage it may cause to a business.

The update to Guidance Note 8 Continuous Disclosure: Listing Rules 3.1 – 3.1B released this month and available here directly addresses the question, providing very helpful guidance.

Background

Rule 3.1 requires immediate notification to the ASX of:

“any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s security”

Paragraph 5.10 of GN 8 specifically confirms that rules applies to companies experiencing financial difficulties:

“The fact that information may have a materially negative impact on the price or value of an entity’s securities, or even inhibit its ability to continue as a going concern, does not mean that a reasonable person would not expect the information to be disclosed.  Quite the contrary, in ASX’s view, this is information that a reasonable person would generally expect to be disclosed.”

Taking steps to enter Safe Harbour is evidence that directors are concerned about solvency.  Surely the forming of a view that safe harbour is appropriate falls in the category of information that would have a materially negative impact on share price?

Updated Guidance

The updated Guidance Note directly addresses the issue, explaining that:

“ASX has been asked whether the fact that the entity’s directors are relying on the insolvent trading safe harbour in section 588GA of the Corporations Act requires disclosure to the market”

Updated paragraph 5.10 recognises that Safe Harbour is a conditional carve-out from a director’s potential liability for insolvent trading.  GN 8 highlights that the legislation does not include an exemption from disclosure obligations, and so Rule 3.1 continues to apply – but goes on to explain:

“The fact that an entity’s directors are relying on the insolvent trading safe harbour to develop a course of action that may lead to a better outcome for the entity than an insolvent administration, in and of itself, is not something ASX would generally require an entity to disclose”

The guidance recognises that investors would always expect directors of an financially stressed business to consider whether there was a better alternative than an insolvency administration:

“The fact that they are doing so is not likely to require disclosure unless it ceases to be confidential, or a definitive course of action has been determined.”

A practical outcome

This is a very practical position for the ASX to take.  Companies can maintain essential confidentiality rather than disclose issues that would almost certainly trigger a crisis of confidence, the freezing of credit facilities, and a severe liquidity crunch.

First published here on