While the main index at the Oslo Stock Exchange is down a "modest" 8-9 % in 2020, and keeps around the same level as one year ago, the lockdown caused by Covid-19 has shot a far more sizable hole in corporate income. Governments home and abroad have been running to the rescue with funding schemes, state-backed guarantees and employment support arrangements to keep companies afloat.
However, as certain important segments remain unsupported, and as any support adopted inevitably will be scaled back, with no clear exit route from the effects of the pandemic and the looming risk of lockdowns being re-imposed, many businesses are facing difficult discussions and decisions of restructuring in light of reduced cash flow, liquidity challenges, asset depreciation, burdensome covenant hurdles and limited visibility ahead.
Key risks in restructurings
Any large scale restructuring effort requires a structured and well-coordinated approach in order to come to a successful close for the benefit of the stakeholders. In our experience, certain key risks have the potential to derail a restructuring process and ultimately destroy value to the detriment of all stakeholders:
- Lack of direction: Difficult decisions will ultimately rest with the board of directors, but they will struggle if presented with only options and no clear recommendations from the management. Guiding the board towards a preferred route may at times seem to be a high-stake game to play by the management, and legal and financial advisors should be involved early in the process to give the much needed support and direction for the process.
- Decision aversion: When faced with complex situations, there will often be a gravitation towards postponing important decisions until more information is available. However, delaying decisions will more often than not operate to limit optionality rather than increasing it.
- Lack of contingency planning: A certainty in any restructuring process is that the end result will differ from the initial plan. Still, when the preferred alternative is identified, planning resources tend to be absorbed in "Plan A", while an analysis of variations in the process, and looking at "Plan B, C and D", is left unexplored. Developing and understanding all options and outcomes should be of high priority, both for the company and the stakeholders.
- Lack of stakeholder management and transparency: Adequate stakeholder management and full transparency at an early stage is essential in any prudent restructuring process, and all key stakeholders should be appropriately involved and fully informed on the current state of the business at all times, as the executability of a restructuring plan ultimately will depend on whether it will result in relative value creation for the stakeholders in light of their priorities and concerns. For listed companies this may pose a particular challenge given the ongoing disclosure obligations and restrictions relating to handling of inside information, and any periodic and ad hoc disclosures should be carefully considered in order to create sufficient space for stakeholder management and discussions.
- Optimism: The talk of a V-shaped recovery and recession is comforting, but there are currently no datapoints to support an expectation of the recovery being as quick and painless as the drop was sudden and painful. It is prudent for both businesses and stakeholders to prepare on the basis of continued impact of the pandemic for the foreseeable future and therefore also continued governmental reactions and restrictions.
In the event of an unsuccessful restructuring, directors should be mindful that their actions may be scrutinized by insolvency administrators, the courts and creditors. With the benefit of hindsight, it is rarely difficult to point at suboptimal decisions, and directors may be subject to claims for damages from both creditors and shareholders. However, the board of directors will not be held liable for prudently and actively taking the required time to develop a restructuring plan on the back of a continuing transparent dialogue with its stakeholders for the purpose of rescuing the business, notwithstanding that insolvency may occur during such process, i.e. where the business is not able to pay its debts as they fall due and the value of its assets are less than its liabilities. The key protection from the perspective of the directors will therefore lie in whether they administered a prudent restructuring process, obtaining all relevant information and expert advice prior to reaching their decision, and properly documented their assessments and actions, even if the final outcome fell short of the aspirations.
From what we have learned so far in 2020, the distribution of the benefit of any recovery may be uneven across sectors. Rather than a V-shaped or a W-shaped recession, we may well be looking at a K-shaped recovery, where some sectors thrive and others are left behind. However, those who approach the challenges in the coming months proactively, realistically and analytically will be better placed to endure the pandemic and stand stronger once we have left it behind.
Tailored restructuring teams
Thommessen has advised on more than 90 % of all large scale corporate and financial restructurings in the Norwegian market in recent years, involving the restructuring of above NOK 200 billion of debt liabilities in total, as well as numerous equity issues. With tailored restructuring teams, we offer leading legal services within financially distressed scenarios, corporate, capital markets and financial aspects of restructurings general, together with sector specific expertise.