Unprincipled restructuring
Resolving problem situations between the borrower and creditors is a creative process that is difficult to formalize. However, there are various restructuring principles, such as the "London Approach" or the INSOL Principles. How applicable they are in Russian practice and how they can be useful to our borrowers and lenders – we will tell you below.
I started working in the Restructuring group in one of the consulting companies in February 2009. At that time, there was a lot of talk about the global financial (economic) crisis, about the "new reality" and the need for adaptation, about the fact that the future economic and financial system would never be the same again. Some of this turned out to be true, some are repeated today, talking about the crisis in our country. In any case, in such times of crisis, the issue of debt settlement becomes especially relevant: debtors have the desire and opportunity (sometimes quite reasonable) to demand a revision of previous agreements with creditors, and creditors have fears that debtors will use the crisis to obtain "unfair" and improper benefits at the expense of the creditor.
Such a conflict of interest can be resolved in different ways: you can go to court, or you can try to negotiate. For pre-trial settlement, European economies have come up with their own rules – the "London Approach", formalized by the international association INSOL as the "INSOL Principles". Since the beginning of my work in restructuring, these very principles have become the subject of many heated debates: professional consultants condemned debtors and creditors for non-compliance with these principles, debtors and creditors considered following these principles to be an infringement of their rights and opportunities in controversial situations. In rare cases of large international restructurings involving multiple creditors (e.g. Rusal's debt restructuring), INSOL principles have been adhered to. But in the overwhelming majority of other debt settlement situations, these principles were rather the lot of "connoisseurs of beauty", while experienced bankers sought to "run" to the asset as quickly as possible, and experienced debtors went on the defensive and gladly transferred the case to the judicial plane of bankruptcy proceedings.
Let's figure out what are the benefits of the INSOL principles in Russia and is it worth talking about compliance with any principles at all when settling bad debts?
Settlement in Russia
Debt restructuring in Western Europe is like the old English boxing, according to the strict rules of the Marquis of Queensberry (see https://ru.wikipedia.org/wiki/%D0%91%D0%BE%D0%BA%D1%81 ). In such a restructuring, the parties devote sufficient time to a preliminary analysis of the situation, hire consultants and comply with the principles. Fight in gloves, the time of the round is limited, do not hit below the belt. Sport! It earns a lot of money and makes big names.
Restructuring, debt settlement, and conflict resolution in Russia are more of a street fight. The place of the battle is where you have to, there are no rules, except for one - strike first, the form of clothing depends on the time of year, the duration depends on the desire of the parties.
Why do we need principles?
In any fight, especially an unexpected one, preparation is important. The best fight is the one that didn't happen. If a person has gone through a boxing school, it can be useful in a fight as well. It is important to understand that knowing the rules of boxing does not guarantee victory. But it can increase the chances of success, all other things being equal.
It is important to distinguish principles from rules, laws, and regulations. Principles provide a general direction for action, framework; Specific actions can vary significantly depending on the specific situation.
Let's take a look at each of the principles of INSOL – whether it can be used in Russia and what are the benefits of it – see the table:
Principle Name | Principle Content | Current Practice in Russia |
1. Introduction of Moratorium | When a debtor faces financial difficulties, all interested creditors should be ready to cooperate with each other and with the debtor, providing sufficient (though limited) time ("Moratorium") to prepare information and develop settlement proposals if appropriate | The Moratorium practice is not properly established in Russian jurisdiction. Recent Civil Code changes (Article 450.1) allow creditors to temporarily waive their contractual rights, effectively formalizing a Moratorium when the debtor meets certain conditions. Practice remains limited, with the common approach being trusted debtors and creditors allowing loan payment delays and agreeing not to go to court for a specific period (typically weeks to a quarter), allowing the debtor to prepare proposals and creditors to manage reserves and Central Bank reporting. |
2. Creditors' Actions During Moratorium | During the Moratorium, all interested creditors should refrain from debt collection actions (except debt sale to third parties) or reducing their exposure; conversely, creditors have the right to expect their relative positions won't change | Principles 2 and 3 are fundamental, defining the "spirit" of European restructuring. All parties agree to act reasonably, considering others' interests. For maximum benefit, no one should "pull the blanket over themselves" as it's a zero-sum game. |
3. Debtor's Actions During Moratorium | During the Moratorium, the debtor should not take actions that could negatively affect creditors' recovery levels (collectively or individually) compared to their position at Moratorium start | Only trust between parties can ensure these principles' implementation. In Russia, there's no trust between borrowers and creditors in crisis situations - everyone is for themselves. Unsurprising, as most problems involve someone "cheating" others: borrower cheating creditors, management cheating shareholders, etc. Restoring trust is extremely difficult. |
4. Creditor Coordination | Creditors' interests are best served through coordinated interaction with the debtor, most effective when selecting representatives to a Coordination Committee and engaging professional consultants | This principle faces potential difficulties. While some creditors' participation is sufficient, others might misuse received information for their interests at others' expense. Creditors understand that without trust, the debtor only wastes time and money. Without trust, creditors resort to ultimatum negotiations, demanding unreasonable compliance under collection threats. |
5. Information Provision | During Moratorium, the debtor should provide creditors/consultants reasonable access to all relevant information about assets, liabilities, business, and forecasts | The Moratorium's goal is understanding the borrower's situation and developing a viable plan. In Russia, borrowers' financial information quality is extremely low. Principal decisions (write-off/restructuring) can be made within days based on key borrower parameters. |
6. Pari Passu | Restructuring proposals and inter-creditor agreements during Moratorium should reflect applicable law and relative creditor positions at Moratorium start | This principle (meaning "equal step/proportion") always attracts attention, involving distribution of available cash flows among creditors proportionally to debt amount, considering collateral status and repayment terms. |
7. Information Access | Information received for restructuring about debtor's assets, liabilities, business, and proposals should be available to all interested creditors and treated as confidential | Russian practice often violates this principle. Information about affairs, assets, and forecasts is most valuable in restructuring disputes. The borrower must carefully consider what information to share with creditors. |
8. New Financing Priority | If additional financing is provided during Moratorium or under restructuring proposals, its repayment should have priority over other debts/claims | Doesn't formally work in Russia. Creditors and debtors can agree informally on priority. Usually works when restructuring/recovery plans include additional working capital financing. Such financing is typically short-term, maturing before previous loans. Any restructuring plan requiring new loans is potentially non-working if the debtor can't optimize business without additional financing. |
What to do with the Principles?
1. Nothing guarantees successful debt settlement in Russia – including adherence to the INSOL principles. It often happens that following these principles can, on the contrary, harm the lender or borrower if all other parties aggressively "press"
2. Knowledge of the principles can help to establish contact with foreign creditors. If the borrower takes the initiative and demonstrates a willingness to "play by the rules", this will be positively perceived by foreign banks and will help to establish trust
3. Russian banks are also gradually adopting foreign experience. INSOL principles have already been tested in a number of successful (relatively) restructurings. If the borrower takes the initiative and shows his knowledge of these principles, this will help to transfer the conversation to a more professional level
4. Behind any restructuring/settlement decision are negotiations and the people involved. Each side in the negotiations has its own position, its own history of relations and its own goals. The principles will help to streamline this chaos of the opposing sides a little. But they should be used carefully, with an eye on creditors who take an aggressive position and have a great influence on the course of negotiations (a large exposition, a state bank, experience in similar situations)
5. The best application is to designate these principles at the initiative of the borrower as guidelines for interaction with lenders, especially in the first period when it became known about problems with debt servicing. This will help calm down some creditors, others may show their intolerance, and still others will be ready for a constructive dialogue. Having once declared adherence to the Principles, one should not violate them - this will only aggravate the mistrust between the parties.
Dmitry Migel
5 February 2016