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:

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.