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When you do not restructure

After 10 years of working in consulting, I felt the need to gain "real experience" and joined the team of a large private Russian bank – of which there are not so many left! I started as a director of a portfolio of distressed assets, and I was excited about the idea of financial restructuring. Previous experience as a consultant had an effect: I considered myself a pro in corporate finance, knew how to build complex financial models, negotiate with syndicates of foreign banks and the management of large public industrial groups.


The first asset in my portfolio is a small regional retailer with an exposure of 150 million rubles, which has just gone into arrears. My analyst collected information on financial reporting and did some research, I called two other creditor banks, trying to find out their position, but not to tell too much about the position of my bank. Everything was clear - it was necessary to appoint negotiations with the management / owner of the retailer and insist on paying off the debt. The meeting took place. I was, as it seemed to me, persistent and convincing, I showed everything in numbers. The borrower listened, promised to provide additional financial information and a restructuring proposal, and left. I made a presentation to the credit committee. A few days later, the borrower sent a scan of the letter to all creditors with a proposal to write off 50% of the debt, "given the difficult financial situation and the prospects for debt repayment." This was my last contact with the borrower. He did not get in touch again.


Only at the credit committee did it become clear that the financial restructuring would not take place:

·       the borrowers (legal entities) of the debt to my bank are trading houses that do not own firm collateral;

·       the debt is secured by a pledge of goods in trade;

·       the guarantor is the owner of the warehouses, but the warehouses are already pledged to another bank;

·       Some loan and security agreements include an arbitration clause, as a result, the fee for filing a claim will amount to several million rubles.

After more than a month of work, I handed over the asset to the collection department.


Since then, I have had no illusions about the "panacea" for financial restructuring. Each subsequent asset in my portfolio (which reached $70 million) was even more complex and neglected. I had to sell a warehouse of spare parts for medium-duty trucks of the Chinese brand DongFeng and CLN to a Russian media group, I negotiated the introduction of external management with one Siberian metallurgist and created a joint venture in English law with another. I had to take into account the safety of the property, the presence of potential buyers and discounts, the risks of third-party creditors entering the register, the enforceability of English arbitration, and much more – the analysis of historical financial results and EBITDA calculations were far from being at the top of my to-do list.


During my time managing a portfolio of distressed assets, I have never turned to my former colleagues from consulting for Due diligence, Independent business review, or a financial model: I could build models, forecasts, and conduct sensitivity analysis myself. The shareholder demanded that I maximize the level of debt recovery, and in this matter, the reports offered by consultants did not help me in any way. Debt restructuring was not an end in itself - I could file for bankruptcy, present writs of execution, sell the debt, swap debt for equity.


Colleagues from the departments for working with distressed assets in banks will confirm that the term "restructuring" in Russian banking practice often means a technical change in the terms of lending, usually prolongation. Restructured loans are not considered overdue, doubtful debt provision on them is smaller, and the burden on capital is less. But essentially, dealing with a distressed asset covers many more aspects that go far beyond financial analysis, modeling, forecasting, and presentation.


At many conferences and round tables on distressed assets and restructuring, it seems to me that the discussion moves away from understanding the key aspect: the goal of the work is to maximize the return/minimize losses in each case, and not to use a variety of analysis tools, use the maximum number of "best practices" or try to predict the future. Another thing is that the systems and business processes existing in some banks, the methods of work used by bank employees do not allow to achieve such maximization, and sometimes it is necessary to choose and apply the right tool for prompt immersion in the situation.


In order to "run to the asset", you need to understand where to "run", with the help of what actions, and then what to do with this asset. In other words, for each asset and portfolio, the bank should be able to (i) conduct rapid diagnostics (quickly!), (ii) develop the main strategy and alternative strategies of work (deeply!) and (iii) apply it (effectively!), but with the possibility at each stage, depending on the changing situation, to press the "stop valve" and apply an alternative strategy.


At the diagnostic stage, the identification of key factors and the analysis of the features of the asset work well:


Source: author's own analysis
Source: author's own analysis

Source: author's own analysis
Source: author's own analysis

At the stage of applying the strategy, it is necessary to understand the risks of deviation from the chosen strategy, the availability of alternative options and motivating factors for the debtor (involvement of shareholders, subsidiary liability, writs of execution, liquid collateral).

Dmitry Migel

7 October 2015

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