HOW TO NEGOTIATE A DEBT RESTRUCTURING

I talked to the owners and managers of very different businesses that found themselves in a situation of inability to repay the loan. These were both oligarchs of various sizes with debts of several billion dollars to various foreign banks, and relatively small entrepreneurs with an annual turnover of no more than 1 billion rubles and one credit line for a comparable amount in a Russian bank. What they all had in common was that they needed to restructure their debts, and that made each of them uncomfortable. .

Restructuring of debt to the bank is a change in the terms of debt repayment under a loan agreement. Behind the simple wording is a variety of methods and principles that are useful to know in case you need to put them into practice.

Restructuring always implies conflict. You cannot fulfill your promises recorded in the loan agreement. You cannot pay the loan on time and in the required amount - right now or in the near future. How can you be trusted after that? Herein lies the main secret of successful restructuring. It is necessary to restore the trust of creditors by all possible methods (negotiations, information materials, proposals, actions).

When to start negotiations

You should think about restructuring if there is a threat to the fulfillment of obligations under the loan agreement or doubts about the sufficient solvency of the business. As in the case of any management decision, you need to weigh the benefits and risks, consider alternative options. Sometimes it turns out that it is better to either wait, or, on the contrary, to go to court with a bankruptcy petition as soon as possible. Cases are very different.

In most cases, it is better to start restructuring negotiations between one and three months before the planned debt repayment date. If you start early, there is a risk that creditors will not take the talk seriously or will take preventive measures, such as assigning debt, changing the terms of the loan agreement, looking for violations of the loan agreement to recover the debt early. If restructuring negotiations are started in a state of actual default, creditors may perceive this as deliberate pressure and will not make concessions.

First steps

Even before contacting creditors, it is necessary to prepare a restructuring plan. It is clear that the final result may be completely different, since it depends on a lot of subjective factors, but you still need a plan to streamline your own actions.

• Make a forecast of cash flow available for debt service (CFADS) several months in advance. How much is not enough to repay the principal debt (cash gap)? Are there enough funds to repay the interest?

• Assess the position of creditors in the planned negotiations. Do you have one bank in your loan portfolio or several? Are these foreign banks or Russian ones? Public or private? How aggressive are they with debtors?

• Assess your credit history with creditor banks. How well did you service the debt? How good was the financial information provided? How often did the bank apply for transcripts and clarifications?

• Analyze the loan and security agreements themselves. What are the repayment schedules (which banks have it earlier, some have it later), what collateral (are they critical for business, are they liquid in the market), are there guarantees? Are there any conditions for direct debit?

Based on this data, you need to determine the overall strategy. Do we gather all creditors together or talk to each one separately? All other things being equal, it is better to gather creditors together. This is in line with foreign practice and experience of successful Russian restructurings.

After that, plan your first restructuring communication with one or more banks. It is better to do this in the form of an official letter on behalf of the management or business owners. In it, you will point out the impossibility of repaying the debt for objective reasons and propose an action plan.

What to say and what information to share during restructuring

• You need to tell only the truth. There is always a temptation to creatively transform information and present a beautiful picture, but this is very easily recognized by more or less experienced bankers. After that, it will be even more difficult to restore the lost trust. There is no need to be zealous in bringing beauty. If everything were fine, you wouldn't have financial difficulties.

• Information should be provided in stages. I do not advise you to dump all the management accounting. The information should be clear and consistent, confirming the main idea of restructuring. The main idea is ideally formulated as follows. Your business is strategically healthy and promising, and current problems are caused by external objective factors; the owners and management are making every effort to correct the situation; It is more profitable for creditors to support the company in such a situation through restructuring than to take aggressive collection actions.

• It is necessary to provide exactly the data that will help the bank to make the right decision in a restructuring situation. By default, the borrower is required to provide a financial model for restructuring purposes (and this is not a model for business valuation, not a model for strategic or operational management – they can be used as a basis for preparing a restructuring model), substantiation of forecasts in the model, conclusions of technical, industry and financial experts. After that, you provide the actual restructuring proposal.

• It is important to show knowledge of the business. No one understands business better than the owner or manager. For a successful restructuring, you must show that you know not only the operational aspects, not only your industry and its prospects, but also understand the financial side of the issue: forecast, cash flows, financial model, bank risks, the process of forming bank reserves. This will simultaneously increase the bankers' trust in you and prevent possible manipulations on their part.

How restructurings are carried out

In Russia, there is no established procedure for restructuring, although the relevant amendments to the bankruptcy law are being prepared right now. Until this happens, borrowers and lenders are guided by their experience, their banks' procedures, logic and commercial calculation, as well as international practice. In my experience of restructuring in Russia, a successful process can look like this.

• The borrower's first appeal to creditors with information about the need for restructuring. Notification of the risk of non-payment. Proposal for negotiations. A proposal to refrain from aggressive actions to collect debts.

• Meeting of the borrower with creditors. Preliminary analysis of the situation, exchange of views and positions of the parties. Agreeing on an action plan. An informal moratorium on going to court for debt collection or declaring bankruptcy.

• Provision by the borrower of information, financial model, proposal for restructuring. Analysis of information by banks. Holding credit committees. Revision of the restructuring proposal. Proposal approval.

• Development of restructuring agreements. Approval by the credit committees of banks. Signing of agreements.

• Implementation of agreements and monitoring.

In my practice, a properly organized process will take three to six months

Source (in Russian): https://secretmag.ru/opinions/dmitrij-migel-kak-dogovoritsya-o-restrukturizacii-dolga.htm