Bankruptcy and Restructuring: Navigating Distress in the Evolving Markets

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Christy: Welcome to today's webinar, "Bankruptcy and Restructuring –Navigating Distress in the Evolving Markets." My name is Christy DeMaio Ziegler, and I will be your host for today from the CSC webinar team.

We're very fortunate today to have some amazing speakers who will be sharing their insight and expertise with us — Michelle Dreyer, Annita Yeo, and Ian Hancock together with our moderator, Eric McDonald. So without further ado, I'd like to pass on to our speakers and let them introduce themselves.

Michelle: Thank you, Christy. Hello, all. I appreciate you joining us for today's webinar. I'm Michelle Dreyer, Managing Director of CSC's Global Restructuring practice. Throughout most of my 24-year career at CSC I have worked with our clients to assist them accomplish their business objectives when they tap into the capital markets. I've had the opportunity to serve as an independent director for many of our clients' borrowing entities, fulfill the duties of an indentured trustee, and assist our clients as they navigate through their bankruptcy and restructuring options.

Ian: Hi, everyone. Thanks for joining. I'm Ian Hancock. I lead the trustee businesses for Europe, Middle East, and Asia-Pacific. I've had a very happy three and a half years at Intertrust, now part of the CSC group. Prior to that, I worked principally in the banking sector. I worked in synchronizations, worked on loan deals, escrow deals mostly as trustee, but also providing agency services. So I've been very, very lucky to have a lot of very, very good, very, very strong, very, very welcoming clients. We're all very, very happy to be able to provide this to you today as well.

Annita: Hello, everyone. Very warm welcome to our webinar. I'm Annita Yeo, and I'm based in Singapore. I look after the trust and agency business in APAC and am responsible for the strategic planning and delivery of our services in the region. My team and I specialize in servicing cross-border debt structures, loan agency, escrows, debt restructuring, and liability management exercises.

Eric: And hi, everyone. Thanks for joining. My name is Eric McDonald. I'm a director within Global Capital Markets for CSC here in the U.S. I focus my career on providing customized solutions to customers across the financial, technology, and energy industries. Today I specialize in providing high-touch, customized loan agency solutions for credit facilities. I'm really pleased to be moderating such a fantastic panel of speakers today, and let's get right into the topics.

I'd like to kick it off by talking about the current state of bankruptcies and restructurings. How have recent economic conditions and global events impacted the number and types of bankruptcies and restructurings that we're seeing today? What are some of the key trends that we're observing, and how does today's environment compare to what we saw during the 2008 recession? Michelle, I was hoping you could kick us off.

Michelle: Sure. Thanks, Eric. I'm actually going to start with your last question first. And I have remarked to several people over the last few years that the market was feeling a bit like the years leading up to 2008. In both periods the Federal Reserve lowered interest rates in an attempt to boost the economy, flooded the market with cheap money. Economies binged on cheap credit and lax lending requirements, and this led to a rise in property values as people rushed to buy homes. Sounds really familiar, like the last couple years. There were warnings in the market then as there are now.

I think the difference between the two periods is that capital markets remain open now as opposed to 2007 when interbank markets basically froze and there was no lending available. Both individuals and corporates are able to continue to tap into capital markets now. But things are getting a bit tougher. With so many overlevered companies who took on more debt over the last two years, the bubble was bound to burst, and we've seen a rise in bankruptcy filings. In an article published by "The Wall Street Journal," corporate bankruptcies are running at the fastest pace since 2010, which for those of you who were practicing then remember it was a very busy year. This rise in filings has been triggered by the rising interest rates, concerns in the banking sector, and a slowing of the economy. I guess I probably should have mentioned that we had a few bank failures leading up to the 2008 crisis, just like we've seen now, only not quite the large size banks.

Companies need to course correct now. They need to delever themselves, and most will do that by restructuring in bankruptcy court.

Eric: Yeah. Thanks, Michelle. You know, a lot going on today and some similarities, some differences between now and 2008. Ian, what are you seeing?

Ian: Thanks, Michelle. Thanks, Eric. I mean it's very, very similar in the UK as well. I'm going to do the same as you and start off chronologically. So yes, if we go back to what it was like in 2008, 2009, it was a very, very difficult period for everyone. The big difference then I think was that generally people were being very, very aggressive. There were a lot of very, very quick, very fast decisions to make. People didn't necessarily have the same experience they have now. We all know not necessarily the best decisions were being made. But the world was difficult. We had to find our way through it.

If we shoot forward to where we are within during the COVID period, yes, again still a very, very difficult world, new issues, decisions having to be made quickly, I think the big difference that we've seen is that everybody sort of realized that we were all in it together. We had to work with each other to get through this. I've seen plenty of examples where decisions have been made and people have taken different approaches that they would never have taken before.

So as a couple of examples, we had one major global client come to us in our capacity as trustee saying, "Look, we're having issues. We would like to delay some of our payments." Well, okay, that's a fair question under the circumstances. Of course, this was a client that had been very, very publicly saying, "We've got loads of money. We've got government backing." So we take that message to the lenders. The lenders say, "Well, actually no, not sure about this. We know they've got a strong cash flow. Actually, we're not going to agree to that. We would rather focus on the clients, the borrowers that we know are having real difficulties. That's who we want to go out and help."

Another example is we were working on a large restructuring. There were about two and a half thousand creditors involved in this. Now ordinarily that would be very, very difficult to try and get everyone together, to get everybody to agree. Even just to get everybody on a phone call would have been pretty near impossible. Again, everybody once we worked together, we were able to work through that. Some of the decisions were made very, very quickly. Everybody wants to get those done because everybody knew we had to get where we needed to be. And that was a large airline, so in those circumstances, equally difficult.

So ultimately I'd like to say it's as though we are in a slightly better, kinder world. I hope that's the case. Certainly I'm not seeing any changes from that. People are still making decisions looking at the bigger picture, and long may that continue.

Eric: All right, Ian. And Annita, how about from your perspective?

Annita: Well, Eric, we may have hazy memories of the 2008 recession, but it was a global crisis with widespread effects on economics worldwide, including Singapore and Hong Kong. The scale of the crisis was significant, with a severe contraction in global trade and financial markets. In contrast, the recent economic challenges, such as the COVID-19 pandemic, have been more diverse in their impact, affecting different sectors and regions in varying degrees.

The landscape of bankruptcy and restructuring in APAC has undergone significant changes, impacting the way companies approach financial distress and seek relief. There has been a noticeable increase in out-of-court restructurings as an alternative to traditional bankruptcy filings. Out-of-court processes actually allow companies to negotiate with creditors and stakeholders to reach a consensus on debt restructuring and other financial arrangements without going through formal bankruptcy proceedings. These approaches can actually be more cost effective, faster, and offer greater flexibility for companies to retain control and value.

Alternative financing has also gained traction in this space. Traditional lenders may be hesitant to extend credit to distressed companies. As a result, alternative financing options, such as debtor-in-possession financing and rescue lending is on the rise.

There is also judicial management, which is a process in which a company is placed under the supervision of a court-appointed judicial manager. The judicial manager assesses the company's viability and formulates a restructuring plan. This mechanism provides an alternative to winding up the company, allowing for a potential turnaround and preserving its value. It also provides companies with breathing space, something that's much needed in order to stabilize their operations and negotiate with stakeholders.

There is also growing recognition of the impact of environmental, social, and governance factors on a company's long-term viability. Stakeholders, including investors, creditors, regulators, are placing greater importance on ESG considerations in a restructuring process. Companies need to address these concerns and integrate sustainable practices into their turnaround strategies to attract and support and maintain stakeholder confidence.

No matter which approach is undertaken, the trustee continues to play a crucial role in a bankruptcy or restructuring process. This actually helps manage and administer the affairs of the company, protect the interests of creditors, play a very central role in coordinating discussions and facilitating the entire restructuring process.

Eric: So it's really interesting to hear some of the trends that we're seeing across the globe in the bankruptcy and restructuring space. I think it'd be really good to dig into some real-world cases. So Michelle, I was hoping you could go into some companies that you've come across that have gone through bankruptcy and restructuring. What were some of the biggest challenges they faced, and how did they overcome them?

Michelle: Sure. Thanks, Eric. You know, I've had the opportunity to work on many interesting matters during my time here. So it was a little hard to decide which cases to highlight because honestly every case has something unique about it. It's part of what draws me to this work, having to solve problems that have never been solved before. So I'm going to touch briefly on three cases that may be of interest to this audience. Because all the cases are a matter of public record here in the United States, I'm able to share this information with you.

The first is an international case, China Fishery Group. China Fishery and 37 of its affiliated companies filed for Chapter 11 in June of 2016 in the Southern District of New York. The debtor is headquartered in Hong Kong, with much of its operations in Peru. And the various debtors were entities from around the globe, including Bermuda, the British Virgin Islands, Cayman, Hong Kong, Samoa, and Singapore. No U.S. entities though. Having a large number of debtors in many jurisdictions made many matters more complicated than a U.S. bankruptcy case with only domestic debtors. Because of the complicated nature, the debtor remained in bankruptcy for several years and was still proceeding through the process when the COVID-19 pandemic hit, further complicating things as the world shut down. The debtor's plan of reorganization included a sale of certain of its Peruvian assets, and this sale proved incredibly difficult to complete when potential buyers were not able to travel to Peru to tour facilities.

The case was now languishing and needed a new path forward. An ad hoc group of creditors composed of lenders and noteholders, came forward with an alternative plan. In March of 2021, things started to move forward, and a restructuring support agreement was entered into, which among other things contemplated a potential scheme of arrangement in Singapore or a scheme of arrangement and restructuring plan in the United Kingdom. This alternate plan got the case moving forward towards confirmation and was confirmed in June. Once confirmed in the U.S., there were still some things to do in foreign jurisdictions. But on September 13th of '22 the process in the United Kingdom for the restructuring plan was initiated, and closing actually took place a few months later almost six and a half years after the case was filed in the U.S.

The complicated corporate structure coupled with complicated operations and a global pandemic made this case very unique and interesting. And in the end, all the participants were able to create a unique solution to finally allow the debtors to emerge.

The second case is U.S. centric, and I'd like to touch briefly on Sanchez Energy Corporation. Sanchez Energy and 10 of its affiliates filed for bankruptcy protection in the Southern District of Texas in August of 2019. The case was proceeding along when a perfect storm of issues arose. In March of 2020, again COVID, the world started shutting down and talks among the members of OPEC broke down. And Saudi Arabia initiated a price war on oil with Russia. The combination of these two events pushed oil prices down, and at the same time Sanchez's DIP loan was maturing.

Sanchez needed to emerge from bankruptcy before it was really ready to emerge, and the debtors needed a creative solution, which came in the form of an agreement to push some litigation that we would typically see during the bankruptcy process to post-effective date. This allowed the debtor to emerge from bankruptcy much sooner than it would have been able to otherwise. To date, the post-effective date litigation has included waiting for the ruling, but like China Fishery, case participants were able to create a unique solution to unique issues. We'll have to stay tuned for the final outcome.

Lastly, I'm just going to quickly mention Diamond Sports Group. Diamond Sports filed for bankruptcy protection in the Southern District of Texas, just a few months ago, with 29 of its affiliated companies. We are in the very infancy of this case, but we have already seen a dispute between the debtors, four Major League Baseball teams and Major League Baseball itself.

The core issues at hand are not unlike other cases. However, the dynamic of such well-known parties coupled with the amount of public interest certainly creates a uniquely compelling atmosphere in the courtroom. This too is one to watch.

Eric: Yeah, absolutely. Thanks, Michelle. So a lot of those cases or a lot of portions of those cases are somewhat U.S. centric. So Annita, I was hoping maybe you could talk about some of the key differences between U.S. bankruptcies and non-U.S. bankruptcies and how companies can navigate those differences, especially if they're cross-border. And what are some of the unique challenges that arise when dealing with those types of bankruptcies, like different legal systems and different cultural norms?

Annita: Well, Eric, there are several key differences between U.S. bankruptcies and bankruptcies in the main financial centers in APAC, such as Singapore and Hong Kong. For example, you have in the U.S. Chapter 11 bankruptcy, which provides a framework for the reorganization of the company, allowing it to continue operating while developing a plan to repay creditors. In Hong Kong and Singapore, the main restructuring tool is the scheme of arrangement. Such schemes of arrangements actually involve proposing a restructuring plan to creditors and obtaining their approval through a court-sanction process.

There are also cross-border bankruptcies, which require coordination and recognition between courts in different jurisdictions. This can involve complex legal and procedural challenges. Mechanisms such like the UNCITRAL Model Law on Cross-Border Insolvency and International Treaties facilitate cooperation and recognition of foreign insolvency proceedings. So engaging professionals experienced in cross-border insolvency and working closely with your local counsel in each jurisdiction can help navigate these challenges .

Besides regulations, cultural norms and stakeholder expectations can significantly impact bankruptcy proceedings. In the United States, the emphasis is often placed on achieving quick and efficient resolution to maximize value for all stakeholders. In contrast, in some jurisdictions there may be greater focus in preserving jobs and social stability, which can influence the restructuring approach and priorities. Companies must be mindful of these cultural differences and adapt their strategies and communication to address stakeholder expectations. So companies should seek professional guidance, develop a comprehensive understanding of the legal frameworks, and work closely with experienced trustees to effectively navigate the differences, challenges, and unique requirements of bankruptcies and restructurings in different jurisdictions and cross-border scenarios.

Eric: And Ian, how about from your perspective? What are some of the differences or similarities that you see between U.S. and non-U.S. centric bankruptcies?

Ian: It's always interesting when you hear about different jurisdictions and you hear the same terms, like schemes of arrangement being used. And so some of those are very, very similar.

I think in the UK the biggest difference was that we had the restructuring plan, which I think Michelle you alluded to a little while ago, which was part of the UK's Corporate Insolvency and Governance Act. And that was brought in principally to deal with COVID, and essentially the whole idea was to make restructuring and insolvency a much quicker, easier process for everyone and a much more defined process as well. And that's had limited success.

So the first few deals that were going through I guess it's to be expected that there were some issues being raised. As I said, one of the points of that was to ensure that things happened much more quickly. I think from the first application going into the court hearing, they were taking a lot longer. They were taking something like 10 weeks in some instances. It's to be expected that over time those did speed up a little bit. They are certainly getting to the point now where it's faster than developments under the original scheme, which continues.

So the whole the whole purpose of this, so the way that the restructuring plan differs is that there are slightly different entry requirements. So there is a higher bar to prove the company is or is likely to experience financial difficulties. But there's also the new concept of the cross-class cram down so that the plan can be agreed by the courts despite not having the agreement of all the classes, provided those classes that either don't vote or vote against it are not going to be substantially in a worse position. So it is a major, major development for the UK legal system. How that develops further will be seen, but so far it's going fairly well.

Eric: All right, Ian. Let's stick with you. So what advice would you give to companies or advisors who are working with companies in distress that might have to consider bankruptcy? What are some of the things that they can do to ensure that they're properly prepared for the challenges ahead?

Ian: I give the same advice to the company as to everybody else involved in those restructuring for their situations. The most important thing is you need to go out there and get the best possible legal counsel. We've worked on deals where there have been a large number of parties and there's almost a [inaudible 00:23:42] trying to see who can get the best law firms involved as quickly as possible. But having the best legal advice, the best accountancy advice, and I'm going to have to say the best trustees as well is absolutely vital in making sure that it's a success and everybody gets to where they need to be at the end. So yeah, go out there and find your lawyers. And make sure that you don't just have the same law firm that you use for everything. We all know that different law firms have different specialties. You need to make sure that you have a law firm and partners at that law firm who have the correct and the appropriate experience and knowledge. So don't just use your standard law firm. Don't just use your standard partners. You have to think about it very, very deeply. And that will be much more successful.

Eric: Michelle?

Michelle: Yeah. So I completely agree with Ian. Following up on what he said, in addition to hiring counsel knowledgeable in bankruptcy and restructuring laws in the jurisdictions where you plan to file, it's also critical to have a competent financial advisor and investment banker to work with that counsel. The attorneys you're working with are going to know the law and the courts, but the financial advisors and the investment bankers can assist with creating a go-forward business plan, which can include forecasting future cash flows, valuing assets, and assisting with a sale of assets if that may fit into your plan. Some companies accumulate assets that may not necessarily fit with their core business, and so in order to come out better on the other, a sale of assets might make sense to fit your post-effective date business plan.

In addition, it's definitely helpful to take an inventory of all the players you have in the bankruptcy process as many of your administrative roles become more active after a filing. Ian alluded to having a good trustee. You need to have someone who is not conflicted and who is going to do their job once a filing happens. So a filing can actually [audio cuts out 00:26:02] the levels of the capital structure. The sooner these potential conflicts are identified, the more proactive the company and their counsel can be in finding successor trustees and agents when necessary. And bringing in successors early can make a much smoother transition into bankruptcy and allow the company to stay focused on the task at hand when a filing is imminent.

Eric: And Annita, I was hoping you could talk about some of the things that companies can do to make sure that they come out of the bankruptcy process stronger and more resilient than before.

Annita: Sure, Eric. Having worked with clients closely as they restructure their debt and then going on to raise fresh funds to regularize their financial position, there are some common traits which help them along the way. For one, they are quick to establish clear communication channels with their stakeholders, trustees, and creditors. They maintain open and regular communication throughout the entire process, proactively providing information on the company's financial position and addressing challenges around operations and restructuring. Transparency and timely communication are really essential for building trust and facilitating effective collaboration, which will then contribute to the company's long-term resilience.

As restructurings are often complex and sometimes contentious, these companies actually work tirelessly with their advisors and trustee. Experienced trustees will have the experience and knowledge in handling such situations and would also be able to share practical solutions to help in the developing of a robust restructuring plan that positions the company for long-term success.

After the dust has settled, these companies actually took time to reflect on the lessons learned from the bankruptcy and restructuring process. They were quick to identify areas for improvement, both operationally and financially, and implemented the necessary changes to strengthen the company's resilience. Key to their success is that these companies continuously adapt and evolve based on the insights gained from their experiences.

So in concluding, Eric, open communication, collaboration, and shared commitment and also experience are keys to emerging stronger and more resilient than ever before.

Eric: And Michelle, do you have anything to . . .

Michelle: That's extremely well said.

Eric: . . . oops, sorry, go ahead.

Michelle: Yeah, I was just going to say that was extremely well said, Annita. The transparency of the bankruptcy process in the U.S. allows for collaboration of parties to get to the best outcome possible, which is what all constituents want even if they don't always get exactly what they want. Compromise.

Annita: Exactly.

Eric: All right. And with that, thank you Michelle and Annita and Ian for sharing your insights and expertise with us today. Your perspectives have been incredibly valuable, and I am sure that everyone who is attending the webinar has gained a lot of knowledge and insights from the discussion.