We are now one year on from the first lockdown, and although many worried in the early days of the pandemic that Romania’s court system might not be able to cope with the large number of insolvencies that were expected, in fact the highly-anticipated wave of restructurings is yet to happen, as the debt moratorium which was enacted and then extended and the availability of the state aid package as well as the generally supportive approach of the lenders have helped companies manage their debt service and need for liquidity. While there is no shortage of funding, the uncertainty of the lockdown period and its impact on future developments have resulted in more amend-and-increase or amend-and-extend transactions, with borrowers adding to their existing lender groups rather than seeking a full refinancing.
Most of the restructuring activity that did exist in Romania took place in the more-affected sectors – such as travel and hospitality and those affected by supply chain issues – just as in the Western markets, albeit at a smaller scale. With very few exceptions, all these were out-of-court processes.
As the outlook seems to be more positive – and, more importantly, with vaccination and other measures taking affect – more settled, and perhaps more predictable, we anticipate that the focus of boards will now change from considerations of survival and maintenance to preparations of thorough analysis of capital structures and needs for rebound. We believe this will fuel future restructuring opportunities, either as M&A opportunities through the divestment of non-core assets or businesses or as additional investment and financing, all of which would – more often than not – require the cooperation of all stakeholders, lenders included.
A successful restructuring requires a deep understanding of the issues and a strategy for dealing with them, as well as an understanding of the stakeholders and how they should be managed most effectively. As they prepare restructuring plans, it is crucial that directors be aware of their duties and how these shift in a distress scenario, and that all stakeholders are cognisant of the directors’ duties and liabilities. Specifically, the duties of directors may be a key factor in determining the time available for stakeholders to agree on the terms of a financial restructuring and what the company may and may not do in the interim. With their conduct under increased scrutiny across the globe, directors should take practical steps to discharge their duties and mitigate their risk of liability by ensuring their information is up to date, holding regular meetings (and keeping detailed minutes of those meetings), proactively managing cash and credit, and, most importantly, engaging with key stakeholders early.
Directors should also have a contingency plan if a consensual arrangement cannot be reached. Boards should look to take the lead in engaging in restructuring talks and identify which stakeholders are key to the delivery of a plan and what is required to obtain their support. This is particularly important in Romania, perhaps, as many companies in Romania have a disparate and diverse creditors group, with bilateral credit lines (often extended on a rolling short-term basis), finance leases and suppliers, and key stakeholders with an interest in keeping the business going, especially key off-takers/clients with an interest in managing their supply chain risk.
To succeed, any restructuring plan must be based on a credible commercial and financial proposition. Boards must ensure that the financial reporting of the company is sufficiently detailed and includes the metrics expected by finance providers and investors. Good-quality financial information and good governance are critical.
Boards must also be mindful of ESG factors and take these into consideration when planning for the future of the business. With ESG compliance now moving from a largely voluntary basis to legal disclosure obligations, both lenders and investors are interested in focusing their resources towards sustainable businesses which look to incorporate, adopt, and measure ESG KPIs. A solid ESG strategy with clearly identified KPIs can unlock additional liquidity and could be vital for restructuring plans, as distressed debt and distressed-situation investors are increasingly incorporating ESG in their due diligence and are bound by disclosure requirements to regulators, the market, and their investors. A successful restructuring plan will need to be for a sustainable business with clear and measurable KPIs.
By Ana Radnev, Partner, CMS Romania