Often while working on a restructuring, there is a point in time when you get a real sense of whether it will succeed or not.

What seem like endless meetings making no progress reach a point where seasoned advisers can determine with a reasonable degree of probability whether the business will survive or whether it will be consigned to the corporate scrap heap.

There are, however, no guarantees.

All successful restructurings require buy-in from stakeholders. This includes shareholders, management, lenders and other creditors as well as significant customers. When one or more of these groups or a significant member of any group is at odds with the restructuring proposal, the chances of success diminish.

Many restructurings involve a dilution of existing shareholders' holdings or a debt haircut or write-down by lenders and the agreement of both these groups is crucial to success.

Often, it is best to ensure that the banking personnel involved in the original lending are not part of the restructuring process to remove any emotional tension between the lender and the debtor's management.

I have seen restructurings fail or taken to the brink of failure for many reasons.

In one major restructuring involving the first ever public listing swap in that country's history, the new investor almost pulled out of the transaction when they discovered the founder's brother was still on the company's payroll. The fact that this person passed away five years earlier did not seem to bother the founder but was very troubling for the investor.

Restructurings can fail due to reluctance on the part of owners or management to recognise that the business environment has changed and the business in its current form is unlikely to ever be profitable. If agreement cannot be reached on the closure of unprofitable parts of the business, there may be little point continuing with the restructuring. Sentimentality has no place in restructurings.

At times, external issues determine the course of a restructuring. Economic and political events may impact on the business. As strange as it may seem, restructurings can fail due to issues such as alcoholism and other addictions on the part of business owners or management. Draining business cash flow to fund owners' personal lifestyles is another potential death knell for a restructuring. These personal issues can affect the business to the extent that a restructuring becomes non-viable. Some form of lifestyle adjustment by business owners is often inevitable if the business is to survive.

There may be examples where a restructuring can be brought to a successful conclusion without full commitment from all stakeholders but it would generally be the exception rather than the norm.

PELEN

November 2017

The content of this publication is intended to provide a general overview on matters which may be of interest. It is not intended to be comprehensive. It does not constitute advice in relation to particular circumstances nor does it constitute the provision of legal services, legal advice or financial product advice.