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The way back to black: Saving a sinking company is tricky in a sea of divergent interests

THE WAY BACK TO BLACK: Saving a sinking company is tricky in a sea of divergent interests.

THE WAY BACK TO BLACK: Why is it so complicated to lend troubled companies a helping hand, and why do efforts sometimes still end up futile?

"Insolvency is not a black-and-white kind of thing. It's quite emotional, especially if it's a company founded by an entrepreneur who managed to build it into a flourishing company when he or she had started with nothing." - Blossom Hing, director, corporate restructuring and workouts and dispute resolution at Drew & Napier.

"It does take a while before things settle down and the expectations get closer and closer and more aligned. It's a process which naturally starts far apart and takes time and effort to close." - Danny Ong, partner at law firm Rajah & Tann.

"Liquidation is a destruction of value, because every listed company has certain value; even an empty shell has some value." - Chee Yoh Chuang, senior partner, restructuring & forensics, corporate advisory, RSM.

"Everything we do is to preserve and enhance value for different stakeholders. That process will require recognition of the various rights of the different stakeholders. It sometimes needs to balance various competing interests." - Baker Tilly Reid principal Tim Reid.

The way back to black for financially struggling listed companies is more often than not a long and arduous one. Companies get added to the Singapore Exchange's (SGX) watch-list more quickly than they can exit, and many firms undergoing judicial management remain in the process years after they had begun. A significant number, after an extended period of trying, still end in liquidation anyway.

Over the past three years, companies that were suspended by the exchange took between 17 and 41 months to resume trading or complete a reverse takeover (RTO) to relist under a new identity. The longest was Jason Holdings, which was suspended at the start of 2016 and only resumed trading in June this year under its new identity as Revez Corporation.

Sometimes, these companies are just collateral damage in a sector downturn - for instance, the 2015 oil price rout that claimed companies such as Swiber Holdings, Ezra Holdings, Pacific Radiance and Technics Oil & Gas as hapless victims.

At other times, the problems take a rapid downward slide with the discovery of audit irregularities, cashflow problems, breach of debt covenants, alleged company mismanagement or fraud and wrongdoing, and other going concern issues. Credibility is quickly lost.

Take Midas Holdings. The company's shares were suspended in February 2018 upon discovery of litigation and enforcement orders against its subsidiaries within the group.

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More dirt dug up by the audit team subsequently revealed significant undisclosed loans and cash shortfalls. In April this year, the authorities, SGX, the Commercial Affairs Department and the Monetary Authority of Singapore announced an investigation into possible wrongdoing within the company and among its former directors and officers, despite the firm having already applied for a wind-up by then.

Industry professionals feel it is not so much that instances of wrongdoing are on the rise, but rather that regulators are adopting a more active stance and the regulatory regime has become stricter over the years.

The Singapore Exchange Regulation (SGX RegCo) isn't just standing by either, but says that it proactively engages with the boards of suspended companies through their independent directors, or appointed professionals such as the provisional liquidators or judicial managers.

"Our experience engaging with these companies has not always been smooth or easy. Directors have been difficult to track down, contact or have resigned. Where contact is established, responses sometimes take a long time," says SGX RegCo.

"Where directors are based overseas, we have experienced difficulty establishing contact. Some independent directors may be owed their fees and accordingly, are reluctant to travel overseas to meet with other board members if these members are located in a foreign jurisdiction."

Stuck in the middle

Of the 41 long-suspended companies as at June 11 this year, half are still exploring trading resumption; six companies are pursuing court action or being investigated for past affairs; while 12 companies are in the liquidation and/or delisting process.

An SGX RegCo spokesperson offered this dismal statistic: Of the total 63 companies that have been suspended for 12 months or more, only eight eventually resumed trading, which works out to about 13 per cent.

On SGX's financial criteria watch-list, there are close to 40 companies that have recorded pre-tax losses for three straight financial years and have had an average daily market capitalisation of less than S$40 million over the last six months.

There is a small net increase in the number of financial watch-list companies each year, as more join the hall of shame compared to those that manage to meet the requirements to exit it.

The challenges

Judicial managers, restructuring firms and dispute lawyers here name divergent interests and agenda among stakeholders as the key obstacles they face when helping these troubled companies.

Danny Ong, partner at law firm Rajah & Tann, says this is correlated with a mismatch in expectations between what creditors demand and what the debtor is prepared to give.

"It does take a while before things settle down and the expectations get closer and closer and more aligned," says Mr Ong. "It's a process which naturally starts far apart and takes time and effort to close."

Another difficulty is the differing attitudes towards restructuring and inconsistency in restructuring regimes within the region, especially in neighbouring emerging countries where many Singapore businesses have set up subsidiaries.

Mr Ong says that sophisticated financial centres such as Hong Kong, London and New York, and tax havens such as the British Virgin Islands or Cayman Islands have good frameworks in place.

Emerging markets don't. Rather, they tend to be protectionist, domestic, and traditional. "People's minds there are always focused on insolvency, meaning corporate bankruptcies, rather than restructuring," he says.

"In various emerging markets, the concept of a turnaround or restructuring is foreign, because the legal framework and the culture in those markets do not facilitate this. This may then result in a binary situation and makes it challenging for distressed corporates and creditors who want to see a positive and meaningful restructuring."

Mr Ong adds: "One may encounter cases where the onshore creditors or courts where the debtor company is domiciled may not recognise a restructuring outcome in Singapore and seek an inconsistent outcome, but there are ways to deal with that, and our experience is that these cases have generally been on a decline."

On top of this, the complex tiers of creditors - from secured to unsecured, trade creditors to bondholders - which dictates the waterfall payment structure, further complicates the process.

How it starts, and where it goes

Often, the first step for a troubled company to take would be the most cost-effective option: consensual restructuring. This does not involve court proceedings. The company needs only to appoint a financial adviser to study the financials of its business and come out with a proposal to restructure, before it reaches out to lenders and key creditors to renegotiate terms, such as to extend and renew the financing or to push back the maturity payment periods.

When this does not take off, then the company will apply to invoke the scheme of arrangement regime. This is done by first applying to freeze or bar all court proceedings against the company and its subsidiaries, with a view to drawing up and presenting a restructuring proposal for approval by creditors.

The recently revamped Companies Act now allows an automatic moratorium of 30 days to take place immediately upon filing of an application. This gives the company and its financial advisor time to further engage in discussions with its creditors, and to come up with a viable restructuring proposal.

Time extensions are sought from the Court as required, and if the extensions are indeed necessary to give the company and creditors more time to achieve a viable restructuring, then they will generally be granted. Eventually, the scheme proposal is put forward to creditors to vote on.

One other possible situation is where creditors have lost trust in the management's ability to run the company, perhaps due to suspected fraud, or management's refusal to provide a complete picture of its financials. Another likely situation is where the debtor company cannot gain enough support from the key lenders for the scheme, but the underlying business has prospects of recovery. In these situations, creditors will push for an independent professional like a judicial manager to manage the business and assets and oversee the turnaround process.

Chee Yoh Chuang, senior partner, restructuring & forensics, corporate advisory, at RSM, says that one objective of judicial management is to preserve the value of the company or any part of it. Within that process, the scheme can still be proposed by the judicial manager to try and rehabilitate the company.

Liquidation is the final resort, tantamount to corporate bankruptcy. Assets are sold in fire sales, and money collected to repay creditors. The process can be lengthy, especially if there are lawsuits involved, or if the debtor company has many layers of subsidiaries, each of whom needs to be liquidated to repay its own group of creditors before the surplus can flow upwards to the parent.

Mr Chee says: "In liquidation, technically everything must stop. Operations must cease, including long-term contracts and ongoing projects, even if the company only has a few more months to go to completion. The other party will claim damages against the company."

Liquidators generally do not seek to continue a company's business unless in some instances, where it is beneficial to the company. In such cases, they would have to seek the authority of the Court or the committee of inspection.

Mr Chee says: "Liquidation is a destruction of value, because every listed company has certain value; even an empty shell has some value."

Value enhancement, or destruction?

While liquidation is clear-cut value destructive, there is debate about whether judicial management is in fact value enhancing, or destructive. Those who think it destroys value say it is because the management with its know-how, connections and technical expertise is abruptly displaced by accountants who may not be equipped with the relevant knowledge to manage the operations.

This puts undue pressure on the judicial manager who has to persuade industry counterparties not to terminate crucial supply and business contracts.

Those on this side of the argument assert that numerous formerly listed companies - Anwell Technologies, Eratat Lifestyle, Mercator Lines (Singapore), Oriental Group - have invariably still ended in liquidation after lengthy judicial management processes.

A handful of offshore-and-marine and oil-and-gas counters such as Swiber, Swissco and Technics Oil & Gas remain in judicial management today, after close to three years since they started the process.

Blossom Hing, director, corporate restructuring and workouts and dispute resolution at Drew & Napier, is among those who think that judicial management is not always a good idea, but concedes that it can be necessary in situations when debtor-creditor trust has been broken.

Others, like Mr Ong, beg to differ, pointing out that many of the companies undergoing judicial management are showing active restructuring. Swiber, for example, last month incorporated a vessel charterer in Mexico with a 49 per cent stake. It is also working towards a rescue plan by New York-listed Seaspan Corp. Mr Ong does not believe that the offshore and marine group will end up in liquidation.

To him, if the judicial manager's job is to rescue the business, sensibly, it will work with the management to resuscitate the business in the interests of both the company and the creditors.

"That's the ideal scenario, where the interests are aligned, in which case there shouldn't be a question of value destruction but value enhancement. Unless you have a scenario where a controlling shareholder is being difficult in cooperating with the judicial manager and doesn't want to play ball, then potentially there could be a negative impact. As it is today, in many of these cases, we are talking about complex cross-border operations where judicial managers need to work closely with management."

White knights

Meanwhile, Swiber's peer, Ezion Holdings, is still hopeful while its potential white knight, Malaysia-listed Yinson Holdings, negotiates with lenders before extending a lifeline to the company. Under a conditional debt conversion agreement, Yinson was to acquire the rights and benefits of Ezion's US$916 million debt.

If the white knight does not materialise, without a fresh injection of funds, there will be near to nothing to distribute to creditors.

Clearly, white knights in the corporate world are not nearly as chivalrous as in fairy tales. They're not always in shining armour, as the failed rescue of Hyflux by SM Investments can attest to. At the end of the day, it is self-interest rather than chivalry that motivates their rescue.

There is a wide variety of white knights that swoop in to help troubled companies, ranging from family offices to private equity funds, tycoons, companies in the same businesses looking to have a Singapore footprint, companies that see value in diversifying into the sector that the troubled company is in. Most probably see the value they can wring from the company, and an opportunity to acquire it on the cheap. But in particular, some investors do take a special interest in shell companies - the cleaner, the better.

Mr Chee says: "Someone might say I have a company and aspire to be listed, either via an initial public offering, or by looking for a clean shell company to inject his business into.

"If the shell is not so clean, we can go through restructuring - for instance, by divesting the operating companies to the existing management or controlling shareholder, or by using judicial management or a scheme to flush out the liabilities - and make it clean for the new incoming investors. Of course, this is subject to creditors' and shareholders' approval."

Can they turn it around?

Baker Tilly Reid principal Tim Reid thinks that white knights also need an understanding of the fundamentals of the business, such as why the business is in distress, and whether the distress situation can be reversed or avoided in future, as well as whether there is an attractive proposition for themselves, before entering.

At the same time, successful RTOs also require proper due diligence by middlemen, consultants and advisers, as opposed to those who just want to push a deal through.

Mr Reid gives the example of the receivership of the Singapore Flyer in 2013. It was a good business marred by poor management and bad contracts, which he as receiver and manager at that point refused to adopt.

He says: "Restructuring, in my opinion, is not about saying the mistake is done; these people need to take a haircut. One needs to look at the business, if the business is fundamentally good, and can it be restructured in a manner to turn it around?

"There may be a requirement for some form of haircut, selling off businesses, looking at the totality, but everything we do is to preserve and enhance value for different stakeholders. That process will require recognition of the various rights of the different stakeholders. It sometimes needs to balance various competing interests."

Agreeing with this view, Ms Hing says: "Insolvency is not a black-and-white kind of thing. It's quite emotional, especially if it's a company founded by an entrepreneur who managed to build it into a flourishing company when he or she had started with nothing. For them to accept that they now can't pay their creditors and need to get everyone to support them in a restructuring is a big step.

"Then, you have a whole bunch of interested parties: creditors made up of banks that just want the money they lent back; bondholders, many of whom may have bought the bonds with their life savings hoping to receive a steady coupon rate every year; trade creditors, essentially suppliers; and employees, who may be saying, 'Can I quit now?'. But you still need them to keep operations going. You have to manage all these people who have different rights and interests and get them to come together and do a restructuring.

"People are angry, pointing fingers, demanding their money, and trade creditors may be panicking because they are dependent on the debtor company for survival and may go under if the debtor company goes under. There is also inter-creditor tension on who should take a bigger haircut. Restructuring is really management of all these different rights and interests to work out a fair solution for stakeholders."

On the brighter side of things, Mr Ong thinks that there is a gradual cultural mindset shift in Asia towards a more Western philosophy that views restructuring as a healthy step for companies to undertake, and not always necessarily about breaking up a conglomerate into its parts and splitting it up between creditors.

Some of the negative connotation has been removed. "Creditors are potentially better off with healthy and proper restructuring anyway," he says.

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