Restructuring of commodities traders: does it always work?

HIGHLY leveraged and unable to repay loans, some commodities traders have found themselves precariously walking the financial tightrope of 2020. A few have found their balance while others have fallen, landing in the net of restructuring processes.

Commodity traders however, have found it challenging to resuscitate their business in restructuring proceedings with a string of high-profile restructuring attempts ending up back in liquidation, at the significant expense of limited resources. For creditors in the commodities space, the nagging question that arises then is whether restructuring is always the right course for the commodities trading horse?

In Singapore, the comprehensive insolvency and restructuring framework provides a safety net for debtors to either restructure and bounce back into business or to catch it for a soft landing to allow an orderly winding-down of the business with the intent of better recoveries for creditors than a frenzied liquidation. A moratorium against enforcement of claims by creditors allows the debtor the breathing space to work out a restructuring plan, forestalling a catastrophic collapse.

Restructuring proceedings would broadly manifest in two forms, either through a scheme of arrangement where the debtor works with a scheme manager in implementing a court-sanctioned scheme or in judicial management, where a third-party judicial manager manages the debtor, including any proposals to restructure the debtor.

FLOGGING A DEAD HORSE

Both approaches entail the use of financial consultants, lawyers and professional insolvency practitioners to either run or assist the company - at a cost that is typically borne from the debtor's dwindling assets itself. The time, expense and indeed energy involved in restructuring cannot be overstated, making it critical to know when one is flogging a dead horse - for commodities-trading debtors, there may be early signs for those that look close enough.

Reading through numerous restructuring proposals by trader debtors, it's clear that a key objective is centred around the effective monetisation of assets and capital injection by potential investors to achieve a higher repayment to creditors - indeed, many restructuring proposals are accompanied by a report from financial consultants with the conclusion that a restructuring is likely to result in a better recovery for creditors than a liquidation. But such reports and indeed restructuring proposals are typically predicated on three key aspects that should be considered and tested by creditors.

First, a trader is likely to point to its receivables as an asset that is yet to be monetised for the purposes of satisfying debts owed to creditors. Receivables for commodities traders most often represent unpaid invoices for goods supplied to counterparts and for some commodities traders, receivables are the only assets they may have. Without physical assets such as mines and facilities, the valuation of receivables needs to be approached with caution - lawyers like myself will tell you that the reality of obtaining recovery of receivables through legal means can be fraught with difficulties.

Counterparts to traders in restructuring may drag their feet on payments, choosing to test the financial resolve of the ailing trader to pursue legal proceedings, and even when such proceedings are commenced, there can be challenging headwinds from counterparts who simply disappear, deny such receivables are due or try to offset such claims with their own claims. With some trading counterparts operating in some of the most challenging legal jurisdictions for enforcement, any restructuring plan largely predicated on collecting receivables needs to be viewed through the lenses of these practical realities.

A second aspect of a restructuring proposal is the prospective business plan of the debtor.

For traders, a prospective business plan may involve a narrowing of focus to more lucrative products or key geographies, but any business plan without the committed support of both lenders and counterparts for future deals is unlikely to succeed. For trading companies, this dovetails into the provision of financial support to the trader. With price and information arbitrage opportunities diminished, trading companies increasingly have to position their relevance through the provision of credit support to their counterparts. This would invariably require a trader to convince its lenders to provide banking lines or documentary credits in support of future trades - an uphill task, both on a psychological and commercial level when dealing with lenders that have existing exposure to the traders in the first place.

It is common - and indeed a requirement of restructuring proceedings - that traders should evidence support from creditors to restructure but it is quite another thing for an ailing trader to get its unpaid lenders to commit to further exposure for prospective business. Without trade finance or physical assets, serious concerns have to be raised on a debtor's ability to restructure.

WHITE KNIGHT INVESTMENT

Which then brings us to the third aspect of a restructuring plan which may include the prospect of a "white knight" injecting capital into the ailing trader to restructure it. The hope of securing a white knight investment to jumpstart the business may be attractive to many creditors but the prospect of securing such investment must turn on a cold objective assessment of the commercial rationale underpinning such a proposal.

If a trading company has minimal physical assets and a bleak chance of getting bank finance, it is difficult to understand why a capital injection would be countenanced by potential investors.

Investors may seek to leverage the trader's book of existing contacts or experience in a certain market but this needs to be weighed against the trader's existing market share and its ability to hold on to that market share in a restructuring scenario - any trader will tell you that the business runs on market sentiment as much as it does on demand fundamentals. Without compelling reasons for a white knight to invest into a company, vague references to potential white knight investments raise more questions than provide answers.

Restructuring proposals should always be welcomed by creditors as they provide some hope of a resuscitation of business and better recovery of debts. But restructuring plans that drag out over time only to end up in liquidation may make creditors want to go back in time and take a closer look at that light at the end of the tunnel - it could make the difference in ascertaining whether that light is an exit from the tunnel of financial loss or an oncoming train.

• The writer is managing director of Blackstone & Gold, a commodities law firm in Singapore. He can be reached at baldevbhinder@blackstonegold.com.