Opportunity for corporate restructuring amid pandemic

WHILE the Covid-19 pandemic has hit many businesses hard, the crisis can be an opportunity for companies on unsteady financial ground to turn things around by taking early and swift action to effect a successful restructuring.

With the crucial ingredients of an early intervention and swift action, a restructuring can be a tool for businesses to have a fresh start. Case in point - Pacific International Lines (PIL), South-east Asia's largest carrier, which concluded its US$3.3 billion restructuring successfully earlier this year had engaged legal, financial and operational advisers to advise on its financial position just over a year before its scheme application was filed with the Singapore court in November 2020. This timely action on the part of PIL's management allowed the company to undertake informal negotiations with creditors without needing to obtain court protection as it had sufficient cash to continue its operations.

In addition, as the restructuring took place swiftly with the court proceedings concluding in slightly under four months, value was preserved, thus allowing PIL to successfully emerge from its restructuring well positioned to take advantage of the recent unprecedented boom in the shipping industry.

However, notwithstanding the introduction of Singapore's new restructuring laws which have greatly facilitated restructurings, companies facing financial difficulties often eschew restructuring in favour of attempts to roll along through a myriad of short-term solutions including delaying vendor payments and attempting to secure more contracts by undercutting prices. Unfortunately, these measures often create a vicious downward spiral for the company.

By the time the other shoe drops and management decides to attempt a restructuring as a Hail Mary pass, the cash runway has become too short and the company is forced to run to court for protection. What typically then ensues is that it loses the confidence of its trade vendors and customers as a result of the sudden and public court filing, accelerating the cash shortage and destroying value in the process.

The situation is exacerbated when restructuring efforts are dragged out. Further value invariably ends up trickling away until the company ends up having its assets sold in a managed liquidation by judicial managers or through a fire sale in formal liquidation.

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The attempted restructuring of Hyflux is one example. The first proposal presented to stakeholders was a S$530 million investment offer from SM Investment in October 2018. This was subsequently reduced to S$400 million in the offer by Utico in November 2019. However, the deals never completed and the restructuring continued to drag. As of June 7, 2021, two days after a winding up application was filed by the judicial managers of Hyflux, the offer on the table has been sharply reduced to S$50 million. Hyflux's failure underscores the reality that in most restructurings, there is typically only a small window to achieve a successful restructuring.

Besides Hyflux, the restructuring attempts of Swiber Holdings, Ezra Holdings, Pacific Radiance and Ezion Holdings have also been ongoing for some time. Unless the restructurings achieve a permanent turnaround of the business such that it is well positioned to survive and thrive, the companies will need to restructure again in the short term and would likely see an erosion of value in such a situation.

BETTER CHANCE OF SUCCESS

Today's economic climate in fact offers companies a far greater chance of undertaking a successful restructuring than before. With the global economic downturn caused by Covid-19, the market is well aware that businesses have been impacted. This translates to reduced blowback when a company announces a restructuring and greater willingness on the part of the relevant stakeholders such as shareholders and creditors to work out a sustainable solution for the company. This was in fact what happened when PIL's announcement of its debt restructuring during the height of the pandemic in 2020 was met with little shock and panic from the market.

Moreover, for micro and small Singaporean businesses, there is an added benefit in restructuring in today's climate in the form of the new Simplified Debt Restructuring framework. The Simplified Debt Restructuring framework, which was conceptualised and implemented in the light of the impact of the pandemic, provides simpler, faster, and lower-cost proceedings for eligible micro and small businesses in Singapore to restructure their debts.

In particular, companies under the Simplified Debt Restructuring framework will be able to put in place a scheme of arrangement based on a lower creditor approval threshold (two-thirds in value) than is required in a typical scheme of arrangement (majority in number holding 75 per cent in value). The entire restructuring process under the framework is anticipated to take 90 days.

Given the circumstances today where almost every business is facing financial pressure, there has arguably never been a better time to restructure than now. Even Sembcorp, Keppel, CapitaLand and SPH whose businesses were impacted by the pandemic have recently undertaken capital restructurings to optimise their financial positions.

The Covid-19 situation continues to be uncertain with Singapore having tightened safe distancing measures earlier in May and now cautiously relaxing them. Companies should therefore seize the opportunity to take action rather than wait and hope that things get better somehow or rely on short-term liquidity props from fiscal stimulus measures. With early action from management and a swift restructuring process assisted by experienced restructuring professionals, companies can navigate the uncertainty of today's economic climate and emerge stronger and better capitalised.

• The writer is a partner at WongPartnership and joint lead partner in PIL's restructuring.