honestbee's restructuring may hinge on fixing business model

Singapore

TO convince creditors to back its debt restructuring plans, honestbee must demonstrate its business viability in the cutthroat offline-to-online retail scene, industry watchers told The Business Times.

The embattled startup is seeking a six-month debt moratorium against S$6 million worth of demands from creditors and 11 legal proceedings, according to an affidavit filed at a Singapore High Court pre-trial conference on Tuesday.

honestbee owes its largest creditors about US$209 million, but plans to clean its balance sheet through a debt-to-equity conversion, for which it is still deciding the terms.

Under the enhanced section 211(B) of Singapore's Companies Act, the court may approve honestbee's scheme of arrangement even without the creditors meeting and approving it, depending on some factors, explained Virtus Law litigation partner Terence Seah.

For one, honestbee will have to provide each creditor with a statement explaining the scheme. The court must then be satisfied that had a meeting of the creditors been held, at least half of the total number of creditors, representing at least 75 per cent of the total debt, would have approved the scheme.

On how the court would make such an assessment, he added: "The creditors would be invited to respond to the notices given to them, and the court would be updated with evidence of the creditors' responses, for the court to determine if the requirement is satisfied."

In the affidavit, honestbee said it has already received support from its key creditors - US venture firm Formation Group, Formation's managing partner Brian Koo, and an entity he controls, A Honestbee. The three parties represent about 77.2 per cent of honestbee's debt.

It is not known if honestbee has secured the support of a numerical majority of its creditors.

Debt-to-equity conversions that "zero-ise" debt are common among embattled companies, and can even provide an upside for creditors, noted senior counsel Thio Shen Yi, who heads the restructuring practice at TSMP.

"However, it only works if the creditors believe the business is viable, because they themselves are becoming owners of the business ... (The companies) need to ensure that they have sufficient cashflow and are not burning the investors' cash without any return," he said.

This then hinges on whether honestbee's plans to adopt an "asset-light and tech-heavy" model will work. honestbee stated in the affidavit that it plans "to continue to work on a marketplace partnership model where we will provide the technology required to bring an offline store online and increase the catchment area".

Scepticism abounds. Competing in e-commerce while containing costs may be tough, noted a startups and venture capital expert who spoke on the condition of anonymity. honestbee will need to "find a niche" where it can truly innovate, he said.

"For a startup in the e-commerce space, what is the inherent value? Do you really have deep technology? Anyone can set up a site and do that kind of delivery. You've got to look at ... what's the inherent value of the company that investors can bring out," he said.

On whether habitat could brighten honestbee's prospects, he added: "habitat is a brick-and-mortar store; the question is then, how do you differentiate yourself ... Are you able to compete against much bigger players with huge economies of scale?"

Moving ahead, all eyes will be on honestbee's long-term ability to generate cashflows, other industry watchers agreed.

To convince the court that it should be given the time to restructure, honestbee needs "a business plan that provides financial viability and a prospect of a better return to the creditors included in the scheme of arrangement than a liquidation", noted Howard Morris, head of the London business restructuring and insolvency group at Morrison and Foerster.

The plans honestbee puts forth to its creditors will matter to the court, added Koh Kia Jeng, a senior partner at Dentons Rodyk.

"The court will certainly keep a close eye on the company's proposals to its creditors, because it needs to balance the company's desire for breathing space, but not unnecessarily prejudice a creditor's right to take action to recover its debt. At the end of the day, it is a balancing exercise," he said.