Advisers on the transaction:

Wellensiek

Rosin Büdenbender

Iuslake

Görg

Latham & Watkins

Noerr

Dentons

Brinkmann & Partner

Milbank

KSBG has been established by six municipal utilities of the Rhine-Ruhr area as an acquisition and financing vehicle for STEAG, a leading energy producer and energy services provider with over 6,000 employees and 7,200 megawatts of installed capacity. STEAG Group, having for decades been one of the leading German operators in the sector of hard coal-fired power generation, is in the process of repositioning itself and focusing on business areas and markets with growth potential, in particular renewable energies.

Dr Achim Compes, Partner at Görg, was involved in the transaction as Corporate, Corporate Financing and Energy legal adviser of the shareholders of the KSBG/STEAG Group.

Further areas of legal advice included:

• Restructuring - Martin Stockhausen, Görg
• Corporate - Christoph Niemeyer, Görg
• Tax - Adalbert Rödding, Görg
• Financing - Thomas Lange, Görg
• Public Procurement - Kersten Wagner-Cardenal, Görg

The shareholder Stadtwerke Dortmund AG was advised by Freshfields (Lars Westphal, Konrad Schott and Hauke Sattler. Görg closely cooperated with Freshfields.

Centrica Plc has announced plans to cut 5,000 jobs in a bid to streamline its operations and reduce overhead.

It is expected that half of the lost jobs will be from managerial positions, and Centrica has specified that half of its 40-strong senior leadership team will step down by September. The company has claimed that three layers of managers will be stripped out by this move.

Chris O’Shea, who became CEO of the company on 17 March, described the cuts as a “difficult decision” that was made in order to “arrest [Centrica’s] decline”. “Since becoming Chief Executive almost three months ago, I've focused on navigating the company through the [COVID-19] crisis and identifying what needs to change in Centrica,” he said, referring to the company’s structure.

“We have great people, strong brands that are trusted by millions and leading market positions, but the harsh reality is that we have lost over half of our earnings in recent years. Now we must bring focus by modernising and simplifying the way we do business.”

As part of a separate announcement, Centrica said that Sarwjit Sambhi, CEO of its consumer arm, and Richard Hookway, CEO of its business arm, will both step down with immediate effect and leave the firm in July as part of the restructuring efforts.

Centrica employs around 27,000 people, 20,000 of whom are based in the UK.

An anticipated rise in UK and European corporate insolvencies over the next two years should be prompting both borrowers and lenders to take early advice where they have concerns about businesses' solvency outlook, says Ogier offshore restructuring specialist Simon Felton.

Simon, a partner in Ogier's Banking & Finance team, was involved in several post-financial crisis restructurings, including the receivables trustee of a £13.5bn portfolio of UK RMBS as well as portfolios of loans in the Irish banking industry and regulatory capital in the Austrian banking sector.

Recent reports have forecast that British insolvencies are set to rise by 8% in 2018 – the second highest rise worldwide, after China – and that the increasing likelihood of rate rises and the end of quantitative easing by the European Central Bank in 2019 threaten a similar increase in Europe.

Already this year, UK firms including Carillion, Toys R Us and Maplin have been declared insolvent.

Simon said that the tightening interest rate and liquidity climate should be prompting both borrowers and lenders to take advice and consider what action may be necessary now, rather than delay when options may be reduced.

He said: "Whether you're a borrower or a lender, you should be analysing each company's solvency position, particularly where those entities are reliant on group support to meet their obligations, and if you think that there are issues, taking advice early as to what your obligations or rights are, and what course of action you should take.

"Early analysis, advice and action is crucial. For directors of debtors, the nature of their obligations changes as the solvency position of the company deteriorates, as does the ability of lenders to protect themselves.

"The regulatory picture may have changed significantly over the last ten years, particularly for financial institutions, but the combination of quantitative easing by the ECB and low interest rates coming to an end may pose a test for some businesses."

(Source: Ogier)

Mia Drennan is the Founder and CEO of GLAS - a global provider of third-party agency and trustee services in the institutional debt and equity markets. The firm’s offering focuses on restructuring and special situations, direct lending, capital markets and leveraged finance. Here, Mia speaks to Finance Monthly about setting up her company and restructuring trends in the UK.

What was the idea about GLAS born out of?

I have always been an entrepreneur at heart and prior to starting GLAS, I leveraged my entrepreneurial skill set for my previous clients and employers. I spent a large proportion of my career in the trustee and agency space working for a large American bank. My success was based on the standard of service my team and I provided to our clients, picking up the phone and returning emails in a timely fashion and being able to be solution driven. Following the crash in 2008, this mentality changed, and these institutions became hard to deal with. After leaving the bank, I had always wanted to establish my own agency and trustee business. The lightbulb moment came at the time of the credit crunch and the need for institutional debt to be restructured. Banks were selling loan portfolios to credit funds and looking to exit from the ancillary roles and that was the angle. It took three months and 400 meetings in the City of London to get our first deal but it was worth the effort and I have never looked back. Today, we are a global business across all continents with over sixty-five employees.

What are the typical clients that you provide loan agency and trustee services to?

Since our inception, we have always tried to differentiate ourselves from our competition, we want to provide a ‘front office approach to a back-office service’. Our focus is on developing expertise in different sectors, which covers the sticky end of the scale, restructuring, work-out and special situations, direct lending – the alternatives and funds we work with, love the fact that we are totally independent and we see the delivery of our services as an extension of the lenders. Within the Capital Markets, we can provide a more commercial and pragmatic approach on Institutional Transactions and Loan Services working on large syndications which we can do more efficiently and partner with the arranging Banks. Our client base is wide. We work with lawyers, advisers, corporates, institutions, accountants, banks, debt funds and institutional investors. The great thing about our business is that is has many touch points and we have many stakeholders and clients.

Which sectors would you say are faced with restructurings more than others in the UK? 

The sectors which are under stress now are those which are (I) real estate heavy; (ii) over leveraged and (iii) have not invested in technology. Retailers have suffered specifically and companies which over expanded and have not kept pace with the consumer trends towards online retail for example. The challenge for creditors is the lack of covenants in the credit agreement which provide creditors with a trigger, making it difficult to carry out a debt restructure. There is still a lot of money searching for good businesses and management teams and these tend to go down an ‘amend and extend’ route and have new money or equity invested. Additionally, we are also seeing Company Voluntary Arrangements (CVAs) as flavour of the month right now.

As CEO, how do you ensure you are directing the company in the correct direction?

The journey for any true entrepreneur is all about growing something. It gets hard when you go beyond the football team size!  I am lucky to have an amazing business partner and that I have assembled a great executive team around me. We are constantly reviewing and aligning our plans, so we can keep growing and maintain a position as a trailblazer in this space.

How do you advise your team to make the correct decisions for the company alongside clients?

We have invested in our central function which comprises, risk, compliance and product development. We have various governance processes and procedures which allows us to remain nimble and solution driven but doesn’t put the business at risk.

What challenges would you say you and the firm encounter on a regular basis?

The main challenges are around keeping the competitive edge, delivering innovation and preserving the family feel culture. I spend my time working on our culture to ensure that our original values and the mission we created live on in throughout the organisation. I strive to do this through communication channels and ensuring new joiners are made aware how we got here and where we came from. Coming into this business today is very different to what is was like in the first year! 

Contact details

Direct:        +44 (0) 20 3764  9318

Mobile:      +44 (0) 7917 446580

Email:          mia.drennan@glas.agency

Website:           www.glas.agency

Roberto di Lauro is Partner at Business Support SpA - a Milan-based boutique financial advisory with additional offices in Singapore. The firm specialises in corporate and financial consultancy services for businesses, banks and investment funds, with a special focus on the SME market. Below, Roberto - head of the Bank Agency & Financial Services practice - tells us about the restructuring and turnaround services that Business Support offers and the firm’s approach when advising clients.

Can you detail the key steps that are involved when turnaround services are required?

It is not easy for an entrepreneur to admit that his company is experiencing difficulties. The first step, when facing the process of debt restructuring and business turnaround, is to do so promptly, critically identifying the factors that led to these difficulties and evaluating every possible solution, before adopting the most suitable one.

The assessment and management of the business in distress usually follows four main phases: diagnosis, planning, negotiation, execution.

The diagnosis allows the company to learn about the genesis of the factors that caused their financial difficulties. Timeliness of intervention and absolute criticality in reading the assessments are key factors during this phase.

The business planning is the key tool of the turnaround process: through the business plan, the company reaffirms their mission, highlighting the assets that are able to generate life blood for the core business, while eliminating everything that is no longer necessary or unproductive, with extreme focus on cost savings.

Negotiation is the most delicate phase of the entire process: at this stage the company needs to convince all stakeholders and, in particular, the creditors, of the soundness of the business plan, its ability to generate income and relaunch the company.

Execution is the end of a long period of evaluation, negotiation and hard work and represents the beginning of the process of relaunching the company.

What are the typical timescales for restructuring/turnover plans to start to have a positive effect? How is progress monitored?

Generally, there is a 10/12-month time span between the identification of the state of crisis and the start-up phase of the turnaround plan. The turnaround plan, depending on its underlying hypotheses, can begin to demonstrate its beneficial effects almost immediately. Very often, the early stages of the plans are characterized by important transactions: asset disposals, cost savings or partial repayment of loans. All these operations aim to deflate the financial tension and allow the company to activate a virtuous cycle of positive results. The monitoring of the execution of the plan usually involves periodic detection of key performance indicators. Monitoring of results must be the compass that guides the company. Since the early performance can often fail to meet expectations, this is a very delicate chapter of the restructuring process, where it might be necessary for the company to make small adjustments to their course of action.

What are the refinancing options available for Italian businesses in financial difficulty?

Today, the main restructuring and turnaround operations involving Italian firms in difficulty take place within the scope of the legal framework set by Italian bankruptcy law. As such, debt restructuring is an operation in which financial creditors allow companies to review repayment plans for their loans on the basis of a business plan prepared by the company assisted by a specialised adviser. The feasibility is assessed by a chartered accountant expert and, in some cases, by the Court of Law. When the turnaround plans manage to reach specific performance targets, many firms are able to refinance their residual debt, involving in the process the original lenders or even new ones, thus completing the restructuring process and opening the full-relaunch stage.

In the last few years in Italy, investment funds specialised in Non Performing Loans (NPL) and credit securitisation vehicles have started trading on distressed debts.

What is your advice regarding handling financial difficulties? 

It is very important for any company to recognize early symptoms of financial distress, choosing the appropriate professionals to assess their financial soundness.

Considering that all companies and organisations are different from one another, the same goes for each crisis, turnaround process and solution. It is very difficult to create specific clusters and only a successful track record demonstrates how any consultant was actually able to make an impact, assisting the client in transitioning into a new phase of their business life cycle. Companies that have been through a turnaround process will be more likely to learn from their sorrow, gaining extensive experience and the tools to finally achieve their targets.

Phone: +39 346.4708468 - Tel.: +39 02.89013129

Fax: +39 02.72015926

Email: roberto.dilauro@business-support.it

Website: www.business-support.it

Insolvency practitioners are required by law to take out a bond to provide appropriate levels of security to cover any losses as a result of fraud or dishonesty on their part. Stakeholders have told the UK government that current arrangements are inflexible and prescriptive and fail to protect creditors.

Following the government’s publication of plans to revise bonding requirements for the insolvency profession, Adrian Hyde, President of insolvency and restructuring trade body R3, has this to say to Finance Monthly:

“With the insolvency and restructuring profession increasingly concerned about rapidly rising premiums for smaller firms and the perceived adversarial nature of the bond claim process, the government’s call for evidence into the issue was timely and necessary.

“Insolvency practitioner bonding is there to ensure creditors are protected if things go wrong, but unaffordable premiums could force small firms out of the market. Without a diverse insolvency profession, the UK insolvency framework’s ability to rescue jobs and businesses and return money effectively to creditors will be compromised. This will have a knock-on effect for UK plc.”

Adrian Hyde adds: “It’s very important for the government to follow up this call for evidence with further research into the market: empirical evidence is needed to shed more light on the issues that have been identified. There are some fundamental questions that need to be resolved, including whether bonding is the right way to protect creditors in the first place.

“One step that can be taken in the short-term is the development of a claims management protocol. While this would not deal with some deep-seated issues with the current legislation, a protocol would help improve communication and transparency and would simplify the claims process for all parties.

“R3 has worked closely with insolvency practitioners, creditors, and insurers on this matter and we look forward to continuing this work and working with the government to find a practical solution to concerns over the coming months.”

Thomas Dorbert has worked for a number of European banks (Dresdner Kleinwort Germany, BNP Paribas France, Mediobanca Italy) mainly in Structured & Leveraged Finance, and had developed a broad network within the whole financing community. His experience spans over 25 years of working within numerous sectors – from capital markets, through to deep restructuring, from LBOs through to investment grade lending, providing neutral financing advice in any situation. Here, he tells Finance Monthly more about debt funding trends in Germany and offers a behind-the-scenes insight on one of the most complex multi-jurisdictional restructuring cases – the Scholz Case.

The funding landscape has dramatically changed – new debt funding trends in Germany, alternative funding options available for corporations which seek to deviate from traditional banks – could you tell us more about the recent changes and their impact?

The lending landscape in Europe and Germany has changed a lot over the last years. More non-banks have come to the market and terms have become more aggressive again. Huge liquidity has led to low margins and cov-light or less structures.

Debt funds have become very important, having pushed into the markets not only in LBO deals, but also lending to large and mid-sized corporates. Generally, those funds are more expensive than banks but also more flexible.

Another development is the growing importance of alternative asset financing. We see an increasing number of those structures providing security to lenders and better terms to borrowers.

An additional source of capital are private placements or notes. Market liquidity is huge (e.g. “Schuldschein” in Germany) with money from institutional investors like insurance companies, pension funds, international banks or family offices. Clients can chose between a widely spread investor base or some larger block investors.

What challenges do you face when starting a new case?

Each specific case has its specialities and must be analysed thoroughly. A transparent communication with top management and shareholders is crucial for us. Being able to explain the strategic rationale and conveying an attractive debt story to new (financing) partners is the core element. This is why we have to understand every detail translating it into the language of a credit committee. Getting the message across is often key for success. Consideration of tax issues combined with financial advisory can add a lot of value and safe real money.

However, network, communication and a sound understanding of our client and financing partners are more important than modelling skills, which are a basic tool but cannot generate success.

From a client´s point of view, what is special about being a financial advisor at KPMG and how do you convince your clients to trust KPMG as their advisor?

Generally, we have a very individual look at any situation and the client can see that. Undoubted loyalty, broad expertise and network, as well as creative thinking are key. Our teams are used to work together and this has often led to successful dual or triple track processes where clients keep all the options until very late in the process. In the last 12 months we have pushed through a decent number of cases where alternatives in equity funding, hybrid money or debt financing were structured and finally implemented. The client remains in the driver’s seat because we simply do not adhere to standard solutions.

What were the most remarkable facts about the Scholz case?

In a nutshell: in one of the most complex and difficult cases many people have ever seen, we managed to keep Scholz on its feet. We started with a huge debt burden, an overwhelming number of stakeholders fighting against each other and decreasing profits and cash flows. To run a truly competitive global dual track process (Debt and M&A) for an asset that some people called “a falling knife” was a challenging job. Our global process led to two binding offers and eventually a take-over by a Chinese investor willing to buy a big chunk of the debt at a discount, a stabilized company continuously supported by the banks and a solution finally accepted by all parties. After all the dust has settled, most stakeholders were satisfied with the results.

To summarize:

To get the best out of a situation, a financial advisor logically has to offer the complete 360°- range of Corporate Finance services like Debt, M&A and IPO as well as other services like Tax or Accounting in parallel with experienced specialists in these fields.

We develop financing structures fully adapted to the individual strategy, cash flow profile and investment horizon of our clients. We follow our client´s guidance when it comes to tough negotiations without impacting long term banking relationships.

In numerous deals, the solution eventually adopted has been found through a dual or triple track process that has pushed different options in parallel with competitive processes.

Important factors are the advisor´s independence from any sales-driven own interest, global reach, a broad network and long experience of the individuals in successfully structuring similar transactions.

Restructuring attorneys and advisers predict that the energy and retail sectors will be the most active for out-of-court restructurings this year, according to The Deal, a business unit of TheStreet, Inc.

Early in the first quarter of 2017, many restructuring attorneys and advisers were certain that the healthcare industry was heading for a wave of out-of-court restructurings and bankruptcy filings because of President Trump's vow to repeal and replace Obamacare.

After Trump's first proposed legislation stalled and a second try at passing a bill squeaked through with minimal support, advisers are no longer certain that Trump's assault on The Affordable Care Act will be a threat to the healthcare sector this year, as they first thought. Advisers are now asserting that companies in the energy and retail sectors will be more active this year seeking out-of-court restructurings than the healthcare industry.

"A long list retailers led a parade of out-of-court restructurings in the first quarter with many of them, such as Macy's, Sears Holding Corp. and J.C. Penney Co., announcing dozens of store closings." said Kirk O'Neil, out-of-court restructuring reporter at The Deal. "The retail sector will continue to be the most active industry seeking out-of-court restructurings in the second quarter, followed by some oil and gas companies that are trying to avoid Chapter 11 filings."

The Deal's exclusive ranking covers the top global advisers involved in out-of-court cases filed between January 1st and March 31st 2017.

Some highlights from the report:

• Lazard Ltd. was the top financial adviser to distressed companies in the first quarter, with 28 deals. Houlihan Lokey Inc. was second, with 19 deals. Rothschild & Co was third, with 13 deals. Evercore Partners Inc. ranked fourth with eight deals. Rounding up the top five was Moelis & Co., with seven deals.
• Houlihan Lokey Inc. was the top financial adviser to creditors, with seven deals. Moelis & Co. LLC was second, with six. PJT Partners Inc. ranked third, with five deals. Lazard Ltd. and Rothschild & Co tied for fourth, with four deals. Ducera Partners LLC ranked fifth, with three deals.
• Among law firms, Kirkland & Ellis LLP was the top counsel to distressed companies, with 10 deals. Latham & Watkins LLP ranked second, with six deals. Cleary Gottlieb Steen & Hamilton LLP and Davis Polk & Wardell LLP tied for third, with five deals each.
• Milbank, Tweed, Hadley & McCloy LLP ranked first for the top counsel to creditors, with 18 deals. Paul, Weiss, Rifkind, Wharton & Garrison LLP ranked second, with 14 deals. Latham & Watkins LLP ranked third, with nine deals. Proskauer Rose LLP ranked fourth, with five deals. Cleary Gottlieb Steen & Hamilton LLP and Gibson, Dunn & Crutcher LLP tied for fifth, with four deals each.
• AlixPartners LLP and Alvarez & Marsal LLC tied for the top restructuring advisers to distressed companies, with nine deals each. FTI Consulting Inc. was ranked second, with six. Zolfo Cooper LLC was third, with three deals. And PricewaterhouseCoopers was fourth, with two deals.

(Source: The Deal)

To find out more about insolvency and restructuring proceedings in the UK, Finance Monthly reached out to one more professional operating within the sector. Garry Lock is a partner with Quantuma - a leading restructuring and insolvency practice, delivering partner-led solutions to businesses and individuals facing financial distress, with offices in London, Southampton, Marlow, Watford, Brighton and Bristol.

As a professional whose practice spans sectors from retail to recruitment, what are the sectors that experience insolvency and restructuring proceedings more than others in the UK?

Those sectors that would experience the highest number of failures would be those with low barriers to entry and low, or no regulation. Businesses which have a high-fixed cost base and rely upon high-volume and low-margin sales also struggle when the economy is unstable. An example would be a retail chain of shops or restaurants.

Construction always has a moderate level of failure because contractors often have to fund projects for considerable periods of times, whereby the profit element is typically not earned until the project is completed. Project holdups, not always the fault of the contractor, can create a cash flow crisis or, in a worst case scenario, the failure of a company.

An understanding and appreciation of the working capital cycle for a business, as well as having a sufficient working capital base to support the turnover, is key. The significance of understanding margins, costings and break-even are often overlooked.

Sectors that also experience high-failure rates often struggle with an overview of the company finances to the point where decisions are made, which decisions tend to be more reactive than proactive. Smaller business in particular often don’t survive a bad trading year.

The continuing recovery in the UK economy has resulted in corporate insolvency falling down steadily in 2015– how have these trends impacted your practice over the past twelve months?

Quantuma was set up in early 2013 by industry veteran Carl Jackson. In the last 4 years the firm has grown to a 12-partner firm, employing over 100 staff in 6 offices. Our firm has grown when other firms have cut their restructuring teams. Quantuma was ranked in the national top 10, for number of formal appointments during the calendar year 2016. The firm has managed to grow market share in a declining market through its good connections and the hard work of the partners and staff.

Market conditions are very challenging, so with declining numbers of formal appointments you have to adapt your approach and also deliver an excellent service when the opportunity arises. Reputation is very important.

The partners in the firm have a good referrer base, which means that we engage with a wide range of stakeholders and retain a high level of input into the work that is carried out.

The firm has a strong management structure which enables flexibility to make decision and to act quickly when opportunities arise. Maintaining regular contact and an open dialogue with those who refer work to you is vital.

What are the typical issues that you face when conducting investigations on corporate and personal insolvencies?

Investigations in insolvency proceedings are carried out for a number of reasons. Primarily, the purposes in both corporate and personal insolvencies is to identify and recover assets for the benefit of creditors. In addition, there are instances where insolvencies give rise to claims that can be pursued by insolvency practitioners where there has been wrongdoing. These claims are covered by both the Insolvency Act 1986 and the Companies Act 2006.

For corporate insolvencies, the actions of the directors in the period after the company became insolvent will also come under close scrutiny to establish whether they have acted in a way that has either enriched themselves or prejudiced the interests of creditors individually or collectively.

Investigating personal insolvencies is generally more challenging than for corporates. This is largely due to the lack of an audit trail for the affairs of an individual, which is often present, in one form or another, for a corporate.

Albeit it is a criminal offence if an individual fails to deliver up a full account of their affairs to the Official Receiver at the outset of a bankruptcy, there are often occasions where full disclosure has not been made. The insolvency practitioner will need to build up a picture of the person’s affairs either with, or sometimes without, the cooperation of the individual.

Not all individuals are fully cooperative with the proceedings, particularly if you are contemplating bringing proceedings for the recovery of assets they might have transferred to third parties before they were made bankrupt. There are sanctions available to deal with instances of a lack of cooperation with the use of court proceedings for interviews and the option to suspend the individual’s automatic discharge from bankruptcy proceedings being available. This does not however always achieve the desired outcome and some individuals can remain bankrupt for many years until they decide to cooperate.

The extent of any investigation will largely be determined by the level of the insolvency, the type of claims against the individual and also representations made by those creditors. If the information and representations provided by the directors or individual are considered reasonable, then investigations may be little more than routine searches. Conversely, if it is clear that the position as a whole just doesn’t stack up then it may lead to follow up detailed investigations which may include reconstructing accounts from incomplete company records, applications to court to deliver up information or even oral examinations.

Corporate investigations tend to have trail to follow and the starting point is a review of the statement of affairs of the company provided by the directors, and then comparing it to the last filed statutory accounts. This helps to assess what happened in the final period of trading and whether it supports the directors’ version of events.

Further review of the company’s books and records, back-ups of electronic data, information obtained from professional advisors and also representations made by the company’s management and its creditors should provide most of the answers. It is rarely the case that the company’s records are up-to-date and complete at the point of insolvency. We also consider whether management have any other entities trading that might suggest the company’s assets, both tangible and intangible, have been transferred.

With all corporate insolvencies, the key aspect is to establish when the company became insolvent and what happened in the period from that point through to the company entering an insolvency process.  There are two tests to establishing insolvency. The first is the cash flow test, which is the point at which the company could not pay its debts as and when they fall due. The second test is the balance sheet test. The point at which the company’s liabilities exceeded the value of its assets. Proving insolvency can sometimes be problematic but there will often be information available to be able to pin point an approximate date.

The next stage is determining what happened from that date through to the date of the insolvency. In essence, did management recognise that the company was insolvent and can we establish what steps were taken by management to address the decline. If no proactive steps were taken, the directors may well be liable but in all instances the evidence has to be clear and presented in a format that can be put before a court if an agreement cannot be reached on settlement.

Creditors’ expectations can be unrealistic and have a tendency to focus on self-interest. Managing those expectations at the outset can also influence the level of investigation work carried out. For larger assignments the formation of a creditors committee can be useful for the purposes of assisting with the understanding of the affairs of corporates.

With any investigation there has to be an element of proportionality and so a cost benefit analysis is always required. The insolvency practitioner has to consider whether detailed work will ultimately lead to a recovery for the benefit of the company’s creditors taking into consideration the costs that may arise from a recovery action by legal process which is always costly and risky. Furthermore by the very nature of the matter there may not be funds available initially to cover detailed investigation work so the insolvency practitioner needs to weigh up the risk of not being paid.

What are the most common tactics that you implement when assisting distressed corporations with restructuring?

Firstly you need to understand how much time you have to implement changes. Where time is short and directors have left it too long, to the point that creditors are threatening winding up, then an insolvency process may be necessary whereby the process is a precursor to restructuring the business operations.

Where circumstances are not quite so critical and you have more time, you need to assess how restructuring will be most effective and so a business review of current operations should be carried out. The level of detail of the review will depend upon the size and complexity of the company’s operations as well as the extent of the company’s current losses. The business review will cover an assessment of the past and current financial performance as well as an overview of the operational aspects of the business. It may also cover the strengths and weaknesses of existing management. The review will highlight the aspects of the business that are both good and bad, and will aid the formation of a number of strategies that should assist turnaround.

Typically the initial focus will be trying to return the company to profitability in the shortest possible time frame.

An assessment of how that will be achieved will be quantified in the business review following which a cost reduction programme and efficiency drive will be implemented. This is likely to include rationalisation of the workforce, as well as a review of the remuneration policy for management which may not be in keeping with financial performance. Those assets that, after review, are considered to be non-performing will be sold.

Sometimes less means more. Often management become obsessed with ever increasing turnover at the expense of profitability and so cutting high volume, low margin products can result in considerable cost savings and increased profitability. Pricing will also need to be assessed.

Over time management can lose focus. Furthermore, corporate governance is often lacking with distressed companies. A refocus of corporate strategy, financial budgets, cash flow projections and key performance indicators will be necessary to understand what is realistic in the short and medium term.

What is the likelihood of insolvency and restructuring processes that cannot save a company and what are the circumstances that typically lead to liquidation? How common are Company Voluntary Arrangements, Creditors Voluntary Liquidations and Members Voluntary Liquidations and how do you assist with them?

For any restructuring process you need the support of the stakeholders of the business, whether that be management, employees, banks, funders, customers and suppliers to effect change. Sometime despite best efforts of management and their advisors, external factors can undermine the restructuring process. An example of this would be the loss of a major contract or key members of staff, high exit costs of an unprofitable contract. These situations can make the company’s operations not financially viable whereby the only option will be to liquidate the company.

Company voluntary arrangements are a useful process where a company may have experienced a one off event such as a significant loss on a contract or a bad debt. Again viability is key to whether it is the correct procedure and also whether there is sufficient working capital to keep trading. There are also other factors to consider because a CVA can last up to 5 years. During that time the company’s credit rating will be recorded as poor meaning that it will have a knock on effect to securing new contracts.

Creditors Voluntary Liquidations form the majority of work for insolvency firms. The process appropriate for directors to wind up failing companies before it reaches a stage of creditors taking their own enforcement action with winding up petitions.

Members voluntary liquidations (MVL’s) apply to solvent companies and are a tax efficient way of winding up a company that has reached the end of its useful life and has surplus capital to return to shareholders. Where the company is not part of a group, by using this process, it gives rise to lower tax for the shareholders and also the option, should the criteria be met, to claim Entrepreneur’s Relief. For group companies the MVL process can end unnecessary administration of maintaining compliance.

The MVL process is very common. With most instructions of this nature timing is very important, particularly with owner managed businesses.

For more information, please go to: http://www.quantuma.com/

Ben Rhodes is a Director at Grant Thornton, Channel Islands. He is a Chartered Accountant, UK Licensed Insolvency Practitioner, Certified Fraud Examiner and qualified Trust and Estates Practitioner. He has specialised in the areas of restructuring, insolvency and forensic investigations since 2003, helping company directors, creditors and other stakeholders. He began his career in London before moving to the Channel Islands in 2012.

 Grant Thornton has the largest single dedicated recovery and reorganisation practice in the Channel Islands, with three UK Licensed Insolvency Practitioners supported by a team of experienced accountants and fraud examiners. Here Ben tells Finance Monthly more about the insolvency and restructuring processes in the Channel Islands and specifically Guernsey, as well as what makes him a thought leader in the sector.

What are currently the hottest topics being discussed in relation to insolvency and restructuring trends in the Channel Islands?

The concept of “Insolvent Trusts” has gained much attention in the Channel Islands in the last couple of years and remains a hot topic now.

It is debatable whether a Trust can become “insolvent”, as it does not have its own separate legal personality. However, a Jersey ruling in 2015 in Re Z Trust has helped provide clarification. This matter concerned a Trust that had insufficient assets to meet its liabilities, as they fell due and was therefore insolvent on a cash-flow basis. The Court recognised that it was incorrect to describe the Trust as “insolvent”, however acknowledged that the terminology was helpful in ascertaining how the Trust should be treated and the duties of the Trustee.

The Z Trust ruling is helpful, however there remain problems to be overcome. There is no insolvency regime in place in respect of Trusts and therefore, no clear remedy for creditors and other stakeholders. This lack of regime results in additional cost. Furthermore, there is difficulty finding a replacement for the incumbent Trustee in these situations.

Which sectors would you say are faced with insolvency and restructuring proceedings more than others in Guernsey?

As expected of an International Finance Centre, we deal with a significant volume of solvent restructuring matters in relation to Trust and Fund structures in Guernsey. These structures have typically come to the end of their useful life and are therefore being wound down. The structures often include entities in various jurisdictions such as Luxembourg, Cayman, BVI and Bahamas, as well as the UK and therefore, we work closely with our international Grant Thornton colleagues. We also work very closely with our tax colleagues in relation to these matters as decisions are often driven by tax considerations.

Do you see any need for legislative change regarding insolvency in Guernsey?

Guernsey is currently embarking on a reform of its commercial and personal insolvency legislation. I was engaged in 2016 by the States of Guernsey to assist with the changes and to provide recommendations on the proposed law reform.

The first phase of the reform is anticipated to include the introduction of insolvency rules; a requirement for independent office holders in an insolvent voluntary winding up; greater consultation with creditors in an insolvent winding up; and greater powers for office holders to obtain information from directors and officers.

These changes will make the insolvency regime far more robust and will enhance Guernsey’s reputation as a safe place to do business.

You have worked on numerous high profile cases in the Channel Islands and the UK - what has been your flagship piece of work in recent years and how did you apply particular thought leadership to this scenario? (94)

We continue to be busy with regulatory and insolvency investigations in the Channel Islands. Our clients may include Trust or underlying entities that have been the victim of fraud; or beneficiaries and investors seeking compensation.

Our forensic investigation work may include isolating and quantifying the fraud, interviewing suspects and witnesses, gathering and preserving digital and other evidence and working with the legal teams to pursue prosecution.

Our in-house Business Advisory and Compliance teams also assist clients with putting processes and safeguards in place to reduce the risk of fraud occurring in the first place.

As a thought leader in this segment, how are you developing new strategies and ways to help your clients?

 As a member of the Association of Restructuring and Insolvency Experts (ARIES) Legal and Regulatory Committee, I have been assisting with the implementation of Guernsey Insolvency Practice Statements (GIPS). These will help to provide best practice guidance to practitioners in Guernsey, in advance of the law reform. The GIPS will cover such practical areas as conducting investigations, reporting on director conduct, the holding of creditors’ meetings and pre-packaged sales of business through Administration.

The GIPS are expected to be released within the following two months. ARIES has also begun drafting Jersey Insolvency Practice Statements (JIPS) to offer similar guidance to Jersey practitioners.

By Aaron Kibbey, Robert Rasor & Brian Bostwick

Whether in court or out of court, in most restructuring situations involving stakeholders with various claims to a Company’s assets, the valuation of these assets is a critical component.  In restructurings involving oil and gas reserves, the valuation analyses are often more complex because of the technical data and skillset required to value these reserves. 

In the recent Sabine Oil & Gas and Energy XXI cases, stakeholders clashed over competing interests, and claims hinged on very different views of the value of the respective companies’ assets.  These cases highlight the importance of retaining professionals who fully understand the technical aspects of performing a valuation analysis on oil and gas assets, and who can also apply their experience in valuing these types of assets in order to tailor their assumptions and inputs to the unique characteristics of the specific assets associated with the restructuring.  In the Energy XXI case, Loughlin Management Partners + Company (“LM+Co”), a boutique restructuring advisory firm based in New York, partnered with HJ Gruy and Associates, Inc. (“Gruy”) a petroleum engineering firm based in Houston, to provide a comprehensive valuation analysis on a specifically targeted portion of the Company.   This article outlines the general approach LM+Co and Gruy applied in their analysis, and also suggests several important considerations for teams attempting to value oil and gas assets.

Although valuing oil and gas assets is not necessarily more difficult than valuing other asset classes, valuing these types of assets requires a detailed understanding of the relative merits of traditional valuation methods.  Valuing oil and gas assets, which comprise a depleting asset base where value is correlated to constantly changing commodity prices and historical production trends, demands a thorough understanding of the technical details included in a company’s reserve database. Although commodity prices fluctuate, the value estimates of the underlying oil and gas assets should be based on current conditions, and are not intended to reflect unforeseeable economic or environmental events that could alter the fair market value subsequent to the valuation date.

The Market Approach and Income Approach

When estimating the value of a company or a group of assets, both a Market Approach and an Income Approach should be employed, and this holds true when estimating the value of oil and gas assets. A Market Approach, such as a Comparable Company Analysis or Precedent Transaction Analysis, provides the relative value of the target assets based on how investors price similar assets. The Market Approach provides an estimate of value based on external information of the subject company, specifically how investors view the value of similar assets.  An Income Approach, such as a Discounted Cash Flow (“DCF”) Analysis or, specifically when valuing oil and gas assets, a Net Asset Value (“NAV”) Analysis, provides an estimate of value based on internal information from the company, specifically the projected cash flows attributable to the target assets.  It is key to recognize, when utilizing any of these methodologies, that there are relative merits and limitations associated with each, and these merits and limitations are magnified by the financial detail available in each unique situation.

 The most common and widely accepted method to value an oil and gas company is a Net Asset Value Analysis, and nearly every valuation estimate for oil and gas assets will include a NAV analysis.  However, relying solely on the results of a NAV analysis leaves the estimate of value susceptible to some potential shortcomings of this method. Although a NAV is essentially a very detailed DCF Analysis which includes very specific information on the selected oil and gas reserves, all of the other methods mentioned above should be considered and evaluated when performing a valuation analysis on oil and gas assets. The quality of the data available will ultimately dictate which methods to use and the appropriate weighting of each method.

 A Market Approach provides an estimate of value based on how investors price similar assets by using a multiple on a common metric. Although sales, free cash flow, and EBITDA are commonly used metrics in this approach, the metric need only be observable, not necessarily financial. Care needs to be exercised when selecting the metric for a Market Approach valuation.

Comparable Company Analysis

A Comparable Company Analysis looks at publicly-traded, comparable companies and calculates a valuation using multiples of financial data based on the Total Enterprise Value (“TEV”, the combined value of the equity and the debt, net the cash on the balance sheet) of the chosen comparable companies. This approach provides the public market view on the value of similar companies or assets, but may be limited by the subjectivity inherent in trying to determine the relative similarity of the “comparable companies”. Comparable Company Analysis is recognized and well received by the US Bankruptcy courts. Two notable recent cases that included this method were Penn Virginia[i] and Swift Energy^[ii].

When using the Comparable Companies approach, the selection of the comparable companies is critical. Finding companies that are similar or nearly identical would be ideal when applying this approach; however, it is typically very difficult to find such companies.  An important consideration when using a comparable company valuation analysis is that a comparable firm need not be identical, in all aspects, to the subject company.  Rather, the key requirements are that a comparable firm have similar cash flows, growth potential and risk^{[iii], [iv]}.  In the Energy XXI case, it is important to note that, although there were no other comparable publicly traded companies operating in the shallow waters of the Gulf of Mexico, other onshore oil and gas companies contained cash flows, growth potential and risk profiles similar enough to be used to estimate how the market would likely value the Energy XXI assets.

Precedent Transactions Analysis               

A Precedent Transactions Analysis looks at companies comparable to the target company that were recently bought or sold and uses a multiple based on the purchase price to estimate the value of the target. This method is also susceptible to subjectivity of how “comparable” is defined, as well as the availability of information regarding recent and relevant transactions.  To apply a Precedent Transactions Analysis, a multiple must be defined. Although earnings based multiples such as revenue or EBITDA generally provide the best indication of value, the multiple can be based on any observable, relevant metric. When valuing an oil and gas company, daily production may be a sector-specific metric on which to base a valuation. Regardless of the metric selected, this metric needs to be defined clearly and applied consistently across the transactions.

As critical as company selection is to Comparable Company Analysis, so too is the transaction selection in a Precedent Transactions Analysis. The transaction must stand up to the same level of scrutiny as the companies chosen for a Comparable Company Analysis. Recently acquired companies identical to the target would be ideal, but the data on acquisitions may be limited compared to the abundance of public market data. Because of this, a longer time frame is typically acceptable for Precedent Transactions Analysis. The characteristic of each transaction needs to be carefully reviewed and understood to ensure the metrics used and multiples applied are consistent across each transaction.  Often times the reported consideration includes contingencies and considerations that can significantly alter the calculated value and this information should be taken into account as part of the Precedent Transaction Analysis.

Discounted Cash Flow Analysis

The traditional and most widely accepted Income Approach method is a Discounted Cash Flow Analysis. In the oil and gas industry, though, this is largely replaced by a NAV analysis. A DCF typically discounts the future projected annual aggregate free cash flow of the entire company. It requires a detailed understanding of the company and its economics.  A Weighted Average Cost of Capital (“WACC”) reflective of the risk of the projected cash flows must also be calculated. Because a DCF analysis requires a complete understanding of the underlying assumptions used in the cash flow projections, without full access to company’s management, there may be limited opportunity to examine and audit the underlying assumptions.  This is the most significant limitation of a traditional DCF analysis.

Net Asset Value Analysis

A Net Asset Value Analysis determines the value based on the subject company’s reserves and is the standard approach for oil and gas assets[v]. This method provides a detailed discounted net cash flow analysis that extends over the life of each property.  To apply the NAV method, cash flow for individual wells or multi-well projects is forecast based on the projected income from the sale of produced oil, natural gas and natural gas liquid. Operating expenses, local production taxes and future capital requirements are included for each well, multi-well project and platform. The projected discounted net cash flow extends over the life of each entity, which may be up to thirty years from the effective date.

Net cash flow projections for the individual entities can be generated using the commercially available ARIES Petroleum Reserves and Economic Software with a provided ARIES Database. Aggregate net cash flow summary forecasts for the various hydrocarbon reserve categories are generated and used as the base for subsequent risk adjustment factor application, resulting in value determination.  During the forecasting, minor changes and additions may be required in order to adjust for property reserve categorization or additional costs. In a low price environment, reserves data may not include critical wells or other assets due to economic write-offs, which could be temporary, but profitable if commodity prices increase. Inclusion of additional costs such as Asset Retirement Obligations (ARO), Lease Operating Expenses (LOE), and General and Administrative (G&A) costs is required to account for recognized expenses that are not included in an original ARIES Database. The costs can be incorporated within the primary forecasts or outside of the cash flow projections. Incorporation within the forecasts forces a more accurate economic limit on each projected property, typically resulting in a more correct forecast.

The prices used to project the cash flows are typically based on the West Texas Intermediate crude oil prices and Henry Hub natural gas prices. The applied price projections are based on NYMEX futures and should be selected as close to the valuation date as is reasonable to ensure the forecast takes into account the current market views. Because the valuation is based on current market sentiment, the NAV approach may not be an accurate indicator of Total Enterprise Value when the market prices are set near cyclical peaks or troughs.  Additionally, because projected commodity prices are one of the strongest drivers in the computation of a NAV analysis, a sensitivity case should be presented wherein a completely independent crude oil and natural gas price forecast, such as the one available from the U.S. Energy Information Administration (EIA), is applied.  Cash flows generated from the reserves and price forecasts are discounted using a WACC and then adjusted using Risk Adjustment Factors (“RAFs”). Adjustment is needed to account for the uncertainty associated with distinct reserve categories.  The adjustment procedure is accomplished by applying an individual RAF to the discounted net present value for each reserve category. This method is well established in the oil and gas industry when performing a NAV approach to valuation. Three different sets of RAFs can be applied to generate low, mid and high market value estimates.

Despite its ubiquity in the oil and gas industry, the NAV analysis has limitations that can significantly alter the derived value of oil and gas assets.  A NAV is only as accurate as the underlying reserves data and assumptions.  An incomplete database or incorrectly applied RAFs can produce unreliable valuation estimates and ultimately have devastating consequences for investors. Additionally, the NAV approach may not be a good indicator of Total Enterprise Value when the “strip price” (pricing derived from the forward NYMEX curve) is set near cyclical peaks or troughs.

Risk Adjustment Factors used in a NAV analysis should also be vetted carefully. Applicable RAFs are dependent on circumstances and quality assessments surrounding a particular oil and natural gas property or portfolio of properties. The application of standardized RAFs, such as those from the Society of Petroleum Evaluation Engineers (“SPEE”) Annual Survey of Parameters used in Property Evaluation ignore the intricacies of NAV analysis. Notably, SPEE itself warns that the information in the Survey is limited in scope, possibly lacks real world detail and likely reflects biases based on individual respondent’s personal experience[vi].

Understanding both the Science and the Art of Oil and Gas Valuation

Valuation is an inherently complex and imprecise process. The Market Approach (Comparable Company Analysis or Precedent Transaction Analysis) provides an estimate of value based on external information to arrive at a relative value. The Income Approach (Net Asset Value Analysis or a traditional Discounted Cash Flow) provides an estimate of value based on internal information from the subject company and attempts to arrive at an intrinsic value. Ideally, one should perform a thorough analysis using all of the accepted valuation methodologies to arrive at a comprehensive view of value. In practice, however, the quality of data available and the circumstances will dictate which methods to use. Based on the relative merits and limitations of each, not all approaches may be appropriate in each instance.  Every effort should be made to combine the estimates of value derived from a Market Approach with the estimates of value derived from an Income Approach in order to estimate the value using both internally (company-specific) generated information and externally (market-specific) generated information. In a November 2012 publication on applying fair value measurement, Ernst & Young noted that

“The fair value of a business is often estimated by giving consideration to multiple valuation approaches; such as an income approach that derives value from the present value of the expected future cash flows specific to the business and a market approach that derives value from market data” (Ernst & Young Publication – November 2012 Fair Value Measurement, IFRS 13 Fair Value Measurement)

We believe this guidance holds true when valuing oil and gas assets, particularly when the valuation analysis is part of an overall restructuring plan.  Whether in court or out, stakeholders should strongly consider retaining advisors/professionals who understand the complexities and technical issues unique to the oil and gas industry and relying on their experience and expertise.  Hiring valuation professionals well-versed in both the science and the art of valuing oil and gas assets is a critical component of a stakeholder group’s ability to achieve a favorable outcome.

About the Authors

Aaron Kibbey is a managing director at Loughlin Management Partners with more than 20 years’ management experience in operations, restructuring, corporate finance, sales and marketing, business development, and mergers and acquisitions. Aaron also has significant experience serving in crisis management positions within companies facing operational and financial challenges.  Through his education and professional experience, Aaron has developed expertise in valuing businesses in various industries, including oil and gas, media and entertainment, and telecommunications.

Robert Rasor is the Executive Vice President and Manager of Engineering of H. J. Gruy and Associates, Inc. With more than 30 years of experience in oil and natural gas valuation, Robert has performed hundreds of oil and natural gas valuations, and has served as an expert witness in numerous national and international litigation and arbitration proceedings.

Brian Bostwick is an associate at Loughlin Management Partners with experience in financial restructuring and process improvement. He graduated with honors from Northeastern University.

[i] “Expert Report of Richard Morgner, Jefferies LLC, Penn Virginia Case 16-32395-KLP Doc 438 filed July 18, 2016”

[ii] Swift Energy Company Valuation Analysis, Case 15-12670-MFW Doc 244-5 filed February 5, 2016

[iii] Damodaran, Aswath. Damodaran on Valuation, Security Analysis for Investment and Corporate Finance, Second Edition, John Wiley & Sons, Inc., 2006.Print.

[iv] Pratt, Shannon. Valuing a Business, The Analysis and Appraisal of Closely Held Companies, Fifth Edition, The McGraw Hill Companies, Inc., 2008.Print.

[v] Sinha, M.K. and Poole, A.V., “Selection of a Discount Rate or Minimum Acceptable IRR”, SPE Paper 16843, Proceedings of the 1987 SPE Annual Technical Conference and Exhibition. Print.

[vi] SPEE. “Society of Petroleum Evaluation Engineers Thirty-Third Annual Survey of Parameters Used in Property Evaluation,” June 2014