The recent corporate restructuring cycle in Russia and central Europe has provided many opportunities for learning lessons that will inform future transactions.
According to Stefan Benedetti, CIO, Alloro Capital, one major problem was the way that foreign debt was packaged with small Russian companies during 2008 and 2009.
“The idea was to create structures with offshore entities, offshore security and offshore trustees that were supposed to protect the investor in case things went wrong,” he said. “But this whole protective structure turned against the investor.”
Working with trustees to get into the formal bankruptcy process is a difficult and lengthy procedure for a disparate group of creditors, such as the small companies that had entered the market.
Between 2004 and 2008, the number of borrowers rose dramatically. This increase took in small companies that in all jurisdictions were looking for bank loans and not bonds.
“When 2008 came along there was a large number of marginal issuers who had no real idea of bonds or what to do when the crisis hit, both on the lender and on the borrower side,” said Benedetti.
Another issue was the capacity of non-Russian companies to create legal structures that gave protection in Russian law.
This doesn’t always work. One case Benedetti discussed involved a property company with a collection account. Rent flowed into the collection account and there were fixed and floating charges over everything in Austrian law. But there was one problem: floating charges don’t exist in Russian law.
Although parties could enforce these floating charges in their own domestic courts, attempting to enforce them in the Russian courts was another matter. Russian courts would simply say floating charges don’t exist in their jurisprudence.
“Russia is a form over substance country where a mortgage that has the right stamps, or signatures, will work,” said Benedetti. “At this stage, I’m less worried about Russian law than about over-complication in the overall structure.”
When asked about an alternative way to solve the problem, Benedetti said that investors can always go into Russian law bonds, rather than international law bonds.
With the Russian instruments, the individual bondholder has the option to litigate against the company without first getting approval from the majority of bondholders.
“When we design bonds, we think more about what is going to be the best place,” added Benedetti. “What we should be thinking about is what works and what doesn’t work should the worst happen.”
Benedetti’s comments came as part of a panel reviewing restructurings in central and eastern Europe at the Debtwire emerging markets forum at The Dorchester on March 22.
Francis Fitzherbert-Brockholes, partner at White & Case in London spoke of his hope that creditors have learned from past restructurings and will take a more active role now.
“They should use their rights and try to lead the restructuring through a broadly representative steering committee,” he said. “An active role is definitely a pre-requisite for an efficient restructuring preserving value for creditors.”