New Financing for Distressed Businesses in the Context of Business Restructuring Law (eBook)

Sanford U. Mba (Autor)

eBook Download: PDF

2019 | 1st ed. 2019
XI, 285 Seiten
Springer International Publishing (Verlag)
978-3-030-19749-0 (ISBN)

Infos

This book focuses on the restructuring of distressed businesses, emphasizing the need for new financing during the restructuring process as well as during relaunch, and examines the role of law in encouraging creditor confidence and incentivizing lending. It describes two broad approaches to encouraging new finance during restructuring: a prescriptive one that seeks to attract credit using expressly defined statutory incentives, and a market-based one that relies on the business judgment of lenders against the backdrop of transaction avoidance rules.

Securing new financing for a distressed business is a critical part of successful restructuring. Without such financing, the business may be unable to meet interim liquidity constraints, or to implement its restructuring plans. This book addresses related questions concerning the place of new financing as an essential component of restructuring.

In general terms, the book explores how statutory interventions and the courts can provide support with contentious issues that arise from the provision of new financing, whether through new financing agreements or through distressed debt investors, who are increasingly gaining prominence as sources of new financing for distressed businesses. It argues that courts play a key part in preventing or correcting the imbalances that can arise from the participation of distressed debt investors. In this context, it critically examines the distressed debt market in emerging markets like Nigeria and the opportunity presented by non-performing loans, arguing that the regulatory pattern of market entry may dis-incentivize distress debt investing in a market that is in dire need of financing.

The book offers a fresh and comparative perspective on restructuring new financing for distressed businesses by comparing various approaches (primarily from the US, UK and Germany) and drawing lessons for frontier markets, with particular reference to Nigeria. It fills an important gap in international comparative scholarship and discusses a living problem with both empirical and policy aspects.

Inhalt

Dedication 5
Acknowledgments 6
Abbreviations 9
Contents 8
Chapter 1: Introduction 10
1.1 The Aim of the Book: New Financing as Component of Restructuring Regimes, Lender Capture and the Distress Debt Market 12
1.2 About the Literature: Approaches to Incentivizing New Financing, Lender Capture and the Role of the Distressed Debt Market 14
1.2.1 Approaches to Incentivizing New Lending 14
1.2.2 Lender Capture Through New Financing 18
1.2.3 On the Role of the Distressed Debt Market in Financing and Restructuring 20
1.3 Choice of Jurisdictions: Rationale 23
1.4 Methodology: Choices and Limitations 27
1.5 Terminology Issues 29
1.5.1 Financial Distress and Restructuring 29
1.5.2 Choice of Restructuring Among Similar Terms 31
1.5.3 Connotation of “New Financing” 33
1.6 Delimitation of This Book: Focus on “New Money” and Non-bank Distressed Borrowers 34
1.7 Roadmap of the Book 35
References 37
Chapter 2: New Money for Distressed Businesses: Sources, Options and the Changing Financing Landscape 41
2.1 Overview 41
2.2 Financing the Distressed Debtor Through Debt: Identifying Lenders and Motivation 43
2.2.1 Prior Lenders Versus New Lender 44
2.2.2 Secured Versus Unsecured Lenders 46
2.3 Equity Financing for Distressed Businesses 48
2.4 The Shareholder as Lender: To Lend or Not to Lend? 50
2.4.1 The Problem with Shareholder Loans 51
2.4.2 Subordination of Shareholder Loans: US and Germany 53
2.4.2.1 United States 53
2.4.2.2 Grounds for Equitable Subordination 54
2.4.2.3 Inequitable Conduct: A Predictable Yardstick for Shareholder Lending 56
2.4.2.4 From Shareholder Equitable Subordination to Recharacterization 57
2.4.2.5 Court Developed Tests for Recharacterization: A Doctrinal Bedlam 58
2.4.3 Between Equitable Subordination and Recharacterization: Impact on Distress Financing 59
2.4.4 Germany 60
2.4.4.1 Equity Substitution Law (Eigenkapitalersatzrecht) 60
2.4.4.2 Statutory Codification of the Equity Substitution Rules 61
2.4.4.3 A New Regime Under Insolvency Law: Changes to German Equity Substitution Rule 62
2.4.4.4 Safe Harbors for Shareholder/Insider Loans 64
2.4.5 Shareholder Loans: A Case for Disclosure in Place of a “No-Fault” Rule 65
2.5 New Financing Through Asset Sales/Divestiture 66
2.6 The Changing Landscape for Distressed Financing: From Commercial Banks to Niche Markets 67
2.6.1 Commercial Bank and Private Lending 68
2.6.2 Banks as Distressed Lenders: The Decline and Emergence of Non-bank Lenders 70
2.6.2.1 Effect of Bank Regulation on Distressed Lending 71
2.6.2.2 Availability of Risk-Shifting 72
2.6.2.3 Disintermediation: Bespoke Distress Lending Options? 74
2.7 Conclusion: Making Distressed Financing Available in Frontier Markets Like Nigeria: What Lessons Can Be Learnt? 77
References 79
Chapter 3: Restructuring: Key Elements and the Financing Component 83
3.1 Overview 83
3.2 Between Formal and Informal Restructuring Regimes 84
3.2.1 Informal Restructuring: Typical First Choice 84
3.3 Specific Formal Restructuring Regimes in the Jurisdictions: A Typology 86
3.3.1 Collective Regimes 87
3.3.1.1 Chapter 11 of the US Bankruptcy Code 87
3.3.1.2 The UK Administration Procedure 88
3.3.1.3 The German Insolvency Statute and the ESUG 89
3.3.2 Targeted Regimes 92
3.3.2.1 The Schemes of Arrangement 92
3.3.2.2 Administrative Receivership 93
3.3.2.3 The German Bond Act 95
3.4 Key Requirements for an Effective Debt Restructuring Regime 96
3.4.1 The Stay of Creditors’ Action and Enforcement 96
3.4.2 Informal Restructuring: Standstill and Waiver Default Agreements 99
3.4.3 Stay in Formal Restructuring 100
3.4.3.1 The US: Comprehensive Automatic Stay and Liquidity Facilitation 100
3.4.3.2 UK: Multiple Restructuring Regimes But Limited Moratorium? 102
3.4.3.3 German “Moratorium”: A Case of a Functional Equivalent? 106
3.5 Restructuring Plan Approval Mechanism 108
3.5.1 Informal Restructuring 109
3.5.1.1 Achieving Binding Resolutions: The “London Approach” Model 109
3.5.1.2 Achieving a Binding Resolution: The Contractual Model 111
3.6 Formal Restructuring Regimes 113
3.6.1 US Chapter 11: A “Cram Down” of Dissenting Creditors 113
3.6.2 UK Restructuring Regimes: Binding Dissenting Stakeholders to the Plan 115
3.6.3 Approving the German Restructuring Plan 117
3.7 Managing the Distressed Business 118
3.7.1 Retained Management 118
3.7.2 Displacing Pre-distress Management 120
3.7.3 A Supervised Management 123
3.8 Restructuring Regimes in Nigeria: The Present and the Future 125
3.8.1 Restructuring Regimes in Nigeria: The Companies Act Regime and Its Deficiencies 125
3.8.2 The AMCON Receivership: A Regulatory Approach to Corporate Restructuring 127
3.8.3 The Draft Bankruptcy and Insolvency Act 130
3.8.4 Proposed Restructuring Framework in CAMA 132
3.8.5 Ongoing Law Reform Efforts and Implication for Corporate Restructuring 132
3.9 Conclusion: What Has Been Learnt and What Is Unaccounted For? 133
References 135
Chapter 4: Financing the Restructuring Process: Incentivizing Through Law 140
4.1 Overview 140
4.2 Incentivizing Through Law: Why Extrinsic Motivation Matters for New Financing 141
4.3 Incentivizing New Financing Through Negative Protection: The Insufficiency of the EU Recommendation Regime 144
4.4 Distressed Debtor Financing: A History of Priority as Incentive 146
4.5 Claim Ranking as Incentivizing Tool and Superpriority Position 149
4.5.1 Administrative Expense Priority 152
4.5.1.1 US: Prescriptive Approach to Administrative Expense Priority 153
4.5.1.2 The Implied Approach: English Administration and German Restructuring as Examples 154
4.6 Security Interest for New Lender: A Technique in Contest 157
4.6.1 Why Security Interests for New Financer or Why Might Administrative Expense Priority Not Suffice? 157
4.6.2 Incentivizing New Financing: Market-Based Approach Versus Prescriptive Approach 161
4.6.2.1 The UK Approach as Market-Based 161
4.6.2.2 Justification for the Market-Based Approach 163
4.6.2.2.1 A Financing Facilitative Regime 163
4.6.2.2.2 Policy Considerations 165
4.6.3 The Prescriptive Approach: The US as Paradigm 167
4.6.4 Between a Prescriptive and Market-Based Approach: SMEs in View 170
4.6.4.1 A Restructuring Facilitative Regime Without a Financing Component 170
4.6.4.2 A Market-Based Approach and Pre-distress Lender Induced Strategic Illiquidity 170
4.7 New Financing in the Nigerian Landscape: What Lessons Can Nigeria Learn? 173
4.7.1 The Approach to New Financing Within a Defective Restructuring Regime 174
4.7.2 Is the Situation Any Different with the Secured Transaction Law Regime? 176
4.7.3 A Case for Prescriptive Approach for New Financing in the Restructuring Framework 178
4.8 Conclusion: Market-Based Approach as Default Approach 180
References 181
Chapter 5: New Financing and Lender Capture 184
5.1 Overview 184
5.2 Financing Agreements: Unravelling the Devil in the Detail 185
5.2.1 Roll-Up and Cross-Collateralization Clauses 187
5.2.1.1 The Problem with Roll-Ups and Cross-Collateralization 188
5.2.1.2 Judicial Treatment of Cross-Collateralization Clauses 191
5.2.1.3 Judicial Treatment of Roll-Up Clauses 195
5.2.2 The Use of Waivers and “Immunization” Clauses in New Financing Agreements 197
5.2.2.1 Waiver of Debtor’s Pre-Petition Claims 197
5.2.2.2 Automatic Stay Waiver (Relief from Automatic Stay) 198
5.2.2.3 Waiver of Junior Lender Financing 199
5.2.2.4 The Problem with Waivers 199
5.2.2.5 Judicial Treatment of Waiver Clauses 201
5.3 New Financing as Control Lever Over Distressed Borrower 202
5.3.1 The Financing Agreement as Control Lever 203
5.3.2 Lender Control and Its Complication 205
5.4 Lender Overreach Through New Financing Agreement: Critiquing the Theoretical Justifications for Special Clauses 206
5.4.1 The “Rehabilitation Goal” Facilitation Theory 207
5.4.2 Incentivizing Policy Theory 209
5.4.3 The “Consideration” Theory 213
5.4.4 The “Whole Package” Theory 217
5.5 Distress Financing and Lender Control: A Case of Practical Convergence Between the US and Europe? 219
5.6 Secured Lender Control: A Case for Carve-Outs and Fiduciary Duties 220
5.7 Treatment of Distressed Lender in the German Law Context 224
5.8 UK Law and New Financing Agreements: Reflecting on New Financing Problematic Clauses 227
5.9 Conclusion: Reflections for Frontier Markets and on the Future of New Financing 229
5.9.1 The Quest for Control Through Financing Agreement: Is There a Problem with the DIP Construct? 229
References 230
Chapter 6: The Role of Distressed Debt Investors in Financing Distressed Debtor Restructuring 234
6.1 Overview 234
6.2 The Distressed Debt Market as Alternative to Traditional Lenders 238
6.2.1 Buyers of Distressed Portfolio 238
6.2.2 Potential Exit Route and Liquidity Providers 239
6.3 The Players in the Distressed Debt Market and Their Capacity to Add Value 242
6.3.1 Hedge Funds 242
6.3.2 Private Equity Firms 244
6.3.3 Other Institutional Investors 245
6.4 Financing Strategies of Distressed Debt Investors 247
6.5 Distressed Debt Investors: Driving Value Through Self-Interest? 248
6.5.1 Distressed Investors as Self-Interested Participants 249
6.5.2 Distressed Debt Investor as a “Residual Claimant”: Value Creation or Re-allocation? 250
6.5.3 Junior Creditors: The Role of Distressed Debt Investors as Residual Claimants 252
6.6 Value Creation and the Goals of Corporate Restructuring Law 254
6.6.1 Self-Interested Participants: How Distressed Investors are Positioned to Add Value 256
6.6.2 Distress Investor Activism 257
6.6.2.1 Distressed Investors as Sophisticated Financial Actors 258
6.6.2.2 Overcoming Senior Creditor Liquidation Bias 259
6.6.2.3 Driving Management Accountability, Discipline and Efficiency 260
6.7 When Distressed Investor Self Interest Becomes Value Destructive 262
6.7.1 Strategic Hold-Up of Restructuring 262
6.7.2 Multiple Positions in Capital Structure and Consequent Perverse Incentive 263
6.8 Fear of Value Destruction and Investor Exclusion: “Throwing Away the Baby with the Bathwater”? 264
6.9 The “Collateral Purpose and Effect” Rule 266
6.10 Managing Distressed Debt in Frontier Markets: The Nigerian Example 272
6.10.1 Nigeria’s Distressed Debt: Post-2008 272
6.10.2 AMCON as Sole Trader in Nigeria’s Secondary Loan Market 273
6.10.3 How Will Distressed Debt Investors Intervention Help? 275
6.10.4 Should Policymakers be Worried About Asset Stripping? 276
6.10.5 Promoting Wider Participation: A Case for the Liberalization of Nigeria’s Distressed Debt Market 277
6.10.6 PAMC: Limiting the Role of Investors as Distress Financers 279
6.11 Conclusion 280
References 282
Chapter 7: Conclusion and Final Remarks 287
7.1 Rethinking Approach to Law Reform in Nigeria: A Case for an Organic Restructuring Law 289
Reference 291

Produkt-Details

• Erscheint lt. Verlag: 29.6.2019
• Zusatzinfo: XI, 285 p.
• Sprache: englisch
• Themenwelt: Recht / Steuern ► EU / Internationales Recht
• Themenwelt: Recht / Steuern ► Wirtschaftsrecht
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• Schlagworte: Banking and finance • comparative law • Corporate bankruptcy • Corporate Finance • Corporate Governance • Dept restructuring • Distressed dept market • Frontier Markets • Hedge Funds • Insolvency • Investor • Law Reform • New financing • Nigeria • Non-Performing loan • NPL • Private Equity • Restructuring • Small and medium-sized enterprise • SME
• ISBN-10: 3-030-19749-2 / 3030197492
• ISBN-13: 978-3-030-19749-0 / 9783030197490