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Thomas Cook’s rescue plan would have probably made it the “best-funded travel company in Europe,” but the UK government’s failure to offer a last-minute financial guarantee effectively brought about its collapse, according to testimony at an inquiry into the firm’s insolvency. Read more on 5 Takeaways from UK's Thomas Cook Inquiry. What caused the collapse of Thomas Cook? Read here.  Toys “R” Us, one of the world’s largest toy store chains, has filed for bankruptcy protection, becoming the latest casualty of the pressures facing brick-and-mortar retailers.
The company made the Chapter 11 bankruptcy filing late Monday night in federal court in Richmond, Va., acknowledging that it needed to revamp its long-term debt totalling more than $5 billion. The retailer, which also owns Babies “R” Us, has struggled to compete with Amazon and stores like Walmart. But the financial plight of Toys “R” Us was exacerbated by a heavy debt load that has weighed on the company for years. The private equity firms Kohlberg Kravis Roberts and Bain Capital, as well as the real estate firm Vornado Realty Trust, purchased the company in a leveraged buyout for about $6 billion in 2005. Toys “R” Us joins a wave of retail bankruptcies this year, including the children’s clothing retailer Gymboree, Payless ShoeSource and rue21, which sells clothing for teenagers. Other retailers have closed thousands of stores and laid off tens of thousands of workers as they try to cut costs and compete with e-commerce. The company said its roughly 1,600 Toys “R” Us and Babies “R” Us stores around the world would continue to operate “as usual.” “Today marks the dawn of a new era at Toys “R” Us, where we expect that the financial constraints that have held us back will be addressed in a lasting and effective way,” Dave Brandon, the company’s cChairman and Chief Executive, said in a statement. During this challenging time, this is a good reminder to you and your team. There are always opportunities in crisis. Just keep on looking and most importantly, stop complaining. "Don’t be fooled by AirAsia’s fancy marketing; we think it’s close to default. We estimate that it has managed to inflate profits by 39% over the past five years through related party transactions with associates. Today, these associates have not only stopped paying their bills but require AirAsia’s financial support. The company is basically creating profits and flattering its operating cash flow by abusing its associates. Real profits have collapsed and AirAsia now needs a recapitalisation that will dilute existing shareholders by more than 100%. We see at least 42% downside with fair value less than MYR1.23/share. Sell or Short. AirAsia may be a new dog, so to speak, but it’s playing a very old trick". GMT Research How to Prepare Loan Restructuring Proposal
As part of the restructuring process, the bank is likely to request for information from the borrower. This information will assist the bank in assessing the viability of the borrower and will be used to decide on the actions to be taken (e.g. to restructure or to commence legal action). To obtain favourable support from the bank, it is important to provide complete and accurate information. Transparency is vital. In order to provide comprehensive information to convince the banks to accept the borrower’s restructuring proposal, there is a need to prepare a detailed Loan Restructuring Proposal. This is an extremely important proposal as the survival of the company will depend on how the proposal is structured and presented. A typical Loan Restructuring Proposal should contain the following: 1. Executive Summary 1.1 Background and introduction 1.2 Objectives of the proposal 2. Corporate Information 2.1 Nature and history of business 2.2 Group structure 2.3 Capital structure 2.4 Board of Directors and key management staff 3. Financial Information 3.1 Review of operations 3.2 Financial performance (last 5 years) 3.3 Financial position (valuation based on various scenarios) 3.4 Projected cash flow (next 5 years) 3.5 Details of existing bank borrowings 4. Rationale for Restructuring 4.1 Causes of default 4.2 Pro-active actions taken 4.3 Management commitment 4.4 Potential recovery / Going concern 4.5 Economic impact 4.6 Sources of repayment 5. Proposed Restructuring Terms and Conditions 5.1 Credit facilities included 5.2 Details of proposed scheme 5.3 Interim standstill period 5.4 Proposed terms of restructured facilities 6. Other Information 6.1 Current legal proceedings 6.2 Contingent liabilities 6.3 Breach of covenants 6.4 Other significant events 7. Attachments 7.1 Audited financial statements (5 years) 7.2 Management accounts (current) 7.3 Projected cash flow (5 years) 7.4 List of all existing bank borrowings 7.5 List of legal proceedings (if any) 7.6 Schedule of asset divestments (if any) 7.7 Other supporting documents Read Part 1, Part 2 and Part 3. Effective Strategies in Loan Restructuring
Having understood and appreciated the bank’s internal restructuring procedures mean that the borrower has the upper hand when conducting negotiation with the bank. This, of course, assumes that the bank is willing to proceed to loan restructuring as opposed to commencing legal actions to wind up the company. Naturally, all borrowers would always aim for a successful restructuring. In general, the restructuring process can be considered successful (from borrower’s point of view) if: a. The restructuring is completed speedily b. The loan can be rescheduled for the longest possible time c. Minimum resources (time and fees) were spent on the restructuring d. The agreed terms and conditions are to the borrower’s advantage e. In the event of settlement, maximum hair cut / waiver is obtained. Public listed companies will have more choices as to the techniques used for restructuring (e.g. debt equity conversion, issuance of new shares, rights issues, issuance of other security papers etc). For private limited companies, the choices are extremely limited. If not handled with care, chances are high that bank will commence legal actions to wind up the company, even though it is still a viable operation (at least from the borrower’s point of view). The Practical Approach in Restructuring Defaulted Loan Now let us be practical. To resolve bad loan, companies need to have cash and the cash has to come from somewhere. Notwithstanding the various restructuring techniques (e.g. issue shares, rights issue, issuance of security papers etc), the fact remained – there is a need to raise sufficient cash to settle the bad loan or face legal actions from the banks. If the cash is not forthcoming, for whatsoever reasons, the bad loan problem remained unresolved and winding up is the only eventuality. Hence, borrower may want to consider the following actions to either resolve the problem or at least delay the problem until business turns around: a. Rescheduling Banks are generally agreeable to extend the tenure of repayment. With the extension, the monthly repayment will be more affordable or in line with the company’s reduced cash flow. To successfully obtain the consent from banks to reschedule, there is a need to prepare a Restructuring Proposal (detailing the pertinent information about the company) in order to support the rescheduling. b. Pay interest only As a general rule of thumb, as long as interest is up to date, banks are rather unlikely to take drastic action such as commencing legal actions. In fact, even if cash flow permit to pay certain amount of installment, it is always advisable to conserve the cash for certain “down” months. This will ensure that interest servicing is prompt regardless of business uncertainty. c. Request for waiver on overdue / penalty interest and/or hair cuts Company that intends to fully settle the bad loan with cash may request for certain waivers such as overdue interest and also some hair cuts. d. Apply for rehabilitation fund Eligible borrowers can apply for the Rehabilitation Fund, which is made available by Bank Negara. With the additional fund, it can be used for working capital to generate more cash flow from operations (which can be used to pay down the existing bad loan). All commercial banks participate in this rehabilitation fund. e.Delay legal actions If the banks are commencing legal actions, the borrower may want to seriously consider delaying the legal actions. However, there are always drawbacks in challenging the banks in the court. f. Consult with Bank Negara (Central Bank) If the borrower feels that it has been unfairly treated or its reasonable proposal has been turned down repeatedly, then the borrower may want to seriously consider referring the matter to Bank Negara. g. Last resort If all the above actions failed, the borrower must prepare itself for winding up (and personal bankruptcy) by maximizing its net wealth through proper assets management. It should be emphasized that, throughout the loan restructuring process, it is extremely important for the borrower to be diplomatic, patient and maintain regular contact with the bank’s representative at all times. At the end of the day, relationship banking still plays a vital role in the success of the whole restructuring process. Read the final part here. How do Banks Decide on Loan Restructuring
The decision of whether to restructure or not may not be a simple one. There is a need for the bank to analyze the viability of the borrower, which is the first step in loan restructuring. Viability is the capacity to function profitably, which is affected by both economic and non-economic factors. Unless the borrower has viability, it should not continue, although carrying on in the short term to complete work in progress or to search for a buyer (capable of making it viable) may be a preferred alternative to immediate close down or fire sale. There is no hard and fast rule to determine or assess viability. As such, it is the judgement and foresight of the banks that count. However, as a general guide, bank will undertake to answer the following questions when assessing the viability of the borrower:
The answers to these questions will assist in the assessment of the viability of the borrower. In practice, however, most banks usually give the borrower the benefit of the doubt that it is still viable and move towards compromising to restructure the banking facility. Read Part 3 here. Introduction
Managing a business is full of uncertainty. At times, things may not go according to plan and this will cause numerous problems and challenges to the management. This includes enormous pressure on profitability, growth and restricted opportunities to do business. If the problems persist, it will also cause the company to struggle in servicing its bank loans and eventual collapse of the company. Under a potential default situation, it is critical for the management to understand and be aware of the basic framework of restructuring banking credit facilities. The potential default situation has necessitated the management to be alert and have access to comprehensive information regarding all aspects of loan restructuring. With this in mind, this article is primarily aimed at assisting and supporting borrowers in restructuring banking credit facilities. It will introduce some effective strategies in restructuring credit facilities. It will also illustrate the framework of loan restructuring that includes the bank’s internal restructuring procedures, how to prepare loan restructuring proposal and the features of rehabilitation fund. Insights of Bank’s Internal Restructuring Procedures In general, banks prefer to restructure bad loans as it offers better recovery rates when the bad loan becomes a performing loan again. In other words, borrower with a “viable” bad loan is usually given the opportunity to restructure the loan in accordance to the bank’s internal restructuring guidelines and procedures. Different banks may have different attitude towards restructuring bad loan, ranging from highly aggressive and super efficient to greatly generous and pathetically slow. Obviously, to the borrower, the later type of attitude is preferred. This, unfortunately, is no longer a choice to the borrower when the loan has already turned bad. Whilst different banks have different attitude, their loan restructuring procedures are rather similar. Upon default in payment, the remedial actions that will be taken by the bank include demanding for the following (usually in the following order): a. Recall the facility immediately b. Reduce the loan amount gradually (by requesting for accelerated repayment) c. Request for collateral/additional collateral and/or guarantee (including debenture) d. Increase the interest rate (in addition to the penalty interest) e. Impose additional covenants to “tighten” the terms and conditions If the borrower is able to meet the bank’s demand, then the loan will proceed as normal. However, if the borrower is unable to meet any of the above demand made by the bank, then the bank is left with the following choices: a. Restructure the loan (i.e. sit down and negotiate) b. Commence legal action to recover the loan (i.e. refuse to negotiate) Read Part 2 here. |
