Restructuring: a how-to guide: successful debt restructurings in emerging markets require careful planning by foreign creditors

International Economy, The, Nov-Dec, 2001 by Steven T. Kargman

For example, if creditors and the debtor are discussing the possibility of pursuing a certain restructuring plan, the creditors should propose a specific and firm deadline for drafting and signing a term sheet. In addition, if the creditors are expecting to receive items from the debtor such as a detailed restructuring plan, a revised and updated business plan, or new financial and cash flow projections, the creditors should communicate timelines to the debtor for producing these items. To be sure, there may be some negotiation with the debtor on whether the deadlines proposed by the creditors are appropriate or realistic. Nonetheless, at least in proposing deadlines, the creditors will have taken the first step in setting some parameters for discussions on timing and on the broader issue of how to keep the restructuring process moving forward.

A corollary to having the creditors propose timelines and associated milestones is that the creditors should be vigilant if the debtor appears to be using delaying tactics to forestall a restructuring solution. The debtor may use the negotiations on certain preliminary documents as a stalking horse for delaying the substantive aspects of the restructuring process. Such preliminary documents include confidentiality agreements, which are important to permit the creditors to begin their due diligence investigation of the debtor, as well as engagement letters and/or escrow agreements that establish the arrangements for the retention of financial advisers and legal counsel. Thus, if the creditors see that the debtor or its advisers are raising extraneous or non-substantive issues in negotiating a confidentiality agreement or other similar documents so that the process of negotiation for such documents ends up taking a few months instead of a few weeks, then this should raise a red flag for the creditors. The creditors should ask themselves whether the debtor is trying in good faith to move the process forward or whether the debtor is instead more interested in delay and obstruction.

If the latter is the case, the creditors should immediately bring this to the attention of the debtor and prod the debtor to get on with the business at hand of advancing the restructuring process. Nevertheless, if there are continued and repeated delays by the debtor over a period of time, this may force the creditors to re-evaluate whether a consensual restructuring with the debtor is in fact feasible or rather whether the creditors should instead consider pursuing whatever other options are available, such as any available options under the applicable insolvency law.

Understanding the Local Insolvency System and the Local Legal Framework. Some foreign creditors may make the mistake of approaching emerging market restructurings as if they can simply extrapolate their home country insolvency laws and the underlying principles of such laws to the relevant emerging market jurisdiction. But as one of my steering committee colleagues has quite properly observed apropos of this mindset: " ... We're not in Kansas anymore." It is of critical importance that foreign creditors involved in an emerging market restructuring make a special effort to understand the local insolvency laws and the local legal systems. Even in an out-of-court, consensual restructuring situation, the creditors must be aware of this local legal framework for several reasons.