On April 28, the round table on “Life and Death of the ‘Forced Partnership’ of Bondholders” was held at the S. S. Alekseev Research Center for Private Law under the President of the Russian Federation.
The discussion showed that the restructuring market and the bankruptcy market are different markets with different objectives, mechanisms, and different participants’ skill sets.
As a result of the discussion, we arrived at the following thoughts on the need to introduce “preventive restructuring,” that is, an out-of-court and/or court procedure aimed at preserving the debtor.
1) A special restructuring procedure is needed for issuers
The stock market is based on investors’ belief that the state cares about creating conditions for preserving their investments (in shares, bonds, units, digital financial assets, and other instruments). Every bankruptcy of a company with publicly placed securities is a write-off of household savings and a blow to confidence in the institutions that admit companies to the stock market and in the stock market itself.
From this perspective, restoring the value of securities of companies in distress serves the common good, increasing household wealth, strengthening trust in institutions, and reducing the cost of capital in the market.
The Russian economy is represented by segments with varying degrees of development of economic agents. We proceed from the assumption that the stock market is one of the most developed segments. Companies admitted to the market undergo screening against listing requirements, establish corporate governance, prepare consolidated audited financial statements, and make regular disclosures.
Companies that are subject to a number of significant orders from the regulator, including those related to reporting and disclosure, as well as those with a negative credit history in the public market, should not be granted the right to use restructuring procedures.
2) It is better for issuers to have out-of-court restructuring, but under the supervision of the Central Bank
The level of professionalism among issuers often allows them to negotiate with creditors independently. Out-of-court restructuring may serve as a format for interaction with all participants with an optimal balance of time and resources.
Supervision by the Central Bank is justified by the fact that the debt portfolio of issuer companies consists of significant investments by banks and households. The regulator’s task in this case is to ensure transparency of the terms for different classes of creditors and to verify that the restructuring plan overall creates a better outcome for them than the situation without it.
3) The basis for restructuring may be a threat of insolvency
Restructuring does not replace bankruptcy proceedings. The basis for applying preventive restructuring is a threat of insolvency in the future.
If, during negotiations on the terms of the restructuring plan, the issuer develops signs of bankruptcy, then the preventive restructuring procedure is terminated.
We understand that the bankruptcy industry’s main focus is on bringing parties to account rather than preserving or restoring the business. The bankruptcy competencies accumulated by participants in this market, including insolvency practitioners and judges, do not include the necessary skills to raise financing and maintain operations, especially when it comes to modern non-industrial asset-light companies that are popular with investors. Thus, the restructuring market and the bankruptcy market are parallel spheres of activity with different sets of participants who have different knowledge and experience.
4) Creditors should be given the right to initiate restructuring
In judicial bankruptcy proceedings, insolvency practitioners are engaged to identify the responsible parties and bring them to subsidiary liability. Bankruptcy has taken on a liquidation-oriented character.
In out-of-court preventive restructuring, in our view, an important role should be assigned to creditors, who already understand the issuer’s business well, as well as how and from what sources to emerge from the crisis and repay obligations.
Creditors will have to rethink more deeply the modern concept of debt. They need to come to the realization that debt is a joint and “partnership” responsibility of the participants in the relationship.
5) Restructuring should take into account the existence of different classes of creditors (secured and unsecured)
New regulation should create the possibility for creditors to see themselves and other creditors within their communities that have a similar level of risk with respect to the issuer.
It is important, based on the principle of majority rule, for creditors themselves to decide on the terms of restructuring for their class, and also to negotiate with other classes of creditors.
6) If the required majority is not achieved, “judicial cram-down” may be provided for
This mechanism means that voting can take place by classes of creditors: for example, secured loans, unsecured loans, and bondholders, digital financial assets. At a minimum, this will make it possible to ensure joint voting by bondholders of all series. At maximum, it will create a mechanism to counter strategies of individual creditors that run contrary to the interests of the majority. It will also make it possible to begin creating restructuring mechanisms for digital financial assets, where debt problems are accumulating without clear rules for dealing with them.