Financial restructuring for the corporate sector. How it works and the challenges
The Law “On Financial Restructuring” that focuses on an amicable settlement of loan disputes has become effective this October 2016. At this moment, there are 10 Ukrainian companies using it to regulate their credit problems and 8 of them approach the completion stage. And these numbers are to go sky-high soon: The National Bank of Ukraine has already reported it will bind all banks to implement plans to eliminate the non-performing loans in the first half of 2018.
What’s that all about?
First of all, let us emphasize that the restructuring procedure is necessary. This is not just about solving certain credit disputes between companies and financial institutions. That is an injection to stimulate the Ukrainian economy overall.
The thing is that the amount of unpaid loans in the corporate sector has been growing over the last few years. This value increased by ₴6.4 billion in December 2017 alone.
With the unstable political and economic situation, it gets harder for companies to do business and, naturally, it affects their solvency as well. They cannot obtain loans since their ruined credit history scares all lenders off. And banks suffer too. The lesser the borrower’s repayment is, the more limited their lending resources get, which leads to a vicious circle: banks lose money, companies lose profits and their efficiency drops down taking the GDP with it.
The law on financial restructuring can solve this issue. That said, both the lender and borrower can benefit from it, which makes it a new type of procedure as compared to the ones prescribed by the Ukrainian legislation before the restructuring law of 2016.
What are the restructuring terms?
There are not so many of them, and they are all outlined in the law. Thus, it governs that restructuring procedures should be initiated by the lending legal entities only. That said, these legal entities cannot do so if they are the subject of bankruptcy proceedings. A borrower should send a letter to the Financial Restructuring Secretariat that will serve as confirmation of its readiness for an amicable settlement of the lending issues. This inquiry should be supported by the letters from lenders confirming they are not against the restructuring. The latter should hold at least 50% of all receivables except for the receivables of parties related to the borrower.
Also, the law provides a detailed list of financial restructuring tools. It includes:
- partial waiver of debt;
- repayment of debt by partially transferring the title to borrower’s property to the lender;
- reduction of interest rates, etc.
How much time does a restructuring take?
After the Secretariat reviews and approves the borrower’s request, the latter will have 180 days to develop a restructuring plan. Applying to the Secretariat is generally preceded by negotiations between the borrower and lender. Practice shows that it can take a plenty of time. Parties try to draft a plan of actions, collect the documents necessary, analyze potential problems and risks that they will face during restructuring. It can take months, and the companies and banks must be better prepared for it.
Complications often arise in the development of the restructuring plan as well. Borrowers follow their own agenda, same as lenders, making it sometimes difficult to compromise on this matter.
What are the obstacles to restructuring?
As we already said, the law on restructuring outlines a clear and coherent mechanism for amicable settlement of disputes. This mechanism alone is not enough to get the process going. Moreover, other legislation aspects related to the restructuring in either way need to be enhanced as well.
First of all, a low protection of lenders’ rights is a doorstopper that lets all the high lending risks fly into the corporate sector.
Secondly, the inefficient Ukrainian court system hinders the restructuring. It is extremely difficult for banks to retrieve funds through courts. Especially if large amounts and influential lenders are involved. It is clear, this scenario does not encourage the business to solve problems through courts and allows companies to abuse their rights.
Finally, one more obstacle is the lack of clear mechanisms of tax preferences for those involved in a financial restructuring.
Until all these complications are resolved, one can hardly expect solid results from a financial restructuring. Statistics are the proof. At this point, the total of unrepaid loans in the corporate sector exceeds US$500 billion. Of that amount, restructured loans account only for ₴7.6 billion, which is not enough. One way or another, this process has to be facilitated. Otherwise, it will have no sense.
This post is also available in: Russian