debtwire Benelux debt
finance forum 2016

Blue Capital Management Partner Didier Simons acted as panellist at the Debtwire Benelux Debt Finance Forum 2016 in a panel with as topics: “How changes to the Dutch insolvency law will change the domestic restructuring landscape; factors driving distressed opportunities and likely sources of supply.”. In addition the Royal Imtech bankruptcy was discussed?.

DEBTWIRE BENELUX DEBT FINANCE FORUM 2016 (16 June 2016, Hotel Okura, Amsterdam)
Panel: How will reforms to Dutch restructuring law impact foreign investors?

Blue Capital Management Partner Didier Simons acted as panellist at the Debtwire Benelux Debt Finance Forum 2016 in a panel with as topics: “How changes to the Dutch insolvency law will change the domestic restructuring landscape; factors driving distressed opportunities and likely sources of supply.”

The Panel was led by Robert Schach, ?Managing Editor at Debtwire and consisted besides Didier of Gijs de Reuver?, Managing Director at Houlihan Lokey and Ilse van Gasteren, Counsel at Clifford Chance.

Reforms to Dutch Restructuring Law

The Dutch government is working on updating the current restructuring and insolvency legislation and there are three proposals on the table, all driven by the principle of “continuity of companies”.  The two most important proposals are:

1) Pre-pack (Wet continui?teit ondernemingen I (WCO I)). This provides a legal framework for the appointment of a so-called silent administrator (stille bewindvoerder) prior to a formal opening of bankruptcy. The silent administrator investigates the possibility of the sale of (a part of) the business and prepares an agreement and plan. Upon bankruptcy of the business, the silent administrator will be appointed as bankruptcy trustee and an agreement with the buyer can be executed immediately.

2) Forced composition (Wet continui?teit ondernemingen II (WCO II)). The second piece of new intended legislation shall introduce a forced judicial composition outside a bankruptcy situation thus without formal insolvency proceedings. By doing so, creditors (including secured creditors) and shareholders may be forced to accept a certain composition (akkoord) offered outside an official bankruptcy situation. Thus, the whole procedure can be accomplished without having to initiate any formal insolvency proceedings, only requiring court approval for the composition in the last stage of the procedure, aiming to create a more effective and quick tool for restructurings.

It is clear that for the new proposed legislation in the Netherlands, major inspiration has been drawn from restructuring tools of other jurisdictions, such as the UK pre-pack and US Chapter 11 combined with the UK scheme of arrangement, therefore aligning Dutch insolvency law with other European countries.

The panel commented amongst others that the new proposed legislation is promising and will bring more flexibility and improvement, which is urgently needed. The balance should be between making it easier for companies to survive distressed situations and at the same time helping creditors to secure their claim without being faced with creditors playing the “hold out game” by blocking any composition based on their veto. New legislation requires sufficient transparency, rules for the manner in which a business or its assets are valued and an independent and effective administrator. Furthermore, the position of employees in relation to bankruptcy is important, and new legislation must be aligned to avoid abuse of new insolvency and employment laws. New legislation should make it less interesting for Dutch companies to take their business elsewhere and to make use of, e.g., the UK scheme of arrangement to restructure financial indebtedness. Time will tell if the right balance shall be found in the Netherlands.

Hopefully, the abovementioned proposals will come into force later in 2016 or soon thereafter.

Royal Imtech NV

Thereafter the panel discussed Royal Imtech NV, one of the most recent high profile Dutch restructuring cases. Following bankruptcy of the holding company, some divisions were sold by the secured creditors to Private Equity Funds via a warehousing route (a structure where shares in the various operating companies are warehoused in preparation of a sale on an individual basis to interested parties).

In the Royal Imtech NV case execution of the warehousing route (with support of the liquidators) occurred post-bankruptcy of Imtech Group BV (the holding company). Following bankruptcy, the secured creditors enforced their share pledges in some operating companies, amongst others Imtech Nordics, Imtech Traffic & Infra and Imtech Marine. These shares were sold to Waterval BV, a warehousing company controlled by the secured creditors. This structure allowed the banks to have control over any sale of the operating companies to third parties.

The panel discussed the merits of being able to enforce a share pledge in the situation where the company is still acting on a going concern basis. Didier Simons stated that at RBS, where he has been active in numerous financial restructurings across Europe, occasionally share pledges were enforced in the event of a continuing payment default but preferably outside of a bankruptcy situation. In an ideal situation, banks would enforce share pledges having a buyer lined up willing to pay a reasonable purchase price (and hence maximize recovery for the banks) and in that respect it is preferable to have the target company acting on a going concern basis over the situation where the company is in bankruptcy.

Please note that with respect to Royal Imtech NV, the operating companies themselves  – which were sold by Waterval BV - were not declared bankrupt. However one can argue that the bankruptcy of the holding company and Imtech Capital BV (the finance company of Imtech Group) was not helpful for a sales process, noting that the events caused significant unrest across the market.

The challenges for both the secured creditors as sellers as well as the acquirers (Private Equity Funds) going through this warehousing structure were significant. 

The secured creditors have used the warehousing structure to run a short but controlled sales process. Besides cash recovery from the proceeds of the disposal of the shares in some operating companies, it is important to note that the secured creditors had a large guarantee exposure linked to the projects business of these companies. Insolvency of the operating companies would have led to likely claims under the bank guarantees and as a consequence the secured creditors had a strong financial interest to sell the subsidiaries on a going concern basis, enabling them to finish their projects and have the guarantees relinquished. Last but not least the sale of the operating companies on a going concern basis saved the jobs of thousands of employees.

The acquirers of the shares in the 3 largest operating companies: Imtech Nordics, Imtech Traffic & Infra and Imtech Marine were all financial sponsors. Notwithstanding the warehouse structure, time to come to a sale was very limited. The risk of a snowball effect following the bankruptcy of various Imtech entities was real. The markets lost their confidence: customers were unwilling to settle outstanding invoices and suppliers actually stopped deliveries on projects. This put a serious strain on the cash flow situation of these companies. The divisional management teams of the operating companies faced a situation which required immediate crisis management, thereby losing the support from their holding in which much of the functional expertise was centralized.

As a consequence the secured creditors and the acquirers had to act swiftly. On the basis of very limited due diligence and without meaningful representations and warranties the sale transactions were executed.

Post acquisition, and often within days, important decisions were to be made with respect to restoring market confidence and providing emergency funding to allow the companies to honor their financial commitments.

In a second step, for one of the operating companies form the first day, dedicated actions had to be taken by the management teams and the shareholder supported by their business recovery advisor to ensure going concern, amongst others:

1) A reliable 13-weeks cash flow forecasting tool had to be implemented, in order to assess future cash requirements and to identify potential cash generating actions

2) Working capital management whereby a delicate balance had to be found between creditors and debtors management (stretching of suppliers vs. collections of accounts receivable)

3) Reinforcement of divisional management in order to fill the voids left by the bankruptcy of Royal Imtech NV acting as a shared service center providing some key holding functions

4) Negotiate with the liquidator to maintain temporary continuity with respect to some crucial holding activities (IT) followed by a set-up of a standalone ICT infrastructure

5) Arrange access to bank guarantee facilities as well as temporary insurance cover, both crucial in a project business as well as continuation of the cash pooling services.

6) In consultation with the workers council and unions, improve staff morale and ensure key staff retention combined with rightsizing and optimization measures of the organizational structure

7) Reinforce corporate governance by introducing an updated authorization matrix and introducing stricter new project tender board procedures to mitigate business risks better going forward

Didier Simons concluded by expressing his appreciation for the support of this operating company received from the local banks, most of which lost money as a result of the Royal Imtech NV bankruptcy. These banks were able to address the situation as a “new client opportunity” offering interesting opportunities and thus helping this operating company back on its feet.

Didier Simons