Do reorganizations really return more value than liquidations?
Margot MacInnis reviews INSOL 2009 Technical Session, ‘Do reorganizations really return more value than liquidations?’
INSOL World, Third Quarter 2009
Chair: John Jefferson, The Hilco Organization, Canada; Panelists: Mark Conzelman, Canadian Imperial Bank of Commerce, Canada; Philip Hertz, Clifford Chance LLP, UK; Gwyn Morgan, Westpac Banking Corporation, Australia.
John Jefferson, session moderator, identified ‘value’ as an important discussion focus, i.e. what do we mean when we talk about value? How do we identify who is winning and who is losing? Jefferson pointed out that value meant different things to different people.
Gwyn Morgan set out a banker’s perspective on value. It is necessary to make a quick assessment whether there has been a temporary breach or a disaster arising from a lending transaction that has gone bad. Is there going concern value or distressed value, or should the lender be focused on liquidation value? Important elements are: identifying the borrower; assessing the situation; understanding the circumstances (bankers sometimes find themselves in a position of not having lent the money to the entity they thought was their borrower). In a disaster, a banker will be looking at liquidation value.
Philip Hertz gave the legal advisors’ viewpoint, commenting that it is vitally important to consider where the stakeholder sits in the structure. Lawyers often find their involvement increasing as the negotiations over value break down and the parties are heading to court. Courts in the US are more apt to construe a company as a “going concern” while English courts are less likely to do so. Mark Conzelman highlighted the difficulties faced by lenders as a result of a more complicated environment. When lending products are fragmented and economic distress has prevented the extraction of value, there is a greater propensity for liquidation solutions.
In the next section of the panel, Mark Conzelman focused on the issues faced by professionals when trying to liquidate and extract value. He identified several key factors, including the credit crunch which restricts the availability of ongoing funding, and the characteristics of the underlying assets – service companies have intangible elements, which are harder to value. Factors other than pure economics are of critical importance. The ability to restructure and reorganize can preserve or create jobs, and governmental pressure in many jurisdictions is influencing the decisions to reorganize vs. liquidate.
There was discussion of several recent cases where government pressure and intervention influenced companies to be reorganized rather than liquidated. Government intervention can drastically affect the ranking and dynamics among the stakeholders. One point that was agreed on by all, so much is changing in these difficult times, and what might have worked in the 1920’s for restructuring may not work in the 21st century.
As to who wins and who loses, there is a common perception that the bankers, professionals, and advisors come out winners. The question was asked – “is it appropriate that the fees are coming out of someone else’s hide?” Gwyn Morgan pointed out that it does make sense to spend some money to find assets but once an entity is in liquidation the focus is to minimize the loss and to focus on giving a good return to creditors and investors. It is important to consider who is driving the process and whether it is a creditor or debtor driven process.
The notion was advanced that society as a whole must benefit and that it is important to balance the corporate
and social values against economic values when determining where the value lies. Pure economics alone cannot drive the decision to restructure vs. liquidate. The government mantra (jobs, jobs, jobs) and the pressure on lenders puts them in the position of having to consider business fundamentals when putting together experienced management teams to lead the company through a reorganization. Sometimes, a business isn’t worth saving, and the key is to know when that point has arrived.