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. Last Updated: 07/27/2016

No White Knight on Debt


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Before the crisis, Russian companies were not prepared for an economic downturn and did not have contingency plans. Restructuring was often seen as a cosmetic measure needed primarily in preparation for an initial public offering or other capital market transactions.

Now, when the bad times have come, borrowers and lenders alike have found themselves in an increasingly difficult position. This is exacerbated by the specific features of the current environment, such as a lack of financing and refinancing sources, legal and process weaknesses, as well as the presence of a large number of parties with vastly different interests in most corporate default cases. Both borrowers and lenders need to learn fast, and the best way to learn is from the mistakes of others.

First, many borrowers are still sitting and waiting, rather than working to address the problems. It is easy to put all your hope on unexpected aid from a white knight — the government, a rich Arab sheikh or someone else. But it is much more difficult to roll up your sleeves and start sorting out your issues. Moreover, I have yet to see a company in which management does not blame external factors — economic environment, government or lenders — for their problems. The reality is often very different.

Second, borrowers are used to thinking that if they have agreements with several lenders, then it is not necessary and even undesirable to tell any one lender the whole story. This approach, which is still used by many Russian companies today, is bound to fail. Lenders will become nervous and refuse to cooperate. The same goes for the idea of providing as little information as possible. This ruins lender trust and prospects for restructuring.

Furthermore, many companies think that debt restructuring is a matter of a couple of letters. These companies are unpleasantly surprised when they find out how complicated — and costly — the process is. Unfortunately, often this is also the only way to save the business.

Regarding management itself, the owners and directors of Russian companies are surprised to hear that management needs strengthening. The most common response is: “But we have grown our business so successfully!” What is forgotten is that crisis management in a downturn requires completely different management qualities than growing the business in a booming economy.

Looking past borrowers’ mistakes, lenders sometimes fail to grasp the full scope of the problem as well. Many banks still wrongly believe that their monitoring processes do not need adjustment. But the monitoring in a crisis needs to become much more substance-based and forward-looking. And when the problem has already happened, the first issues the bankers often face is a psychological one. They mistakenly believe that restructuring is the same as granting a loan. We see that many bankers who issued loans and are now going through the pain of restructuring are shocked at how borrower behavior changed when things turned sour.

It will take time for the lenders and borrowers to get experience. In the meantime, the number of corporate defaults has increased sharply. What will be the end result of this? Voluntary restructuring is the most constructive way to resolve current Russian corporate debt issues in situations where the underlying business is still viable and the debtor is willing to cooperate. There are a number of large multibank restructuring cases that are currently being worked out in the country. Their success will depend on coordinated action by Russian and international lenders, as well as on full cooperation and the willingness to share the pain by the debtor and its owners. Government support of this approach will also be an important factor. In turn, successful voluntary restructuring would make state financial assistance to Russian companies more effective and would increase the government’s chances of recovering its money.

To be sure, implementing a successful restructuring of corporate debt will be an extremely difficult process, but there seems to be little practical alternative.


Alexander Yerofeyev is head of restructuring at KPMG in Russia and the CIS.