Florian Philipp Cvak and Martin Abram discuss the restructuring procedures available in Austria, and highlight key features of the country’s insolvency legislation that an investor should be made aware of.
1. What trends, in terms of activity levels, affected industries or investor focus, have you seen in the restructuring and insolvency market in your jurisdiction over the last 12 months?
The appetite of national and international investors for Austrian distressed debt and businesses in financial distress has continued from 2013 and 2014. Distressed debt was often auctioned off by Austrian banks in portfolios of secured and unsecured consumer and corporate debt. Due to the size of these portfolios, this prompted several of the big international debt funds to the scene. Furthermore, on the equity side, most assets that came to the market in the last 12 months have been troubled for a while. Some of them (like the DIY chain Baumax or the shoe retailer Leder & Schuh) were auctioned off in the course of a bank driven out-of-court restructuring. Other distressed situations were solved by selling into the up-picking M&A market before the banks got involved.
Troubled industries include the retail sector (with the most prominent recent examples of publicly known restructurings mentioned above), the energy sector (where Austrian suppliers particularly suffer because of more restrictive incentive schemes for renewable energy and increased competition from China) and the financial sector.
2. What is the market view on prospects for the coming year?
Current projections are that the overall number of restructurings in 2016 will more or less stay the same. These projections are based on the low commodity costs and the continuing low interest rates. There are, however, serval uncertainties that call for caution: first and foremost, the moderate growth projections, the economic downturn in China, the interest policy of the ECB, the relative strength of the Euro and the recent stock market turmoil. Against this background, predictions are very difficult.
3. What are the key tools available in your jurisdiction to achieve a corporate restructuring – are they primarily formal, court-driven processes, or are informal out-of-court restructurings possible? Do you feel that the tools you have available are effective in terms of providing speedy, fair and predictable outcomes?
Traditionally, Austrian restructuring practice has focused on in-court restructurings. More recently, however, the majority of the major restructuring cases have been bank driven out-of-court restructurings governed by private agreement.
The (traditional) in-court restructuring is opened upon application of a debtor which is insolvent or at least threatened to become illiquid. A debtor is insolvent if he is either illiquid (that is, when the debtor cannot settle liabilities due – known but undue liabilities are not considered – and this is not just temporary) or over-indebted (that is if the assets – based on their liquidation value – are not sufficient to satisfy all of the creditors, and a business forecast shows that the debtor is likely to become illiquid within a reasonably predictable period; usually at least the current and the following financial year are considered for such a test). Creditors cannot apply for in-court restructurings. They can only apply for the opening of insolvency proceedings (in which case they have to prove that the debtor is insolvent and that they have a valid claim against the debtor). The debtor can also apply for a restructuring after a (creditor-initiated) insolvency proceeding has been opened, as long as the proceeding is not closed.
The debtor’s application for in-court restructuring proceedings must include a restructuring plan (Sanierungsplan) which must provide (i) that the rights of secured creditors (that is, rights of creditors holding a property interest in an asset in the estate to request return of the asset (Aussonderungsgläuber) and the rights of creditors (Absonderungsgläubiger) holding a security interest in an asset to the proceeds of enforcement into that asset) will not be affected, (ii) full payment of all estate claims (Massseforderungen) (these are, ranked in order of practical importance, claims for labour, services and goods furnished to the estate post-filing, the costs of the proceedings (including the remuneration and reimbursement awarded to the creditor's committee and the Special Creditors' Rights Protection Associations), any monies advanced by a third party to cover the initial costs of the proceedings (to avoid a dismissal of the filing in limine), and the fees of the administrator), as well as (iii) an offer to pay at least 20 per cent (or 30 per cent if self-administration is requested) of the claims filed by other (unsecured) creditors that were not contested by the administrator (insolvency creditors) within two years of the approval of the restructuring plan. The advantage of restructuring proceedings with self-administration is that the debtor retains control over the estate. Only for matters outside the ordinary course of business is the restructuring administrator’s approval required. However, the restructuring administrator may also veto matters which fall within the ordinary course of business.
The restructuring plan must be approved by simple majority (by headcount) of the insolvency creditors present at the restructuring plan hearing (Sanierungsplantagsatzung) who must represent at least 50 per cent of the outstanding unsecured debt represented at the hearing and be confirmed by decision of the court. Insolvency creditors who have acquired their claims after the opening of the proceedings have no voting right (unless they acquired the claim based on an agreement entered into prior to the opening of the proceedings). In principle, the restructuring plan must treat all insolvency creditors equal (Paritätsprinzip) unless (where a group of insolvency creditors is concerned) the unequal treatment is approved by simple majority (by headcount) of the affected insolvency creditors present at the restructuring plan hearing who must represent at least 75 per cent of the affected insolvency claims represented at the hearing, or (where an individual creditor is concerned) the individual creditor has granted his explicit consent. The court decision confirming the restructuring plan releases the debtor from his obligation to pay insolvency creditors in excess of the agreed quota. If the debtor defaults and fails to come current during the requisite cure period the released claim is reinstated and becomes immediately due.
The restructuring plan may provide that a trustee is appointed to (i) supervise the fulfilment of the restructuring plan by the debtor (in which case supervision is similar to that during self-administration proceedings), (ii) take over the estate (übernehmen) with the mandate to fulfil the restructuring plan (Sanierungstreuhand), or (iii) liquidate the estate (Liquidationstreuhand). If none of the above options is provided for in the restructuring plan, the debtor will (again) be vested with all rights in and to the estate.
Tools available in in-court restructuring proceedings differ. Some are only available to an insolvency administrator (that is in a restructuring without self-administration), others are also available to the debtor (that is in a restructuring with self-administration (under supervision of the restructuring administrator)). In particular:
Out-of-court restructurings can only be implemented pre-insolvency or within the sixty -day grace period (that is, management has an obligation to file for the opening of insolvency proceedings without undue delay, but in any event within sixty days of insolvency; during the sixty days grace period, management may make reasonable efforts to restructure the debtor or prepare an application for a restructuring proceeding). The obvious advantage of an out-of-court restructuring is that the proceedings are not registered in the insolvency data base (as would be the case with in-court restructuring proceedings), and thus it is less likely to become public. The other advantage is that out-of-court restructurings tend to offer more flexibility and can be implemented quicker as long as all relevant parties contribute. The downside is that out-of-court restructurings only capture the contracting parties (and not all insolvency creditors) and in certain situations there may be a risk of voidance where an agreement is entered into at a time where the debtor is already insolvent and the effect thereof is to potentially reduce the estate.
The outcome of Austrian restructurings – be it an in-court or an out-of-court restructuring – is fairly predictable if a conclusive restructuring case is prepared, sufficiently organised and pre-discussed with all important stakeholders (including the insolvency court). In a distressed situation, the major challenge is to secure sufficient time to develop the restructuring concept prior to approaching main relevant creditors.
4. In terms of intercreditor dynamics, where does the balance of power lie as between shareholders and creditors, and as between senior lenders and junior/mezzanine lenders? In particular, how do valuation disputes between different stakeholders tend to play out?
The balance of power as between shareholders and creditors has slightly tipped towards secured creditors, but shareholders still have a much stronger say as in most other jurisdictions. This is mainly because there is not much that creditors can do to force shareholders to financially support a restructuring because there is no shareholder cram down regime. In practice, creditors are left with two options: to accept the debtor’s restructuring plan; or to reject it, which inevitably results in liquidation and in most cases will leave them with even less than under the (creditor unsupported) restructuring plan.
As between lenders, the balance of power is with the senior secured lenders, at least where a restructuring requires them to contribute for the restructuring to work (as highlighted above, an in-court restructuring plan must provide that the rights of secured creditors will not be affected which effectively gives secured creditors a veto). In addition, most of the time there will be an intercreditor agreement among all major lenders providing for priority of payment for senior lenders over junior and institutional lenders (that is, shareholder debt) and decision making powers for the senior lenders.
5. Have there been any changes in the capital structures of companies based in your jurisdiction over recent years caused by the retreat of banks from loan origination? In particular, have you found that capital structures now increasingly comprise debt governed by different laws (such as New York law governed high yield bonds)? If so, how do you expect these changes to impact on restructurings in the future?
As a result of the recent NPL transactions, many corporate borrowers ever so often are faced with an aggressive fund as the new lender instead of their trusted bank. That has caused no-assignment clauses to become a major concern for borrowers. For new debt, borrowers have looked to a variety of alternative sources of funding to replace bank debt, most notably private placements, bond issues and sometimes direct lending funds. In particular, the bond market has been a growth market which is mainly due to the attractive interest rate environment and the relatively light covenant package.
Capital structures now often include bank debt typically governed by Austrian law (where (only) Austrian banks are involved) and English law (where non-Austrian banks are involved), and sometimes high yield debt typically governed by Austrian law (where it is a domestic offering) or New York law (where it is an international offering).
6. Is there significant activity on the part of distressed debt funds in your jurisdiction? How successful have they been in entering the market, and how much has market practice (or law) evolved in response? If funds have not successfully entered the market, can you identify reasons why?
So far, distressed debt funds have only played a role in larger restructurings. On the one hand their arrival has helped to professionalise restructurings as creditors with no appetite to be involved were able to sell their position to a fund which is engaged and familiar with the process. On the other hand, it has made things considerably more complex which is a result of the sophistication of those funds and the fact that their objectives are often not aligned with those of other creditors – these funds are very focused on maximising returns and are prepared to hold out for longer than banks and trade creditors who often have an interest to quickly move on with a restructured creditor.
7. Are there any unusual features of your insolvency law that an external investor should be aware of (such as equitable subordination, or substantive consolidation)?
There are a couple of features of Austrian insolvency and creditor’s protection law that an investor should be aware of when dealing with an Austrian debtor in distress:
8. Are there any proposals for reform of the legal framework that governs insolvency and restructurings in your jurisdiction?
The UNCITRAL Model Law on Cross-Border Insolvency is currently under consideration in Austria. Other than that, there are currently no proposals for reform.
9. If it was up to you, what changes would you make?
One of the major deficiencies of Austrian restructuring law, which has already caused major in-court restructurings (e.g. A-Tec Industries) to fail, is the lack of a creditor initiated shareholder cram down. Another feature, similarly important, would be to group creditors in classes of creditors with similar interests and to provide for separate voting of each class on the restructuring plan. This would offer a whole array of structuring possibilities for the restructuring plan, as it allows to account for the different objectives of each class (e.g. one class may be interested to receive a higher quota in the long run or a combination of debt and equity, while another may be interested to get a lower quota fast). In addition, it should be discussed if the insolvency court should not also have the power to cram down classes of creditors subject to those creditors receiving no less than they would receive in a liquidation of the debtor and receiving everything left there is (similar to the Chapter 11’s absolute priority rule and as already discussed by the European Commission in preparation of the EuInSVO reform).
Another area prone for reform concerns the voidance rules. The complexity of the current legal framework and the increased aggressiveness of insolvency administrators challenging pre-insolvency transactions under those rules have caused considerable uncertainty among various market participants. One issue is possible management and advisor liability where a restructuring attempt fails later on. Another issue is that dealing with businesses in distress becomes more and more of a challenge as a practical matter, particularly for SMEs who often do not have the time and resources to assess the financial state of their business partners and the associated voidance risks. While practitioners have formed a fairly reliable view on most of the associated questions, it would help if the legislator revisited the voidance rules in an effort to make them more comprehensible for the average user in day-to-day business with troubled companies.