Depending on the specific scenario, a formal restructuring may benefit sureties or it could increase the risk of restructuring terms being imposed on them.
Where these companies are bonded, sureties should plan to ensure that they achieve the best result from a restructuring or insolvency. Assessing areas of risk will allow sureties to understand the strength of their position in any restructuring negotiations.
Where bonds have not been called, sureties will be a ‘contingent creditor’, albeit commonly with entitlement to cash cover and with typically uncommitted facilities. As such, sureties often have a strong hand in a restructuring negotiation. Other creditors with non-contingent debt claims are susceptible to companies seeking to have that debt written off or converted into equity. We have been able to resist this approach being applied to surety exposure on the basis that this cannot be compromised while contingent.
Equally, it is possible that other stakeholders may want sureties to participate in any balance sheet restructuring on the basis that they will be a beneficiary of the continued trading of the restructured business, particularly by avoiding bond calls on an insolvency.
We recognise that during a restructuring every additional day is often a good day in achieving the run-off of your exposure and we understand the drivers that sureties have in a restructuring context. This helps us work with you to formulate and deliver successful strategies and achieve your desired objectives. In our experience, the key issues for sureties to consider if a restructuring is being proposed are:
- Strength of indemnity net: where a business operates as a group, both sureties and other financial stakeholders may have recourse via the deed of indemnity and/ or guarantees to other group entities. Where there are differences in the extent of these, this can have a significant impact on the balance of power in restructuring negotiations. Understanding the relative strength of different stakeholders will allow you to prepare for negotiations.
- Identifying particular risk exposures: it is important to identify which bonds are most likely to be called and the potential impact for you of a call. It can also be helpful to understand the impact of a call on the company and on other stakeholders and in turn the strategies available to mitigate risk.
- Security: are other financial stakeholders taking security for the provision of new money or for amending the terms of old money? If your counter indemnity includes a negative pledge this would mean your consent is required and equivalent security should be sought. If you do not have a negative pledge, you may have commercial leverage.
- Commitment of facilities: availability of future bonding may be critical to there being a supportable business plan for other financial stakeholders. Given the bespoke nature of bonds in some sectors, it can be challenging to create a true commitment to bond, but we have experience in striking the balance between a level of comfort that is sufficient for other financial stakeholders and auditors and the usual working practices and credit processes of sureties.
- Intercreditor ranking: there is an inherent tension between the old money position of sureties and other creditors. Old money debt will typically remain subordinated and be the last to be repaid, whereas surety old money bonds will often be the first to run off. This can make it challenging to achieve an intercreditor ranking that is satisfactory to lenders putting in new money. We have seen the balance being struck in different ways depending on the relative positions of different stakeholders.
- New restructuring plan: the Government has published a draft bill to introduce new restructuring and insolvency procedures and impose temporary measures to deal with the challenges of coronavirus. While there is scope for the drafting to be refined, we do not expect significant changes to the overall structure and approach taken. This includes a new restructuring plan which may be more flexible than the existing options of CVAs and schemes of arrangement. This flexibility could be used to pressure sureties to accept less favourable terms. We have extensive experience of proposing and challenging both schemes of arrangement and CVAs so can assist sureties in assessing their position if a restructuring plan is proposed.