Vol 2 (2005) - Issue 2

Article preview

Challenging and Exciting Times Ahead for the Restructuring Industry

The past decade has seen the corporate restructuring market around the world grow far more complex. Broad macroeconomic trends, globalization, regulatory and legislative changes, as well as increasing numbers of stakeholders - and their increasing sophistication - have combined to create a tough and sometimes confrontational market containing what are often very different agendas. Yet these same forces are also creating a market more focused on consensus-based restructurings that save businesses and preserve value.

Being able to balance these different agendas to obtain positive outcomes is setting a high standard for restructuring professionals everywhere. Over the next decade those who thrive will be the ones who are most adaptable, flexible and willing to challenge the status quo. Those who do thrive will find it the most exciting period of their professional lives.

A mixed forecast for the world economy

In macroeconomic terms, with the United States, China and India looking set to drive growth in the world economy, the European Union and companies based within it face particular challenges. The strong cyclical recovery for the world economy as a whole over the past two years has had less of a positive effect in Europe than elsewhere. According to the ITEM Club, the economic think tank sponsored by Ernst & Young, world trade in manufactured goods increased by about 10% in 2004. Many European suppliers missed out on this growth, however, unable to compete with low-cost manufacturing centres elsewhere. At the same time they suffered from the increased costs of commodities that have been driven by Asian demand.

Although taken as a single entity the EU’s economy is now the world’s largest, growth and investment are predicted to be significantly lower than in North America and Asia over the next four years. The current strength of the Euro and Sterling, as well as the long-term costs of integrating 10 new Eastern European member countries and their 70 million citizens, will help shift much of the world’s investment capital to Asia and its promise of higher returns.

Lastly, despite today being a single market, the EU’s history means that there are many more companies operating in each industry than are needed. Over the next decade pressures on the European economy guarantee that some will fail. Many others will need to consolidate to create the efficiencies and high-growth opportunities needed to attract global investment. When there are failures, a legal structure with the flexibility to preserve value for stakeholders is essential.

Harmonization not on the horizon

Although many countries around the world are taking positive steps by adopting ‘rehabilitative’ corporate restructuring regimes, the environment still differs widely from one country to the next. The European Council Regulation on Insolvency Proceedings (ECRIP) has been introduced to act as an umbrella across EU member states, but harmonization of law across Europe, let alone globally, is unlikely to occur during the working lifetimes of any current restructuring professionals, if ever.

Restructurings are always performed against the backdrop of directors’ responsibilities and what would happen in a formal insolvency process. Europe finds itself occupying a middle ground between countries with unproven formal processes on one side, and the UK and the United States on the other. UK administration is well tested, and its flexibility increasingly understood; US Chapter 11 bankruptcy protection is now so common that some companies seem to view entering it as a normal part of doing business.

Individual European countries, including Spain, France and Italy, have reformed their insolvency legislation in recent years. But many still have harsh penalties for directors who don’t file for insolvency early enough when they see their company is in trouble. This can work against the idea of preserving value and avoiding liquidation by not giving a company’s management time to explore all of its options.

Restructuring practioners, recognizing that harmonization of restructuring regimes is not coming any time soon, are becoming very resourceful at using the best of different aspects of restructuring processes in different jurisdictions.