08 Sep 2015

Turnaround culture and secondary debt market to head From Red to Black, says Clayton Utz

Sydney, 8 September 2015: Australia is gradually embracing a turnaround culture, with "smart" boards being proactive in working with external advisers to chase down costs and strengthen their balance sheets by accessing international markets, according to a new Clayton Utz report on the dynamics of Australia's restructuring market in FY15 and outlook for FY16.

Launched last week, From Red to Black is aimed at everyone involved in the turnaround process, from boards of financially challenged companies and the providers of the money, to insolvency practitioners and debt traders. Clayton Utz Restructuring and Insolvency (R&I) partner and national practice group leader, Karen O'Flynn, said she was a strong advocate for the value delivered to companies whose boards embrace experienced restructuring specialists being brought into situations well before the entities became truly distressed. However, she said a number of Australian boards were still some way off embracing the value of turnaround specialists and early intervention.

"I think attitudes are changing. It takes a very strong board, however, to be able to accept that a company may be in trouble and be pro-active in getting in expert advisers in to help turn the situation around. The Productivity Commission [1] has recommended a 'safe harbour' defence as one option to give directors the ability to explore restructuring options without the risk of liability for insolvent trading. I'm not sure it's a necessary step. It's really about educating directors that early intervention can preserve the company's value," said Karen.

Another key trend in FY15 was the "landmark" development in the Nexus Energy administration of the use of the compulsory debt-for-equity swap provisions in s444GA of the Corporations Act 2001. Karen said the evolution of s444GA had been "slow but steady". "It has only been in recent times that the full potential of the section has been realised. What happened with Nexus Energy (in which Clayton Utz acted for the administrators/deed administrators) really was a significant development. It was the first example of s.444GA being used in a situation where there was real controversy over where value broke in the company. I expect we'll see greater use of the provision in future."

From Red to Black also notes that despite a lull in activity, the outlook for the secondary debt market in FY16 is positive. Clayton Utz R&I partner Nick Poole said debt trading was likely to go through a period of "renewed vigour" in the short term.

"The secondary debt market in Australia really only emerged after the GFC, when high-profile collapses of over-leveraged companies generated opportunities for distressed debt investors. Since then we have seen an increased willingness on the part of the banks to exit positions through the secondary market," said Nick. "In the last 12-18 months though, the market has plateaued, with a noticeable decline in volumes and deal flow. However our discussions with lenders indicate that the plateau is not likely to be a long-term trend. Lenders remain open to debt trading as part of an overall realisation strategy."

Nick said mining services and downstream contract service companies likely present the most opportunities for FY16.  "The continued downward pressure on commodity prices, slowing Chinese economy and the stalling of a number of public and non-public restructures will continue to present opportunities for investors with appetites to fund through the cycle which, from all indications, is expected to be long and deep," said Nick.

From Red to Black is an innovative analysis by Clayton Utz' market-leading R&I team of restructuring market trends. It has practical insights relevant to anyone involved in the turnaround process: including lenders, funders, debt traders, insolvency practitioners and boards of financially challenged companies. To read From Red to Black online click on this link: http://landing.claytonutz.com/from_red_to_black.

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[1] The Australian Government Productivity Commission's Final Report on Business Set-up, Transfer and Closure is due to be released on or before 30 September 2015. Back to article

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.