24 Nov 2016

Cultural change beyond legal reform needed to help return companies From Red to Black

Sydney, 24 November 2016: Australian companies are slowly embracing a turnaround culture, but board and management attitudes still need to change for more successful restructurings to occur, according to a Clayton Utz report From Red to Black on critical developments in the Australian restructuring market in FY16 and predictions for the coming year.

Clayton Utz partner Karen O'Flynn, who heads the firm's national Restructuring and Insolvency practice, said while the last 12 months had seen an upswing in the engagement of turnaround specialists, many boards and management teams in Australia were still reluctant to embrace the benefits of early intervention when a company was in trouble.

"An example of a board that successfully rose to this challenge was Atlas Iron. The Atlas board engaged restructuring specialists who together were able to draw on their decades of experience to implement a successful turnaround plan that ultimately delivered a better outcome for both creditors and shareholders than had the board sat back and let the company be placed into administration or fallen into liquidation," said Karen.

Karen said the Federal government's long-awaited proposal to introduce a "safe harbour" defence for directors as part of its National Innovation and Science Agenda may go some way to encouraging boards to engage advisory teams early on to devise and implement turnaround plans. However legislative reform alone was not the answer to create a true business rescue culture in Australia.

"While we welcome the Federal government's promotion of a "safe harbour" defence for directors to strike a better balance between encouraging entrepreneurship and protecting creditors, legislative reform merely provides a process for change. We also need to change cultural attitudes to restructuring so boards see it not as a sign of failure but as a valuable tool in successfully turning around the company when it falls into distress," said Karen.

Clayton Utz partner and a co-author of From Red to Black, Cameron Belyea, said current market conditions pointed to more corporate restructurings over the next 12 months.

"There are a number of factors at play, including a looming debt wall for FY17, bubbles within segments of the property and construction markets, and higher banking capital to cover risk. Triggers such as industrial action, litigation, market disruption, debt overburdens, or just bad management can all tip a company into distress territory.

"A good board will have systems in place that pick up the early warning signals and have a turnaround plan ready that responds to the distressed event triggers.  As we saw with Atlas Iron, the future bode well for boards willing to engage advisory teams early to devise and implement turnaround plans."

Among other findings, From Red to Black notes that while the secondary debt market is now firmly placed as a viable enforcement option in distressed situations, conditions continue to hold back market growth. Commenting on this trend, Clayton Utz partner and report co-author Nick Poole said: "While there has been limited activity in the public space, recent high-profile matters including Bis Industries and Arrium have resulted in renewed interest from investors. Private sector trades continue to advance given traditional lenders' increased lending hurdles, the continued slowdown in the mining and mining services sectors, and traditional lenders' preference to avoid the costs, risks and potential reputational damage associated with formal enforcement action." 

From Red to Black contains market insights and analysis relevant to anyone involved in the turnaround process: including lenders, funders, debt traders, insolvency practitioners and boards of financially challenged companies. 

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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.