As at November 2020, many borrowers in Romania are still enjoying the moratorium on debt and interest payments introduced by the Government to help combat the effects of the COVID-19 pandemic. But the moratorium period will lapse by December 31, 2020 and, if it is not extended, borrowers will need to resume debt service to avoid default.
Restructuring teams inside the banks are steeling themselves for a potentially intense few months, and are likely to encounter the following challenges.
Creditors recognize that insolvency in Romania is to be avoided, if possible. This is not because the “rule of law” is lacking in formal proceedings, but rather because: (a) a high percentage of insolvencies end in bankruptcy, and formal “reorganization plans” (proposed by key creditors to enable the company to trade out of insolvency) often fail; (b) legislation includes an open-ended “observation period,” enabling creditors to attack one another’s claims in court before they are admitted onto the formal debt list (this mechanism is now generally discredited and certain countries are taking steps to replace it); (c) there is no equivalent in Romania of the “pre-pack,” which enables a business to be sold quickly as a going concern; and (d) the length and costs of an insolvency can significantly reduce distributions to creditors.
In addition, insolvency inevitably damages goodwill and reduces asset value, while restructuring promotes an orderly sale of assets. Finally, on insolvency, claims in foreign currency automatically convert to local currency (RON), and interest ceases to accrue.
It is common to find corporate groups with multiple bilateral credit facilities provided to various group members. Creditors can include banks, finance lease providers, multilateral financial institutions (such as EBRD and IFC), and local non-bank financial institutions.
In these cases, creditors have different borrowers, guarantees, and security, and some are all too aware that they are not as well collateralized as others. A corporate group in distress often does not know how to reconcile these conflicting interests. Meanwhile, creditors are angling to cash in collateral and escape, with potentially disastrous knock-on effects.
A distressed group may therefore turn to financial specialists (sometimes with encouragement from banks). Directors in Romania are obliged to apply to the court for creditor protection if the company cannot pay its debts, but are (rightly) slow to do so while they have support of key creditors and a restructuring is being explored.
Approaches to Restructuring
Many of Romania’s leading lenders and leasing companies are subsidiaries of banking groups with operations throughout Central Europe. These groups maintain centralized restructuring teams which, in significant cases, support their local work-out colleagues in forming an institutional view of how best to proceed.
So there is a broad consensus among Romanian creditors of the techniques employed in restructurings, and the principles applied in multi-creditor workouts. Although seldom invoked (and not part of Romania’s legislation), banks acknowledge the INSOL II Principles for distressed situations. These encourage formalizing a “standstill period” during which creditors agree not to take enforcement action while financial information is gathered from the group and shared among all creditors, enabling a restructuring plan to be developed.
Techniques and Documentation
Banks in Romania will consider “standstill” arrangements for multi-creditor work-outs. These will be governed by foreign law only if foreign lenders are in a position to demand it (e.g., multilaterals typically insist on English law).
Creditors may formally appoint a coordinating committee of one or more core lenders to take the initiative (and certain decisions) in the restructuring. Appointment documents typically follow the Loan Market Association format, but local law is preferred.
As in other countries, creditors are slow to give up bilateral rights to call defaults and take their own remedies, but will consider deferring certain decisions (e.g., acceleration or enforcement of security) to lenders holding a majority of the total debt, if this protects the integrity of day-to-day trading and creditors’ interests.
An agreed restructuring proposal can be documented in an “override” agreement which sits above all bilateral facilities, and sets out common terms. Local creditors may insist on supplements to their bilateral documents mirroring the agreed terms, especially if the “override” agreement is governed by foreign law.
Creditors will of course seek new guarantees and security, mindful that certain transactions may be set aside if the company is declared insolvent during applicable “hardening periods” (six months for new security and two years for transactions at undervalue).
By Simon Dayes, Partner, Dentons