Restructuring Trusts – A More Efficient Way to Recover Debt?

→ Wolfgang Höller

→ Miriam Simsa

In times of financial difficult and a challenging market environment, establishing a restructuring trust provides an insolvency-proof structure that meets the demand of the financing banks for an immediate change of control in the company while ensuring a professional M&A process with an upside for all stakeholders.

The dilemma

When a debtor com­pa­ny expe­ri­ences a severe finan­cial cri­sis, the financ­ing banks usu­al­ly face a dilem­ma. They can either extend exist­ing loans and pro­vide addi­tion­al financ­ing in order to give the com­pa­ny time to imple­ment restruc­tur­ing mea­sures and over­come the cri­sis, or they can “pull the plug” and try to recov­er as much as pos­si­ble by enforc­ing exist­ing secu­ri­ty rights.

Financ­ing banks usu­al­ly con­sid­er enforce­ment of secu­ri­ties as a last resort. A forced sale, which would also have to com­ply with the statu­to­ry rules on secu­ri­ty enforce­ment, usu­al­ly gen­er­ates sub­stan­tial­ly low­er con­sid­er­a­tion than an organ­ised trans­ac­tion process. Even less favourable is the sit­u­a­tion when the financ­ing banks have secu­ri­ty rights only over the assets of the debtor com­pa­ny but not over the shares in the com­pa­ny itself, in which case enforce­ment equals a liq­ui­da­tion of the com­pa­ny.

But financ­ing banks are often reluc­tant to con­tin­ue financ­ing a dis­tressed com­pa­ny. This holds true espe­cial­ly when the share­hold­er is not able or will­ing to pro­vide addi­tion­al financ­ing. In such cas­es, financ­ing banks fre­quent­ly request a change of con­trol in the com­pa­ny as a con­di­tion for fur­ther financ­ing. Such requests strain the already tense rela­tion­ship between the financ­ing banks and the share­hold­er.

The com­mon way to achieve such a change of con­trol is either a fire-sale, which nor­mal­ly forces the share­hold­er to accept com­pa­ra­bly low con­sid­er­a­tion and the financ­ing banks to agree to a hair­cut, or the grant­i­ng of a secu­ri­ty over the shares of the com­pa­ny in favour of the financ­ing banks com­bined with a pow­er of attor­ney to sell the shares out­side of a statu­to­ry enforce­ment pro­ce­dure. Both alter­na­tives are usu­al­ly per­ceived by the share­hold­er as a de fac­to expro­pri­a­tion and are met with strong resis­tance.

Solution: a restructuring trust

One way to solve this con­flict of inter­est is to estab­lish a restruc­tur­ing trust over the shares in the com­pa­ny. This struc­ture is well estab­lished in Ger­many, suc­cess­ful­ly used, for exam­ple, in the restruc­tur­ing process of Mer­ck­le, and has recent­ly been used by Schoen­herr in sev­er­al restruc­tur­ing cas­es in Aus­tria.

To set up a restruc­tur­ing trust, the financ­ing banks and the share­hold­er appoint a joint escrow agent to hold and then sell the shares in the com­pa­ny on trust for the financ­ing banks and the share­hold­er. Depend­ing on the finan­cial sit­u­a­tion of the com­pa­ny and the mar­ket envi­ron­ment, the escrow agent is man­dat­ed to sell the shares in the com­pa­ny either with or with­out car­ry­ing out a pri­or restruc­tur­ing process. Thus, the escrow agent typ­i­cal­ly is a spe­cial pur­pose vehi­cle set up by a restruc­tur­ing expert or finan­cial advi­sor.

In the restruc­tur­ing trust agree­ment, the financ­ing banks and the share­hold­er agree on gen­er­al guide­lines for the escrow agent, such as pos­si­ble trans­ac­tion struc­tures, the min­i­mum pur­chase price and rep­re­sen­ta­tions and war­ranties. Apart from these guide­lines, the escrow agent is not bound by instruc­tions from the financ­ing banks or the share­hold­er (weisungs­frei). The for­mer share­hold­er can thus rely on the escrow agent to adhere to the guide­lines set out in the restruc­tur­ing trust agree­ment, while the financ­ing banks have the com­fort that the com­pa­ny is no longer con­trolled by the for­mer share­hold­er. In addi­tion, financ­ing banks usu­al­ly insist on the escrow agent not being bound by instruc­tions from the trustors in order to min­i­mize the risk of qual­i­fy­ing as a de fac­to share­hold­er under the Aus­tri­an Cap­i­tal Sub­sti­tu­tion Act (EKEG).

The guide­lines for the sales process should be draft­ed in line with the gen­er­al statu­to­ry prin­ci­ples for enforce­ment of secu­ri­ties so to avoid being chal­lenged for cir­cum­ven­tion of manda­to­ry law.

A key advantage

One cru­cial advan­tage of the restruc­tur­ing trust is that, if done cor­rect­ly, it will remain bind­ing even if one trustor becomes insol­vent. Oth­er than escrow arrange­ments with just one trustor, which ter­mi­nate auto­mat­i­cal­ly if the trustor becomes insol­vent, escrow arrange­ments with two or more trustors (mehr­seit­ige Treu­hand) sur­vive if cer­tain con­di­tions are met, even if a trustor becomes insol­vent. If the restruc­tur­ing agree­ment under­ly­ing the restruc­tur­ing trust agree­ment can­not be ter­mi­nat­ed or oth­er­wise set aside by the receiv­er of an insol­vent trustor, the receiv­er will also remain bound by the restruc­tur­ing trust agree­ment. The escrow agent can thus con­tin­ue the trans­ac­tion process and dis­trib­ute the gen­er­at­ed pro­ceeds accord­ing to the pro­vi­sions of the restruc­tur­ing trust agree­ment, even if the share­hold­er becomes insol­vent in the course of the process.

The guidelines for the sales process should be drafted in line with the general statutory principles for enforcement of securities so to avoid being challenged for circumvention of mandatory law.