INSOL International The ART 2014 Informal Workout Game Uganda | Kampala | 18 October 2014

Prof. dr. Jan Adriaanse

Jan Adriaanse Professor of turnaround management at Leiden Law School

Department of Business Studies TRI Leiden – “Turnaround, Rescue, Insolvency” research team www.tri-leiden.eu

Founder of global training institute Turnaround PowerHouse®

Training programs including turnaround games for turnaround professionals and management teams

www.turnaroundpowerhouse.com

Turnaround Powerhouse®

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We work with turnaround professionals, insolvency lawyers, judges, restructuring bankers and

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Playing a game: let’s rescue

the Uganda Hotel-Casino

Group. Or not…?

Your important task for today…

• Save a 1,500 employees hotel-casino business

• Try to come to a “standstill agreement” and after that an “informal

workout agreement” (and with that the rescue of the company)

• Training goal: “restructuring in the shadow of the law” i.e. rescuing

without using judicial rescue procedures

• Background: informal workouts create less “value destruction” than

formal routes however holdout problem and free-rider behaviour of

stakeholders can occur

• Theoretical construct of this game: Harvard Negotiation theory and

INSOL Statement of Principles for multi-creditor workouts

Groups (see participants’ list for your role)

• O1 = Owners game 1

• A1 = Lenders company A game 1

• B1 = Lender company B game 1

• C1 = Lender company C game 1

• D1 = Lender company D game 1

• T1 = Trader creditors game 1

3 Rounds to come to a solution

• Round 1: 30 minutes to prepare with your

subgroup

– State/define your position

– Initiative for 1st meeting taken by Owners

• Round 2: maximum of 30 minutes to come to a

standstill agreement

• Round 3: 90 minutes to come to a final (written)

workout agreement

Your position in the game…

Be cooperative and act in good

faith yet keep close eye on your

legal and financial position at all

times

What if no agreement…?

No problem… then company will file for judicial reorganization

Potential bottlenecks however…

• Loss of control

• Negative effect on sales and brand (30%-50% turnover drop)

• Gaming authority has legal right to terminate license immediately

• Judge will only grant moratorium in case of reasonable probability that

business can be saved and that rescue is better for all stakeholders as

compared to immediate liquidation

So, there seems to be a good reason for an informal solution

The game in progress…

The game in progress…

The game in progress…

The game in progress…

The game in progress…

Getting to a deal!

INSOL Statement of Principles as

a guiding tool in workout

negotiations

Game analysis

1. Did you come to a solution?

2. What were the hurdles to overcome?

3. What are your lessons learned?

Lessons learned...

• First of all, try to create a standstill and with that stabilize the situation

(“informal moratorium”)

• Agree about “fresh money” and how to deal with it in case the company

collapses anyway (“loss-sharing agreement”)

• Try to generate as many options as possible before deciding on solutions

• Make information transparent for all

• Be aware of fact that some stakeholders in practice have more power than

strictly based on their legal positions (suppliers in this case seem to be

monopolists…)

• Create a negotiation atmosphere based on mutual trust and respect

• Keep a close eye on legal positions: do not try to put stakeholders in a

worse off position as compared to their legal status

• Use Harvard Negotiation principles and INSOL Statement to help guide

negotiations and to create some kind of “informal rules” (framework)

• Make sure the company works on a turnaround plan (“fixing the business”)

• Use a little bit of humor… (indeed, research shows it helps in difficult

situations)

How to come to an informal workout

agreement

Harvard negotiation framework

1. [People] Adopting a problem-solving approach and not allowing personality

differences to side-track this [dealing with frustrations]

2. [Interests] Avoiding taking and defending positions but rather concentrating on

parties’ respective interests [enlightened self-interest]

3. [Options] Before making decisions, generating as many options as possible,

particularly those creating mutual benefit [tailor made solutions]

4. [Criteria] Establishing objective and fair criteria for a resolution, rather than the

judgment of either party [sophisticated turnaround plan – commercially viable future

- root causes addressed]

Failure and success factors of business

rescue processes/informal workouts

Failure factors [Adriaanse, 2005]

Passive attitude management and shareholders

– Started too late; “too little, too late”

– Need for strategic redirection not seen

No speedy and adequate operational restructuring

– Lack of turnaround planning based on vision, strategy, operational and financial planning

– Too much focus on costs instead of sales

– No indications of methodical approaches towards turnaround

Important stakeholders not involved

– Banks badly informed

– Important suppliers/vendors ignored

Insufficient transparency regarding financial situation and proposed reorganization

– MIS is disaster

– Lack of attention with regard to steering on financial key performing indicators

Not enough efforts towards bringing in risk-bearing capital (equity)

– Too much focus on additional debt and/or workout agreements with (unsecured) creditors

– Need for additional equity not seen by management

Success factors (Adriaanse, 2005)

• Active attitude by management and shareholders

• Seeking help from professional advisors

• Adequate operational turnaround measures [fixing the business]

• Transparency with regard to financial situation

• Injection of risk-bearing capital

• Involvement of financiers (major financial and trade creditors)

Confirmed by (among others): R3 research (UK), Slatter & Lovett (London Business School) and Franks/Sussman (UK)

Informal workouts versus formal workouts

Advantages [not limited]

• Confidentiality

• Control

• Flexibility

• Wide range of solutions possible

• Less reliance on legislation or judiciary

• Encourage commitment

• ‘Selffulfilling prophecy’ can be avoided due to relative silence

Disadvantages [not limited]

• Holdout problem / free-rider risk

• No instruments to force stakeholders to participate in solution

Source [amended]

Chatterji & Hedges, Loan workouts and debt for equity swaps. A framework for successful corporate

rescues, Wiley Finance, 2001

Cross-cultural differences and potential conflicts in workouts

Examples

• Settling of priorities

• Local habits and behavior

• Times of the day people work and hours in workweek

• Acceptable pay wage/fees

• Motivation of people

• Ehtical standards practiced in business

• “Rescue culture” in business community / stigma on failure (yes/no)

• (direct) Involvement of governments

• Influence of local labor laws and role of unions

• Bankruptcy and tax laws (debtor - creditor friendliness)

• Level of experience with workouts and bankruptcy (”Kosovo” example)

• Sophistication of banking sector (“London Approach”)

• Etc…

Source [amended]

DiNapoli (ed.) Workouts & Turnarounds II, Wiley/PriceWaterHouseCoopers, 1999

Rotterdam Science Tower

Marconistraat 16, 12th floor

3029 AK Rotterdam

The Netherlands

tel +31 (0) 10 204 56 70

fax +31 (0) 10 204 55 55

jan.adriaanse@turnaroundpowerhouse.com

www.turnaroundpowerhouse.com

Appendix

INSOL international statement of

principles for a global approach to

multi-creditor workouts

First Principle

• Where a debtor is found to be in financial difficulties, all relevant creditors should be prepared to co-operate with each other to give sufficient (though limited) time (“stand still period”) to the debtor for information about the debtor to be obtained and evaluated and for proposals for resolving the debtor´s financial difficulties to be formulated and assessed, unless such a course is inappropriate in a particular case

Appendix II:

Statement of Principles for a Global Approach to Multi-Creditor Workouts

Second Principle

• During the standstill period, all relevant creditors

should agree to refrain from taking any steps to

enforce their claims against or (otherwise than by

disposal of their debt to a third party) to reduce

their exposure to the debtor but are entitled to

expect that during the standstill period their

position relative to other creditors and each other

will not be prejudiced

Third Principle

• During the standstill period, the debtor should not

take any action which might adversely affect the

prospective return to relevant creditors (either

collectively or individually) as compared with the

position at the standstill commencement date

Fourth Principle

• The interests of relevant creditors are best served by co-ordinating their response to a debtor in financial difficulty. Such co-ordination will be facilitated by the selection of one or more representative co-ordination committees and by the appointment of professional advisors to advise and assist such committees and, where appropriate, the relevant creditors participating in the process as a whole

Fifth Principle

• During the standstill period, the debtor should

provide, and allow relevant creditors and/or their

professional advisers reasonable and timely

access to, all relevant information relating to its

assets, liabilities, business and prospects, in

order to enable proper evaluation to be made of

its financial position and any proposals to be

made to relevant creditors

Sixth principle

• Proposals for resolving the financial difficulties of

the debtor and, so far as practical, arrangements

between relevant creditors relating to any

standstill should reflect applicable law and the

relative positions of relevant creditors at the

standstill commencement date

Seventh Principle

• Information obtained for the purposes of the

process concerning the assets, liabilities and

business of the debtor and any proposals for

resolving its difficulties should be made available

to all relevant creditors and should, unless

already publicly available, be treated as

confidential

Eighth principle

• If additional funding is provided during the

standstill period or under any rescue or

restructuring proposals, the repayment of such

additional funding should, so far as practical, be

accorded priority status as compared to other

indebtedness or claims of relevant creditors