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The Workout Process

A Workout or debt restructuring will be essential where:

* there is the potential for a viable business after the workout;
* the value of the business has fallen below the par value of the debt;
* the current debt is unserviceable.

The Workout will need to encompass and be aligned to the wider restructuring objectives of the company, the risk taken by lenders, the corresponding reward for their forbearance and the required ultimate exit route for the lenders.

A Workout process need not follow any set formula. In practice, the timing of a Workout will be dictated by each particular situation.

Workouts can be agreed in a short space of time or they can take months to agree. In an effort to bring some order to the process, the first step in a Workout is often the agreement of a Standstill Agreement amongst the creditors. A Standstill Agreement sets out some basic principles for lenders and the company with its overriding purpose being to maintain the status quo, whilst negotiations proceed.

Restructuring professionals will sometimes adopt what is known as the London Approach. The London Approach caters for large multi bank situations and calls for cooperation between lenders. The London Approach can be informally mediated by the Bank of England and follows various pre-agreed principles in regard to Standstill Agreements, coordination of creditors, priority of new money advanced, loss sharing, entity priority and a notional liquidation principles.

A key part of a Workout will almost always involve a restructuring of the company’s debt. The objective in the debt restructuring will be to reduce the financial risk faced by the company with a view to improving cash flow, restoring the balance sheet and leaving management free to concentrate on strategy and operational issues.

The deal finally agreed between a company and its creditors need not follow a set prescription. In practice, the agreements are often quite imaginative and are designed to suit the specific needs of the situation. The risk and reward considerations revolve around:

* the type of debt instrument taken in exchange for existing debt;
* the debt to equity exchange ratio, which will require some sort of valuation;
* the proportion of equity dividend to creditors;
* the tax treatment of the residual debt and the converted amount.