Skip addressing national conference in Beijing on debt recovery
The La Cima team members are recognized internationally as debt restructure and recovery experts.
Skip has been an invited expert speaker on the topic of debt recovery at international forums sponsored by national and multilateral DFI’s and ECA’s around the world, including at conferences in Beijing, Tokyo, Warsaw, Rome, Hamburg, Marrakesh, and New York.
Beatriz was also an expert speaker at a Berne Union meeting in Warsaw, and she moderated a panel on Financial Fraud in the Latin American Capital Markets at a conference of the Center for Audit Quality in Cartagena, Colombia.
Roel has given presentations on special operations and finance at international forums in Warsaw, Paris, Potsdam, Marrakesh, Cologne, and Utrecht. Roel was also a speaker at this year’s Global Entrepreneurship Summit in The Hague on Access to Capital - Blended Finance Catalyzing Sustainable Commercial Investment.
Debt recovery approach
La Cima believes that the debt recovery process is driven by three factors:
- Understanding the debtor
- Motivating the debtor
- Developing a payment solution.
By developing an understanding of the debtor, we can assess its resources, motivations and whether it is dealing in good faith. A debtor may cooperate, among other things, to preserve a relationship, its reputation in the community, its future access to credit, or its ability to transfer or refinance assets.
At the outset, we seek an amicable resolution. In the process of restructuring a debt, we endeavor to build a relationship of trust.
We also, however, seek to improve the legal position of the client. For example, we often re-document a debt in a manner that will facilitate execution, and seek (additional) collateral and/or personal guarantees.
By increasing the client’s leverage if litigation becomes necessary later on, we increase the likelihood that the debtor will prioritize the debt and avoid defaulting in the first place.
Litigation is often a potent tool to motivate a debtor to cooperate, and we keep the lines of communication open during the litigation process with the hope of negotiating a settlement before the execution phase.
Liquidating the debtor’s assets at execution, or seeing the bankruptcy process through to the bitter end, is rarely in the interest of the creditor.
Here is an example of where we used the judicial process as a tool to motivate the debtor to pay its debt:
The debtor – a textile concern in Manama, Bahrain – was losing money and its assets were encumbered by liens in favor of senior creditors. The principal of the debtor insisted that our only hope was to accept a protracted (and to our mind, uncertain) repayment plan. However, by networking in the Manama business community, we learned that the debtor was planning to sell a business line to a large U.S. company.
This informed our decision to immediately move the Manama “Urgent Court” for an injunction blocking any sale by the debtor. We were successful in obtaining the injunction. As a result, the debtor was forced to pay our client virtually the full amount of the debt (over $3 million) in order to move forward with its planned sale.
Monetizing Credit Rights
Where a debtor lacks the cash or willingness to pay a debt, we look to recover by liquidating the debtor’s assets.
- Sometimes the creditor offers assets in the context of an amicable resolution.
- In other circumstance we may sell credit rights secured by an asset (e.g., real estate) where the buyer intends to complete execution to acquire the underlying asset, and our client wishes to avoid the execution and transfer costs, and as well as coming into the chain of title.
- Other times we complete the execution, and then liquidate the assets.
- Mexico: Baby products (three containers)
- D.R.: Business jet
- Philippines: Residential development land
- Ghana: Industrial food dryers
- Colombia: Stock in limestone quarry concessionaire
- U.S.: Hay farm
- Trinidad: Television transmission equipment.
- Nigeria: LNG facility and tanks
- Romania: Ice cream facility
- Curacao: Containers of footware
Creative Solutions to Recapitalize Debtor
Case Study 1 – Manufacturing Company in Bogota
The debtor, a Colombian company, purchased expensive, specialized machinery to manufacture electrical components for industrial clients. It then defaulted on the equipment loan guaranteed by our ECA client.
Beatriz arranged for a debt restructure under which the debtor’s equipment was pledged as collateral to the client (thereby ensuring that the client would at least have some recovery in the event of the debtor’s insolvency). The debtor resumed making payments for three years, but again defaulted. By that time, the debtor lacked even the cash to pay employment taxes, and was considering filing for insolvency.
The equipment was too specialized to have much value in a liquidation. We determined, however, that the debtor had significant going-concern value: It had costly machinery, a trained workforce, valuable ISO certifications, and a solid customer base. Our analysis was that the debtor would become profitable again if it overcame its lack of liquidity.
The turn-around solution
Network to Investors: To effect a recovery, Beatriz used her extensive contacts in the LATAM financial world to find prospective investors for the company.
Marketing and sale: We helped the debtor prepare a package of financial information and projections as well as a “teaser memorandum” (giving prospective investors a high-level description of the company and its potential). We then arranged a sealed bid sale of the client’s claim. The high bidder purchased at a discount the client’s claim for triple the amount we expected to receive from a liquidation sale, and infused capital that revived the business.
Key to Success: Beatriz’s creative solution insured that the client’s recovery was maximized. This is because the debtor’s going-concern value was preserved, and part of that value was reflected in the purchase price paid by the new investor for the client’s claim.
Case Study 2 – Exhibition company in Turkey
Tüyap (the “Company”) is the largest fair and exhibition company in Turkey, with its main fair and exhibition center in Istanbul. FMO had been an unsecured lender to the Company for a number of years when, due to devaluation of the Turkish Lira and negative operating results, the Company defaulted on its senior debt to a Turkish bank. The Company initiated an insolvency proceeding to avoid bank foreclosure, and spent four years in insolvency (the maximum period during which execution proceedings are stayed). At the end of this period, the bank decided to foreclose notwithstanding that the Company had returned to profitability. A foreclosure would likely have resulted in FMO’s loss of its entire USD $7 million loan.
The turn-around solution
Injection of PE Funds: Roel arranged for the restructuring of the Company pursuant to a scheme whereby FMO and a private equity (PE) fund (IS Venture) each made a $5 million equity investment in the Company. This infusion of equity enabled the Company to effect a discounted (for overdue interest) payoff of the bank loan.
Reporting and Control: In return FMO/IS obtained 40% of the Company’s equity and the majority of voting rights. FMO/IS also obtained major representation on the Board of Directors and had a number of veto rights. A new CFO was appointed and governance and reporting was drastically improved.
Terms of Restructure Motivate Fast Exit: The terms of the restructure provided that if the FMO/IS equity was not redeemed at an agreed-to IRR within a certain period of time, FMO/IS would receive an increase in their equity together with the right to cause the Company enter into a sale/leaseback of assets to a third party. These terms strongly motivated the original (60%) owner of the Company to quickly obtain new financing so as to enable the Company to redeem the FMO/IS equity interest and pay off the FMO loan. This redemption/loan repayment occurred within 18 months of the restructure, and FMO/IS achieved a 50% return on their equity investment.
Key to Success: By creatively engineering a restructure and persuading a PE fund to participate with FMO in the new infusion of equity, Roel was able to not only salvage FMO’s original investment, but also make a high PE-return on the new money and exit the transaction quickly.