Central and Eastern Europe – a brief update on restructuring and insolvency
July 2017 | PROFESSIONAL INSIGHT | BANKRUPTCY & RESTRUCTURING
Financier Worldwide Magazine
July 2017 Issue
The restructuring and insolvency landscape in the central and eastern European (CEE) region varies as much as the legal systems on which it is based. The European Bank for Reconstruction and Development’s (EBRD) outlook for most CEE countries remains positive, with 2017 GDP growth expected to be in excess of 3 percent in many countries, though the region’s overall economic development remains fragmented. The framework to deal with failing businesses also remains varied, with attention on this following the general economic cycle but also influenced by local political factors.
There have been a number of significant restructurings starting or, after lengthy periods, concluding in the CEE region recently. These have tested the existing legislative frameworks and, in some instances, have either validated their approaches or prompted a change, sometimes case-specific.
Croatia, Slovenia and Serbia
Agrokor, the Croatian-based retailer and food producer, is the most notable situation currently evolving in south Eastern Europe. As one of the largest regional groups, employing thousands in countries of the former Yugoslavia and supporting many other businesses as suppliers, its importance to the economy has attracted political attention. At the time of writing, the situation is moving rapidly, including with a recently introduced extraordinary administration regime in Croatia (referred to as lex Agrokor) aimed at stabilising the situation and a further legislative response in neighbouring Slovenia in an effort to ring-fence the local operations. Its corporate structure and debt arrangements appear complex, with full details still emerging, but involving myriad stakeholders.
While Croatia deals with the challenges of Agrokor, the Slovenian state continues to deal with remnants of the global financial crisis, having recently announced its intention to sell at least 50 percent of Nova Ljubljanska Banka, a previously nationalised bank. At the time of writing, investor appetite for this remains to be seen, particularly given the crowded local banking market. More generally, there remains some activity in non-performing loans (NPL) in Slovenia.
NPL portfolio trades also continue in the region with perhaps the current focus being the Serbian market. Serbia has introduced reforms to facilitate NPL transactions in a concerted effort to help the local banking sector resolve this problem. Although foreign exchange and bank licensing issues can still be problematic, dealing with corporate NPLs has become easier and there have been a number of successful transactions recently and more are expected.
As the Ukrainian economy returns to positive growth, it also marks the resolution of several large restructuring situations. The completion, in early 2017, of the DTEK and MetInvest restructurings show how corporate groups with a long-term international view can work together with creditors to deal with some of the most difficult operating situations imaginable. Reports from eastern Ukraine of increased hostilities in March, potentially involving these businesses losing control of key assets, came when the restructuring otherwise looked to be nearing a close and provided a reality check on the risks of operating in a conflict zone.
Other situations remain to be resolved, with Ukrlandfarming and Avangard reported to be in discussions with creditors. Similarly, at the time of writing, the consequences of the nationalisation of Privatbank remain unclear. The bank and its role in the domestic payment infrastructure is understood to be critical to the Ukrainian financial system, although so far, its nationalisation does not seem to have been cause for concern. These complex situations will no doubt take time to resolve, with both local and international investors interested in a positive outcome.
On more technical matters, in a move that should facilitate trading in foreign currency debt owed by Ukrainian borrowers, the National Bank of Ukraine has recently removed the need to involve the borrower in the registration process to recognise a new lender. Previously, though it had been customary for documentation to require Ukrainian borrowers to assist with the registration process, in practice such obligations have held little value when the borrower is already in default under the loan.
A new voluntary restructuring regime came into effect in October 2016, developed with input from multilateral organisations. The law supplements the existing insolvency and administration regime, though it is only expected to be in place for a period of three years. Some local commentators suggest this is largely a domestic-focused solution driven in part by the local banking sector, and the practical effect on large internationally-led restructurings of Ukrainian groups remains to be seen and is perhaps unlikely to be significant.
Austria’s banking sector has finally moved beyond the troubles of the financial crisis, with the likes of Raiffeisen Bank International now reporting healthier profits, Erste Group coming to the end of its NPL sales process and a deal agreed between the Austrian State and bondholders of Heta Asset Resolution (the ‘bad’ bank from Hypo Alpe Adria). Bank Austria, in turn, transferred most of its CEE operations to its Italian parent UniCredit in 2016, to focus on the less risky Austrian market.
Generally, Austrian banks are jostling for position in this new environment, which is marked by evermore onerous regulation, a slow but steady shift away from traditional branch banking to other distribution channels, the disappearance of structured products from large parts of the business, and continuing pressure on interest rates and fees. These rather harsh conditions are, in part, offset by the European Central Bank’s generous provision of liquidity to the market which, somewhat paradoxically, increases some of the other pressures from which banks are suffering. These developments are expected to result in continued consolidation, as it becomes increasingly difficult for smaller players (both within the established ‘sectors’ and those without affiliations) to maintain the necessary levels of profitability and access to capital.
The remaining parts of Heta are in the process of being wound-up under a bail-in process instituted under the Austrian implementation of the EU Bank Recovery and Resolution Directive. Market participants report that, of late, Heta’s propensity to settle its remaining disputes has somewhat increased, pointing to a strong desire to close its books, together with one of the more infamous chapters of Austrian financial history, for good in a few years’ time. In addition to Heta, two other failed Austrian banks are in a solvent ‘run down’. This is an Austrian legislative novelty aimed at maximising value by more slowly running down a former bank, rather than winding it up immediately. This should continue to bring portfolios of assets to market in and outside of Austria and should provide some opportunities for investors.
Separately, some CEE-based subsidiaries of Austrian banks remain up for sale, though investor appetite seems muted. The potential to piece together a new regional banking group remains. For instance, private equity investor Advent (together with EBRD) has created Addiko out of some of Heta’s regional operations. The challenge may be to create sufficient scale across countries, keeping emerging market risks (which subsist in many places) under control, while also efficiently tackling the banking regulatory challenges in each country.
Beyond the banking sector, since the fallout from the collapse of Alpine, an Austrian-based construction company, the Austrian restructuring and insolvency landscape has been comparatively calm, with just a few exceptions.
Elsewhere in CEE
Economically, Romania remains a highlight and is unlikely to have significant corporate restructuring activity in the near term. Large protests in the streets of Bucharest in January and February 2017 focused on the government’s purported attempt to undermine aspects of the criminal justice system and the fight against corruption do not seem to have dinted the economy, with GDP growth to 31 March 2017 at an EU-high of 5.6 percent. Similarly, while the political situation in Hungary is often criticised by Western commentators, investor sentiment is surprisingly high, particularly in the real estate sector.
The Czech Republic remains relatively economically robust, albeit impacted by its industrial connection to Russia. Separately, the insolvency of OKD, a coal miner and large regional employer which suffered in the commodity downturn, continues with a sale process underway.
In Poland, reports suggest the economy has reached an interim peak with a less dynamic outlook, though it remains to be seen if this will trigger a wave of restructurings among those too optimistically leveraged. Also, Poland remains one of the European jurisdictions with a level of potential political risk which investors need to be comfortable with and comprehend.
The outlook for restructuring in CEE is naturally influenced by the varied and differentiated development of the region itself. While some countries are on the way up economically, with less potential for restructurings, less quickly developing economies may see more corporate and bank resolution work emerge. In addition, we see a move away from general economic cycles toward sectoral or industry-specific cycles, particularly among the more industrialised parts of the region, and expect this to be a continuing theme in the future.
Blair Day is a principal associate and Simon James Fitzpatrick is an associate at Freshfields Bruckhaus Deringer LLP. Mr Day can be contacted on +43 1 515 150 or by email: email@example.com. Mr Fitzpatrick can be contacted on +43 1 515 150 or by email: firstname.lastname@example.org.
© Financier Worldwide
Blair Day and Simon James Fitzpatrick
Freshfields Bruckhaus Deringer LLP