The Law No1414 «On financial restructuring» came into force in autumn 2016. Since then 25 cases were initiated resulting in restructured debts for the general amount of USD 1,35 billion, where 20 cases for the general amount of USD 1 billion were successfully closed. The restructured entities include companies from Kyiv and Kyiv region (83.43% of total cases) and big companies located in Zhytomyr, Volyn, Kherson, Ivano-Frankivsk and Donetsk regions.
However, still not all debtor companies are aware that they may take advantages of the options provided by the Law only until 19 October 2019. In other words, there is only a little more than half of the year left. Worthy to note, the procedure of financial restructuring itself takes around half a year. Thus, in case of debts need to be settled with the bank yet under favourable terms, debtor companies have no time for doubts, whilst banks ought to make a decision with respect to such clients immediately.
Due to the Law, 13% of general corporate NPLs has been restructured until now. The volume of procedures submitted to restructuring in 2018 reached USD 28.5 billion. This indicator has increased by 3.5 times comparing to 2017. The volume of procedure in 2019 is expected to be no less than in 2018.
It is important that financial institutions possessing at least 50% of the total debt claims among all the financial institutions, have to consent to the procedure of financial restructuring and negotiate with the debtor companies. The Law allows not to take into account the investment standard, and thus banks are free to negotiate the partial debt release through convertion of the debt into share in debtor company’s equity fund thereby assuming control over it. The Law provides exactly the same allowance for the state banks as for the Deposit Guarantee Fund (DGB).
The most significant benefits of financial restructuring for the banking sector are:
- Preservation of an insolvent lender and avoidance of the bankruptcy procedure;
- Liberation from the NBU standards during the procedure:
- Short-term liquidity (Н6);
- The maximum credit risk per counterpart (Н7);
- The maximum credit risk per counterpart (Н7);
- Limits of the total open foreign exchange position of the bank (L13);
- Setting the interest rate at any level;
- Tax allowance (for instance, release from VAT and income tax instalments as well as amendments to effective legislation related to guarantee, pledge and mortgage that ensure the protection of the pledge right for banks during the procedure);
- Write back;
- New instruments for debt redemption (debt conversion into equity);
- Speed and control over the procedure;
- Mandatory arbitration of any disputes arising during the procedure of financial restructuring. The possibility of recognition and enforcement of the arbitral award in the national court of Ukraine.
For debtor companies the Law provides:
- Resumption of business activities;
- Moratorium on enforcement of creditors’ claims against debtor within the procedure;
- Instalments of credit for several years through any convenient for the parties mechanism;
- Interest rate under the market level;
- Easy conversion of the debt into UAH;
- Tax allowance on released debt and on alienated part of assets as the debt repayment;
- Restructuring of tax debts and reconciliation of tax debt older than three years.
Are there any drawbacks of the procedure?
They are virtually non-existent. One of the greatest disappointments is too late implementation of the Law. At numerous promotional events held in Ukraine by the Financial Restructuring Secretariat, both the Independent Association of Banks of Ukraine and EBRD stated that many debtor companies were not timely aware of all the advantages provided by the Law.
Expectations and perspectives for 2019
The well-organized communication between the debtor company and creditor is crucial for all the business procedures.
The terms may be negotiated over but they are very limited (up to 180 days for procedure and signing the restructuring plan). It should be borne in mind that the Law requires certain activities preceding the approval of the restructuring plan. It is advisable to implement the maximum number of preparatory measures for its successful approval. Particularly, large holdings with complex corporate structure may evaluate advantages and disadvantages of the Law for long enough.
UAH 36 billion of non-performing loans restructured in Ukraine under the Law without any enforcement measures by the authorities is bright evidence that the Law is viable on the market.
Those companies that have already made use of the Law consider it as a useful tool to solve the interim troubles with debt repayment, whilst financial institutions keep on calculating income related to the financial restructuring.
It is no surprise there is a growing interest in the financial restructuring in 2019.