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April 16, 2006

Global Perspective Helps for Smooth Cross-border Restructurings, Kargman Associates President Tells Fletcher Students

Restructuring failing companies in the developing world requires a combination of legal, financial, and political skills, leading practitioner Steven T. Kargman explained at The Fletcher School in a seminar exploring this dynamic field.

“The Fletcher interdisciplinary approach is very valuable in this kind of work,” Kargman said.

Kargman visited Fletcher on April 11, 2006 as part of the International Business Program’s Global Speakers Series. Currently the President of the international restructuring advisory firm Kargman Associates, he was previously a lead lawyer with the US ExIm Bank and was involved in some of the biggest restructurings in Mexico and Southeast Asia.

Kargman returned often to the ways in which contextual issues shape the process of restructuring.

“You can’t look at restructurings from a legal or business perspective alone – you need a strategic perspective,” he said.

Corporate restructuring is the process of reorganizing companies that are in financial difficulties and are unable to pay their creditors. While it is a complicated legal and financial process in developed countries, it is even more challenging in emerging markets.

Legal maneuvering is a feature of all restructurings, and in countries with weak regulation or unreliable courts, it becomes much more complex.

“In many countries going into the courts is a perilous exercise, and you can’t rely on your rights being observed,” Kargman said. “In some countries studying the law isn’t worth the time since the courts are so unreliable [that] creditors stay out of them.”

Although legal reforms in many emerging markets are creating insolvency laws that seem to facilitate more efficient restructurings, Kargman cautioned that the letter of the law does not always offer full protection.

“You can never rely on a new law, “ said Kargman. “You have to be cautious, since you don’t know how it will be applied. I learned by hard experience that reading that statute doesn’t mean that it will actually work that way in court. You need to learn from local counsel.”

Companies being restructured often have powerful political friends, making it even more difficult for foreign creditors trying to get some of their investment back.

“You need to be aware that you may not be negotiating on a level playing field,” Kargman warned.

Sometimes local elites with an influence on the political process and the legal system can also be a hindrance.

“You are not dealing with an inanimate corporation, but the powerful families that control these corporations,” he said.

These problems are “Combined with negative public opinion about foreign creditors, especially if restructuring may lead to layoffs. Foreign creditors are not viewed as sympathetic parties,” Kargman explained.

“The governments themselves are often involved in these situations – their local development banks may have made loans to the company in trouble, and local creditors may be getting preferential treatment,” he said.

He pointed to a case from his own experience - the restructuring of Asian Pulp and Paper. In this case Indonesian creditors and Chinese state banks were able to get money before other foreign claimants.

Restructurings can also be very lengthy. Kargman once spent over seven years – his entire tenure at the US ExIm Bank - restructuring a major Mexican steel company. During such a period creditors may receive nothing due to a debt service moratorium.

He also explained a range of negotiating tactics that debtors can use to hold up restructuring. One tactic is to create an “illusion of progress” – stalling at the same time as looking productive, winning valuable points in local politics and public opinion.

“A couple of millions in payments to lawyers and banks to keep the process going is a drop in the bucket compared to the money they are saving by not servicing the debt,” he said. “It’s a challenge to stay on top of a restructuring that takes lots of time and money.”

Kargman warned that many other problems can develop while creditors are locked in long negotiations. For example, often no cash controls are in place during restructuring. Kargman pointed to the Mexican steel company he worked with which was generating lots of cash during a boom in steel prices, even though the company was still in a debt moratorium and not paying its creditors.

“What’s happening to the cash during restructuring? This is a big problem for creditors, since value might be taken out of the company,” Kargman said. He pointed to projects where hundreds of millions of dollars disappeared from bank accounts in Vanuatu and the Cook Islands.

Unfortunately, getting the information necessary to stop these problems is not easy either. “The company doesn’t want the creditors to know too much, since there is often some dirty laundry,” said Kargman. “The lack of information and transparency is a persistent problem. This can be a big obstacle to due diligence.”

Students attending the seminar said Kargamn’s ideas and the field of corporate restructuring were especially interesting because they combined the strands of politics, business, and law that make up the Fletcher curriculum.

By Charles De Simone, MALD '07

Posted by fletcher at April 16, 2006 04:47 PM