Restructuring Opportunities and Challenges in Central and Eastern Europe

<p>In the United States, the aim of chapter 11 is to
give the debtor company a chance to emerge as a restructured corporate
entity, and the role of Chief Restructuring Officer (CRO) within that
process is well-established. In Europe, tradition and insolvency law
have supported the development of a "creditor-in-possession"
culture, which can deprive companies of rescue funding, strip directors
of their powers and hamper corporate rescues. </p><p>This has also
influenced the role of the European restructuring adviser, where the
adviser has often been limited to an accounting firm preparing a report
for a bank group. The problem with this is that after four to six
weeks, nothing much has changed; valuable time has been lost, and the
company has another significant demand on its cash flow as a result of
the report. Management grumbles, and other creditors feel shut out and
get nervous while shareholders start to fear the worst: insolvency. In
the United Kingdom, the management team may even see the situation as
an opportunity to bid for the trade and assets of the company from the
inside. </p><p>In Central and Eastern Europe (C&amp;EE), insolvency law
tends to be even more focused on the insolvency process itself and
less focused on the rehabilitation of the company as a going-concern.
The shortcomings in local restructuring laws mean that the banks are
very keen to avoid insolvency at all costs. </p><p>Providers of
debtor-in-possession (DIP) funding are few and far between, and the
survival of distressed corporate entities is rare. Few, if any,
businesses enter into insolvency in Europe and emerge intact. Most end
up being liquidated and their assets sold at liquidation values. Worse
still, because of these deficiencies and the lack of rehabilitation
processes, companies often trade well beyond the point of no return.

</p><p>A further challenge in European restructuring is the number of
jurisdictions often involved even for mid-market companies with
cross-border operations. Despite the growing trend toward
harmonization of European legislation, each country has so far
retained its own insolvency law, requiring familiarization with a
number of different sets of rules. This is in addition to the various
different cultural attitudes toward change that is normally engendered
by restructurings. </p><p><b>Role of the European Restructuring Officer
</b></p><p>It is only in recent times that company-side advisors have become
an acceptable face of restructuring. Historically, even large
companies would enter a restructuring or insolvency process guided by
the banks' own advisors only. This may be a laughable thought to
someone familiar with the American approach, where the company drives
the restructuring and the creditors take advice from their own
counsel. </p><p>The rise of the European CRO has been fueled by the need to
avoid bankruptcy, which might sound strange to a U.S. bankruptcy
advisor. European CROs tend to work on informal restructurings and are
therefore focused on operational improvement and out-of-court
financial restructurings, such as debt-to-equity swaps. If a court
process is required, it tends to be used to confirm the restructuring
agreements rather than to control creditors. </p><p><b>Opportunities in
C&amp;EE </b></p><p>There are currently some attractive opportunities for
CROs in Europe generally. While costs of production are still lower in
C&amp;EE than in the United Kingdom and America, rapidly escalating
wages and energy costs mean that the recent European Union (EU)
entrants' competitive edge is vanishing. The other problem in low-cost
countries is that companies tend to employ more people. So although
the latest accession countries are benefiting from certain aspects of
their membership, such as major investment in infrastructure, social
costs are rising as an inevitable consequence of the harmonization
process. </p><p>Indeed, the pattern of consumption in these new EU countries
is no different from their more-established neighbors. Take an evening
promenade along the high street of any mid-sized city in the region
and you notice that the brand names in the shop windows are no
different from those in any high street of America or Western Europe.
With wages and salaries growing disproportionately to sale prices,
many companies are struggling to rationalize their cost base and improve
efficiency. </p><p>In addition, many of the new EU entrants have been hit
with exchange rates moving against them. Many of those trading within
the EU have seen their currencies strengthen against the Euro, and
those trading with the United States have also suffered from the
strength of the Euro against the dollar. Many Euro-based currencies
such as the Hungarian forint have appreciated by more than 50 percent in
relation to the U.S. dollar in the last two to three years. This has
had a devastating effect on earnings for these export economies with
companies exporting to the United States. Costs are inevitably
Euro-based while incomes are dollar-based, and no amount of hedging
offsets the uncertainty that this brings to investment decisions.

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<p><b>The Future of Restructuring in Europe </b></p><p>The outlook for 2006
and beyond will see the demand for restructuring services accelerate
in C&amp;EE as the region comes to terms with a reducing competitive
advantage. The rapid rise of low-cost manufacturing capability in China
and the liberalization of the Ukrainian and Romanian economies are
only exacerbating the problem. The whole of Europe is set for a
further shift of production eastward. </p><p>This will prove challenging for
the economies of C&amp;EE, which were until relatively recently
subject to central planning. The concept of outsourcing production,
for example, is new to many of their companies. However, it is
undoubtedly one of the next steps for these markets to fully catch up
with their more mature Western couterparts that have already been
through the process. As a result, part of the CROs' role in CEE in the
years to come will be to educate their clients on issues that are now
taken for granted in Western Europe and
America.</p>