In debt for equity swaps, shares are usually acquired in the parent company of a group. When a loan to a subsidiary is included in the transaction, problems may arise as the lenders are legally required to give consideration to the parent company in exchange for the shares.

The simplest mechanism of addressing this issue is to ‘transfer’ to the parent company the subsidiary’s indebtedness owed to the lender. Alternatively, the parent company guarantee, if one exists, may be called provided there are no cross-default problems.

The process is more difficult if there is no parent company guarantee as such transfers of indebtedness can be construed as the subsidiary providing financial assistance to its parent to purchase the latter’s shares. This is prohibited in some jurisdictions.

In certain circumstances, a ‘good’ company may be created to separate viable assets and businesses of a group from those identified for liquidation. It may be easier to facilitate exit by obtaining, say, preference shares in the ‘good’ company with conversion rights into the shares of the parent company. The lenders’ returns from the transaction will then be linked with the prospects of the ‘good’ company. The conversion option will provide an additional exit avenue if the group as a whole is sold.

The sooner a company’s problems can be identified, the easier they are to resolve. The company’s most significant problems should be established before the process of developing a solution begins. Other problems that emerge during the transaction also need to be resolved effectively. Very often the eventual solution addresses only symptoms, or only some of the company’s difficulties, with the consequence that a further restructuring is necessary soon afterwards. In more extreme cases, the company fails. In addition, the solution should be robust enough to withstand uncertainties and accommodate contingencies. Financial restructurings should be seen as ‘once and for all’ solutions.

Finally, but perhaps most importantly, the right people must be involved in a restructuring, and the right relationship exist between them, for a loan workout to succeed. Apart from the quality of the company’s management, the calibre, experience and training of the bank staff involved in the workout, as well as those of the advisors, are also critical. This also includes the personal relationships between the company’s management, the bankers and other creditors. A restructuring is unlikely to be successful without the confidence of all parties in each other’s ability and integrity.