EY Hungary has been advising the European Bank for Reconstruction and Development on best practices for financial restructuring, as the regional head told the Budapest Business Journal in an exclusive interview.
When a company gets into financial trouble, some lenders may seek to withdraw money or funding support as soon as possible, Raj Apte, head of restructuring for CSE at EY Hungary, tells the BBJ. It is enough if just one of potentially multiple lenders wants its money back, as a domino effect soon sets in that sees all the others demanding the withdrawal of their money too. That inevitably results in the collapse of the company and it being broken up and sold off. However, if lenders unanimously decide to pause and let the company get its finances organized, the business, as well as the lenders’ money, often has a better chance of being saved.
“I think there has been a great interest in financial restructuring here in Hungary, just as in the wider region,” explains Apte, who is based in Budapest. “Financial restructuring advice requires a combination of corporate finance analysis and analysis of the applicable legal framework, including insolvency-related laws, in a ratio of about 80%-20%. A new perspective is emerging about how financial restructuring should be done in an out of court consensual manner to preserve and maximize value for stakeholders; it is a shame that when credit gets tight, in many cases some lenders or even suppliers start withdrawing liquidity, creating the risk that a company collapses and is eventually sold for pennies in a value destructive manner for all stakeholders, including employees,” Apte comments.
EY believes that, where a company is commercially worthy of support, all the related creditors should decide to voluntarily and consensually wait by signing a standstill agreement, thus allowing time for a proper longer term solution to be explored. Implementing such comprehensive restructuring solutions enables the company’s finances to be sorted, not only saving the company and jobs, but also giving the creditors the best chance to get back their money at the end of the day. “All the lenders need to agree to wait and give the company time; it can only work if everybody agrees to it,” Apte stresses.
By December at the latest, the National Bank of Hungary (MNB), is expected to publish the finalized version of its financial restructuring guidelines, prepared for it by EY, which will offer out-of-court and voluntary best practice, in order to get non-performing loans (NPLs) restructured. “EY has been in the forefront of talking to the Hungarian market about a set of formalized but voluntary and consensual guidelines, which has been encouraged by the EBRD,” Apte explains.
The MNB has been looking for solutions to address the high volume of NPLs and their effect on the financial stability and long-term economic performance of Hungary, as well as on banks in the country. A workgroup was set up including the biggest lenders in Hungary. EBRD appointed EY to perform a thorough review of international guidelines and best practices applied in selected European countries and their application in Hungary. Based on interviews and market analyses EY had carried out here since January 2016, a non-legally binding framework was established for financial restructuring.
“Negotiations are ongoing and we are hopeful that the finalized guidelines will soon be presented to the MNB for approval,” Apte states. “At the end of the day, a dialogue is always better than fighting. Instead of getting into an ego-fight or carried away by emotions, all parties standing still and having a rational discussion is a better way to achieve an optimal outcome for all.”