All — Sharing an article that my family friend wrote. Discusses his perspective on developing temporary restructuring agencies. Also touches on perhaps using Japan’s Industrial Revitalization Corporation as a precedent.
This is a guest post by Jay Alix and Richard Gitlin, which argues governments need to establish dedicated restructuring agencies to help economies whether the coronavirus storm. Alix is the founder of the global restructuring and turnaround firm, AlixPartners and was appointed by President Clinton to the national Bankruptcy Review Commission. Mr Alix also advised the nation of Japan on its national restructuring program and designed, developed, and helped lead the implementation of the rapid 40-day bankruptcy restructuring of General Motors, supported with US government funding from both Presidents Bush and Obama. Gitlin has played a leading role in the development of practices and procedures for successfully resolving complex global restructuring and insolvency cases, sovereign debt, and systemic corporate debt crises. He has also advised the IMF and the governments of Japan and Indonesia on their national restructuring programs.
Governments have created massive lending programmes to businesses to respond to this extraordinary economic crisis. Unfortunately, many of the these businesses were highly indebted even before the virus.
Combining highly indebted businesses with a collapse in demand and supply chain disruption is a formula for economic stagnation. A shift in policy by governments is urgently required to invest in companies that can grow once debt is reduced to sensible levels and businesses are restructured to adapt to new market realities.
How can this happen on the massive scale that is required?
Bankruptcy systems will be essential but will probably be overwhelmed.
Governments will need to invest growth capital but only as part of a commercially sensible restructuring of both the balance sheet and the business.
The development of an extraordinary government agency will probably be required to the oversee the job, staffed primarily with restructuring professionals. It would work in concert with the bankruptcy system harnessing its power to approve compromises and to eliminate contracts that are an impediment to a successful restructuring.
In essence, debt reductions, debt-for-equity swaps and equity for new investments will be required. There would be much shared pain by shareholders and existing lenders. And new capital will have to be properly rewarded.
Investors specialising in distressed assets would play a significant role in providing liquidity to lenders and would bring restructuring experience to the process.
But only the government can ultimately supply the massive growth capital required and only it has the power to create the expediting restructuring entity that will be needed to make this happen.
Speed is essential so there must be power to override regulatory roadblocks. It is also essential that tax burdens are not applied to the cancellation of indebtedness, for this would inhibit successful restructurings.
Capital relief for lenders who make concessions to enable a restructuring may also be required.
However, it’s critical that this new government entity is formed with a sunset provision, ensuring it is a temporary entity. It should be in existence for only the time necessary to complete the crisis restructurings and the time required to successfully sell to the market the interests received by the government entity in exchange for growth capital investments. It’s appropriate to accept extraordinary government involvement in the economy to resolve a crisis, but otherwise the practice is best left to the marketplace. The risk otherwise is that a powerful government bureaucracy is created that lives on forever.
There is precedent for such a recommendation. Japan created the Industrial Revitalisation Corporation of Japan in 2002 to unleash the growth potential of a great number of overly indebted companies. The IMF led this effort for many countries during the Asian crisis. The United States also created this type of entity to save the auto industry in 2009, when it launched its Presidential Task Force for the auto industry.
Time is of the essence. Planning and communicating this concept must start today.
Those countries who do this early and successfully will be the first to emerge from this painful, economic crisis and answer to the desperate needs of their citizens.