(a) If a corporate debtor is in financial difficulty, is there an attitude of 'concealment' or 'denial' toward the admission or exposure of that financial difficulty?

 

Yes. A corporate debtor in financial difficulty generally has an attitude of `concealment' or `denial' toward the admission or exposure of that financial difficulty. The corporate debtor fears that by admitting their financial difficulty, credit will be harder to get. Also, it fears that the creditors will immediately enforce on their security.

(b) If so, is the reason for this based on cultural or other factors?

 

The reason may be based on their experience with their creditors. If they feel that they can turn to a particular creditor who is sympathetic to their plight and is willing to help them then they might disclose their financial difficulties. Otherwise, if they are not close with their creditors or do not have a long-standing relationship with their creditors, they will be reluctant to disclose their financial difficulties for fear that they are not sure how these creditors will react.

(c) Is it likely that a corporate debtor would:

(i) volunteer the fact of its financial difficulty to a lender or group of lenders; or

(ii) admit or concede it only if and when confronted by a lender or group of lenders?

 

Generally, The corporate debtor will admit this only when their creditors start calling on their loans which have become past due and in order to buy more time for paying off the said loans; they will disclose their problems and say that they are in the process of coming up with a business plan to solve their problems and ultimately request for a moratorium or payment of principal and interest and a stay on any action against them for a certain period of time.

For corporation required to file reports under RSA Rule 48-1, also known as the Rules and Regulations Covering Form and Content of Financial Statements, their financial difficulties is easily more discernible compared to a privately-held firm because of the relatively stringent requirements of the rules and regulations of the SEC, including RSA Rule 48-1, with respect to reportorial requirements to be filed with the SEC.

(d) If a corporate debtor is in financial difficulty, is it likely that the corporate debtor would:

(i) do nothing;

(ii) seek expert assistance and advice; or

(iii) accept the appointment by a lender of an outside expert/advisor?

 

It is likely that the corporate debtor will do something about the situation and seek refinancing of the loan. In some instances, corporate debtors seek expert assistance and advice for by doing so, they are assured that the people they have hired will work for the corporate borrower's best interests and not that of their lenders.

It is also possible that the borrower will try to get the protection of the politician it has supported in the last elections to try to exert pressure on the banks to be lenient in collecting the amount due from the borrower.

(e) If it was agreed between a lender and a corporate debtor that an expert/advisor would be appointed, is it likely that a corporate debtor would give the expert/advisor unrestricted access to all relevant financial and other information regarding the corporate debtor?

 

That would depend on the disposition of the corporate debtor and on the relationship between the debtor and the expert. It is a natural reaction for the corporate debtor to be reluctant to give sensitive and perhaps even "embarrassing" information to outsiders. However, if the expert/adviser has the full trust and confidence of the corporate debtor then it would be more feasible that the corporate debtor will give the expert/advisor unrestricted access to all relevant financial and other information regarding the corporate debtor.

(f) In that situation, is it likely that the financial and other information regarding the corporate borrower would be:

(i) complete; and

 

As to completeness, it is quite a common occurrence that not all the information being required by the expert/advisor is given immediately. There is usually a certain amount of time involved before all such information is disclosed by the corporate borrower to the expert/advisor. However, if the expert/advisor is able to stress the importance of the necessity of such financial and other information to the corporate debtor, then there is a higher chance that the information given by the corporate borrower to the corporate borrower will be complete.

(ii) accurate (particularly regarding the valuation of assets and the assessment of liabilities)?

 

As to accuracy regarding the valuation of assets and the assessment of liabilities, it is a common practice that the corporate borrower will just plug in valuation which they will think would be beneficial to them. However, it is also a common practice that they get a third party to appraise the value of the assets

(a) Is it more common that the financial difficulty of a corporate borrower will be:

(i) volunteered by a corporate debtor; or

(ii) discovered by a lender (and, if so, how)?

 

More often than not the financial difficulty of a corporate borrower will be discovered by a lender the minute such corporate borrower is finding it difficult to service their loan obligation, and the first sign of this is when the corporate debtors start asking for an extension of the due date for their loan obligations. By doing this, it sends out a warning signal to the lender that something may be wrong with the corporate borrower that will cause it to do some investigation.

Sometimes, the corporate debtor volunteers the information to its creditors that it is experiencing financial difficulty.

Perhaps due to its relatively small size, Philippine business community is often filled with gossip about the financial condition of a corporation or a prominent individual. Hence, it is common for large corporations to be hit by a rumor that it cannot anymore service its financial obligations or that it is a step away from applying for suspension of payments with the SEC. Sometimes, banks get the first news of the borrower's financial difficulties through such gossips.

 

(b) If a lender becomes aware that a corporate debtor is in financial difficulty, is it likely that the lender would seek to investigate the financial crisis of the corporate debtor itself and employ an expert/advisor to investigate the financial position?

 

Usually it asks it own people to do the investigation of the financial condition of the corporate borrower

(c) If so, is the expert/advisor likely to be:

(i) an independent professional; or

(ii) an 'in-house' employee of the lender?

N/A

(d) Is it likely that information regarding the financial position of a corporate borrower as discovered from the work of an expert/advisor would be:

(i) kept secret from other lender/s or creditors;

(ii) disclosed to other/selected lenders?

 

That would have to depend on how the corporate borrower and the expert/advisor plan to address the problem and whether or no there is a confidentiality agreement entered into between them. The corporate borrower will usually try to keep it a secret from the creditor for as long a time as possible. Eventually, though, the corporate debtor will have to disclose the status of their financial condition to a select group of creditors whom they feel are sympathetic to their problems and is willing to help create a feasible solution for them.

It should be noted though that banks generally do not hire outside expert/advisor.

(e) If there were 2 or more lenders (not in a syndicate) involved with the same corporate borrower, is it likely that they would:

(i) join together to share information and endeavour to work out a common approach to the financial problems of the corporate borrower; or

(ii) act secretly and independently of one another?

 

The bottom line for corporate lenders is that the credit facilities that they extended to the corporate borrower be paid in full. This principle is what will determine the manner of action of the corporate lenders.

Some important consideration which will determine whether or not the creditors will cooperate with each other are the following:

(1) whether or nor the creditors have equal security position (i.e., all are secured or all are unsecured);

(2) whether or not the borrower has sufficient assets to cover the loans.

If a lender realizes that his position is inferior with respect to the others, then it might try to throw a monkey-wrench into the work out until its position is more or less equalized with the other creditors.

(f) If there was a group of lenders (whether in a syndicate or not) involved with the same corporate borrower, is it likely that one of them would offer or seek to be the leader on behalf of them all?

 

In a work-out situation, it is normal and likely that a particular corporate lender or even a group of corporate lenders shall take the initiative to present themselves as the representatives for the rest of the corporate lenders in discussing with the corporate lender. Normally, it is the bank with the biggest exposure which takes the lead.

(g) If so, is it likely that such a proposal would be agreed to by the other lenders?

 

More often than not all the banks will come together to form a creditors committee.

(h) Is it likely that local lenders would have employees who are experienced in informal work outs?

 

Yes.

(i) If there was foreign bank lending involved, is it likely that domestic lenders would:

(i) combine with; or

(ii) act independently of the foreign lender/s?

 

There is no clear cut rule. Sometimes, it depends on the reputation of the foreign bank but ultimately much depends on their relative positions with respect to the security being held by them.

(j) Is it likely that 'junior' or 'minor' lenders might seek to trade their debt?

 

This is not being practiced in the philippine.