Knowledge

Financier Worldwide canvasses the opinions of leading professionals around the world on the latest trends in bankruptcy & restructuring. In April 2022, they published their InDepth Feature on Bankruptcy & Restructuring 2022 which includes an interview with Kai McGriele (partner), Jamie McGee (associate) and Jonathan Stroud (associate) on the trends in the Cayman Islands.

Q. Reflecting on the last 12-18 months, how would you characterise the Cayman Islands in terms of failing businesses and bankruptcy filings?

A. Statistics in the Cayman Islands make for interesting reading. In 2021, winding up petitions arising from insolvency and restructuring situations, such as creditors’ petitions, voluntary liquidations and restructurings involving the appointment of joint provisional liquidators, made up the majority – around 82 percent – of the petitions presented. However, the numbers in question are modest, with only a total of 51 winding up petitions having been presented in the whole of 2021. Notably, the majority of the creditor petitions presented concerned either companies or funds whose primary business was conducted in Asia. Despite the global economic challenges arising from the coronavirus (COVID-19) pandemic, we have not seen a rise in pre-2020 insolvency and restructuring activity. With the introduction of a new debtor-friendly restructuring regime and a growing debt issue in the People’s Republic of China (PRC), it will be interesting to see whether there is a significant rise in insolvency and restructuring during the next 12 months.

Q. Could you outline the primary macroeconomic trends currently affecting businesses? Are any particular sectors demonstrating structural weaknesses, resulting in distress?

A. Businesses, particularly those in certain manufacturing industries and those dependent upon global supply chains, are still being affected by the COVID-19 pandemic. That said, with the general easing of restrictions worldwide, it is expected that the effects of the pandemic will begin to subside and those worst-affected will have already gone through an insolvency or restructuring process since the onset of the pandemic in 2020. The growing debt issue in Asia, where a significant number of companies are incorporated in Cayman, has caught attention. We have already seen significant restructuring cases in Cayman arising from the high debt position in PRC, most notably Luckin’ Coffee Inc., which underwent a restructure of $460m of debt last year. Given the debt profile in Asian companies and particularly those in the PRC real estate sector, we are expecting to see further distress issues leading to restructuring under the new regime in the next 12 months.

Q. Have any recent restructuring trends or cases in your country of focus captured your attention in particular?

A. Since the onset of the global pandemic, the world has almost exclusively, until now, focused on the effects of COVID-19; whether it be the global health crisis itself or the economic impact of the virus. The economic fallout from the pandemic had devastating effects not only on individuals and their families but also businesses, with service sectors such as aviation, travel and tourism being ground to a halt for the better part of two years and global development and manufacturing being substantially inhibited as a result of, in many instances, restrictions being placed on the number of employees who could be in one place at the same time, resulting in a lack of manpower and a shortage of raw materials. Many businesses still remain in the recovery process, but it is anticipated that many will not. China’s real estate development sector is one which remains in limbo, with estimates indicating that in this sector alone over $117bn of debt is due to mature this year. Furthermore, the Russian invasion of Ukraine has carried with it not only physical devastation and loss of life, but the implementation of significant sanctions designed to cripple Russia’s economy.

Q. How easy is it to renegotiate existing debt in the current market? Is there funding available to support distressed companies and finance restructurings?

A. Generally speaking, we have found that distressed companies have been able to find opportunities to restructure their borrowings, whether that be through institutional or alternative lending, particularly with overseas lenders. It is positive that we have seen companies with plenty of refinancing options from lenders with an appetite for distressed debt, particularly given that there have been increases in lending rates in both the US and the UK recently. Given that government-set interest rates are expected to rise in both the US and the UK through 2022, accessibility to refinancing for distressed companies will be an interesting area to monitor this year.

Q. What trends are you seeing in the market’s appetite to purchase troubled assets? How would you describe recent distressed M&A activity?

A. The M&A market for those actively seeking to purchase troubled assets has been relatively quiet over the last two years and we would, in part, attribute that to the challenges associated with the COVID-19 pandemic. More recently, we have seen that the war in Ukraine has created opportunities in the M&A market. However, understandably, prospective purchasers are being dissuaded from taking advantage of those opportunities at the moment due both to ethical concerns and concerns over the impact that might be caused to their reputation if they were seen to be profiting from opportunities created by the war.

Q. Could you outline some of the personal risks facing D&Os of a company that nears insolvency or enters bankruptcy in the Cayman Islands?

A. Acting as a director or officer of a solvent company is known to carry with it significant scrutiny, particularly in light of the exercise of their fiduciary duties in decision making. This is even more so when the company becomes insolvent. In these circumstances, the subject of the director’s duty shifts from that of the shareholders as a whole to the company’s creditors. In such cases, and where an insolvency professional is appointed over the company, each and every decision made by the director will be reviewed and the rationale and effect of such decisions may give rise to actions against the directors for breaches of fiduciary duties. There are certain pre-emptive measures which will certainly limit a director’s liability, such as ensuring that their appointment is done in accordance with the company’s articles of association and that a separate director’s services agreement is in place and sets out the terms of the indemnity afforded under it, as the costs associated with defending such proceedings can be costly.

Q. How do you expect restructuring and bankruptcy activity in the Cayman Islands to unfold for the remainder of this year, and beyond?

A. The restructuring and bankruptcy industry’s focus for the last few years has been on the effects of the global pandemic, and more recently, the impact of the Russian invasion of Ukraine and the sanctions imposed upon Russia by the majority of the other countries in the world. We predict that there will be an increase in the number of companies which will either be forced into liquidation or to restructure, where possible. Given the devastating effects of these tragedies, and impact on the global economy, it is entirely unsurprising that many entities will be forced to examine their ability to thrive, survive or recover and those which are unable to will become victims of the circumstances.

First published by Financier Worldwide Ltd in April 2022 in their InDepth Feature on Banking & Restructuring 2022.