For years now, Poland has been experiencing a vibrant and well functioning market for NPLs portfolio transactions with a sizeable share of consumer loans and some presence of SME loans. While this has not been the case of single-names, the situation is likely to change in the course of 2014 with more Polish banks willing to clean up their balance sheets at an earlier stage. The Polish market for single-name restructurings is expected to grow rapidly in 2014. Discounted, but still valuable assets, should be increasingly available on the Polish market, and may satisfy a growing investment appetite of investors, including private equity funds and investment banks. The range of available single-name receivables will vary, but is likely to emerge in the case of companies from the construction, telecommunication, and retail sectors. In addition to investments in distressed loans, distressed bonds or other debt instruments, investments in distressed equity or assets may be considered or associated with investments in distressed loans.
1. Claims trading
In principle, claims trading in Poland is only restricted by contractual limitations on assignments that may among other things take the form of required debtor's consent. Legal regulations governing the protection of banking secrecy also constitute an impediment to the claims trading, provided that the relevant prohibitions are lifted for the assignment of claims that are deemed "lost" according to the banking regulations on mandatory provisioning or the assignment is made to a regulated entity called a securitization fund that is formed under the Law on Investment Funds. Securitization funds have been frequently used for NPLs transactions in Poland since 2005 although such transactions covered almost exclusively portfolios of loans (of mostly consumer, but also some corporate loans) rather than single-names.
In principle, the assignment of claims also involves the acquisition of any collateral security rights accompanying the claim. However, for registered pledges, the transfer of a registered pledge to the assignee requires the re-registration of the relevant pledge in the pledge registry. In turn, in the case of mortgage loans, the re-registration of a mortgage in the name of the assignee in the land and mortgage registry is a condition precedent to not only the acquisition of collateral security, but also for the valid assignment of the mortgage claim. This is a practical hurdle for trading in mortgage claims as the re-registration may take on average 1-3 months.
2. Debt to equity conversion and discharge of debt
Single-name restructurings are often associated with debt-to-equity swaps. Conversion of debt into equity of distressed companies can happen in several ways. During pre-bankruptcy it can be effected upon the adoption of an appropriate corporate resolution on the increase of the debtor's share capital. Cooperation of the debtor and the debtor's majority shareholders are obviously required in such circumstances.
A debt-to-equity swap could also be part of an arrangement among the company's creditors after the debtor commenced a Chapter 11 style restructuring proceeding called "postepowanie naprawcze". While the debtor conducts this proceeding out-of-court, it is subject to supervision of the court-appointed supervisor and the arrangement is subject to the approval of bankruptcy court. Once the arrangement is approved, the respective changes to the debtor's ownership structure are made without a need for a separate resolution of shareholders.
A similar debt-to-equity swap could also be effected as a part of the arrangement in the course of bankruptcy proceedings with the option of an arrangement ("arrangement bankruptcy"). Following an affirmative creditors vote, a court decision approving the arrangement is also required. Such creditors vote and conversion into equity can actually take much longer that an arrangement reached in "postepowanie naprawcze". On the other hand, an expedited track for an arrangement bankruptcy and debt-for-equity swap is also available through a so-called preliminary creditors meeting. Such creditors meeting may take place within ca. 2 months following the filing of a motion for the declaration of arrangement bankruptcy. Assuming an affirmative creditors vote, the bankruptcy court would (subject to certain mandatory conditions) approve the arrangement and arrangement bankruptcy in one decision.
A debt-for-equity swap is practically not an option in a liquidating bankruptcy. However, a liquidating bankruptcy can be converted into an arrangement bankruptcy in case the grounds for conducting the arrangement bankruptcy (which is essentially a better satisfaction of creditors compared to liquidating bankruptcy) develop in the course of proceedings.
3. Investments in assets
Single-name restructurings may also consist of investment in assets, in particular in the course of liquidating bankruptcy. Acquisition of assets from an insolvency administrator in a liquidating bankruptcy is made free and clear of liabilities and encumbrances (subject to certain minor exceptions). The framework for such acquisitions is not really efficient time-wise due to the fact that they need to be preceded by an appraisal which is often fairly unrealistic while the bankruptcy court requires that one or more court auctions should be held where the bidders can only bid at the level of appraisal at a minimum. Only after those court auctions (often) fail, can the judge-commissioner (or a creditors council formed in the proceeding) allow the administrator to conduct a free-hand sale with an asking price that is more realistic.
Such stringent restrictions with respect to setting a minimum price are not present in arrangement bankruptcy. However, even though a sale of assets to an investor could be part of the arrangement, there is no clear safe harbor for such a sale allowing it to be run free and clear of liabilities.
4. Material limitations
The lack of a well-developed "restructuring culture" is arguably a major obstacle to distressed investing in Poland. This is supported by the fact that less than 25 % of bankruptcy proceedings in Poland are arrangement bankruptcies and so far there have been very few successful out-of-court ("postepowanie naprawcze") restructurings. An attempt to change the current liquidation approach to a more restructuring oriented one is currently being made in that a special governmental committee has recently proposed a new bill that contains multiple routes for restructuring. It also seems that the existing regulation of pre-packs at the preliminary creditors meeting is fairly efficient and simply not used by creditors (including distressed investors); bankruptcy judges sometimes complain about this fact. Finally, it is conceivable that debt-for-equity swaps are effected in cooperation with the company and/or its shareholders without a resort to court proceedings.
