Restructuring for sustainable recovery

Successful restructuring balances enforceability with sensitivity, using legal, financial, and behavioural levers to turn defaults into sustainable recoveries

Amid ongoing reforms and evolving standards in trade finance, the need for effective restructuring has never been more pressing. Trade finance banks and credit insurers face a complex interplay of counterparty risk, heightened scrutiny, changing regulations, and debtor distress. Restructuring should not merely aim to collect arrears, but also develop agreements which are resilient to legal challenge, align incentives, and ensure the long-term sustainability of trading relationships.

To achieve these goals, practitioners must use two lenses: strategic vision and legal skill. Taking a cue from the eternal strategic wisdom of Sun Tzu – where knowledge of one’s adversary and self is the foundation of success – creditors must embed themselves in the debtor’s working realities while rigorously analysing their own leverage and boundaries. This discipline forms the foundation for settlements that avoid long-drawn-out battles and release value through cooperation rather than force.

Mapping the debtor's capability landscape

A comprehensive breakdown of the debtor’s financial profile, going far beyond line items in the balance sheet, should include working capital cycles, receivables quality, and industry-specific drivers like commodity risk or regulation changes. The nonfinancial drivers are also crucial to map out: political risk, currency controls, or local insolvency cultures.

By combining these inputs in an aggregate risk profile, credit experts are able to distinguish short-term liquidity crunch from systemic insolvency. This diagnostic acuity guides the creation of repayment schedules calibrated to reflect medium-term cash flows with leeway for turnaround in operations.

Incentive structures and behavioural levers

Real restructuring transcends rescheduling. It uses behavioural economics to generate aligned creditor-debtor interests. For capable debtors with poor commitment, conditional interest concessions triggered by prompt payment can increase discipline. Where penalty clauses are legally acceptable, stepped-up default rates against late performance serve as a reward and as a deterrent for late payment.

Where insistence on punitive rates risks strangling the debtor’s recovery, creditors can resort to equity kicker provisions or revenue sharing as an alternative. These hybrid instruments turn creditors into stakeholders and encourage a philosophy of cooperation. Embedding clear performance milestones – whether to quarterly EBITDA targets or receivables turnover ratios – ensures that upside sharing remains linked to genuine operational improvement.

Cultural differences should be given careful consideration. In markets where relationship is the most important equity, outright coercive measures can lead to reputational backlash. But in environments where concessions by debtors are the norm, a more confrontational negotiating style could secure better conditions without destroying confidence.

Legal framework and enforceability

The success of a restructuring agreement is ultimately measured by its enforceability. Standardisation in documents – prefaced with a recital, explicit acknowledgment of indebtedness, a granular repayment plan, and clear default triggers – reduces uncertainty. Each covenant, positive or negative, should be drafted with precision, avoiding vague adjectives that invite conflicting interpretations.

Guarantees and security documents deserve the same level of scrutiny. For guarantors, insufficiency of consideration must be established; for security interests, perfection steps –filings timelines, registry jurisdictions, and priority conflicts – must be mapped with care. Harmonising choice of law rules with seat of arbitration or forum court helps avoid jurisdictional bifurcation in cross-border financings. Where the United Nations Convention on International Settlement Agreements Resulting from Mediation (the Singapore Convention) is applicable, mediated agreements carry the same enforcement weight as arbitral awards, streamlining recognition in signatory states and offering a faster, more cost-effective solution.

Creditors’ self-assessment and strategic playbooks

Before making bids to the debtor, creditors must perform an internal calibration of their own positions as well. Key considerations include net present value recovery through restructuring vs. potential litigation returns; strategic advantage of continued market access vs. immediate cash inflows; and impact on regulatory capital requirements and rating agency views of extended payment terms.

This introspection should produce a tactical playbook outlining acceptable concession levels, reserve drawdown limits, and escalation protocols for potential default events. Providing frontline credit or claims officers with clear decision matrices – specifying scenarios that do not require escalation to management – ensures faster responses and greater portfolio uniformity.

Execution and ongoing monitoring

Execution is only the first benchmark; ongoing compliance depends on vigilant monitoring. Automated payment reminders and digital dashboards tracking covenant compliance can prevent drift. Periodic financial reviews, ideally coordinated with yearly budgeting cycles, offer disciplined checkpoints to rebalance terms if operating performance significantly differs from expectation.

In more complicated restructurings, a specialised workout staff consisting of credit people, lawyers, and operating advisers should be ready to provide the intense attention needed to achieve recovery. With open lines of communication, creditors can identify early warning signs such as inexplicable declines in receivables aging ratios or downward shifts in market sentiment, and trigger contingency provisions in a timely manner.

Conclusion and strategic imperatives

For practitioners or senior directors in credit insurance and trade finance, the art of restructuring is the fulcrum on which portfolio performance turns. By blending intense financial analysis with incisive legal drafting and culture-adapted negotiation, creditors can convert default positions into recoveries that are commercially acceptable and relationship-building. The true mark of success is not the mere recovery of principal, but the creation of mechanisms that balance enforceability with sensitivity, making both creditor and debtor more inclined to cooperate in the future.

Should you be interested in reading our booklet about restructuring considerations, including sample clauses and a list of publicly available collateral databases, please reach out for more information by email to L.varnai@recoveryadvisers.com.