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In Practice
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In Practice
The negative impact of complex corporate
structures in distressed scenarios
Author Nick Hood
Key points
––Financial disclosure standards in the UK are unfit for purpose and encourage
a lack of transparency which is dangerous in distressed situations.
––Complex corporate structures can create suspicion in the minds of major
stakeholders in business rescue situations.
––Key data on debt and other adverse financial issues relevant to UK operating
companies can be hidden in international structures, often in jurisdictions
which resist their disclosure.
The devil is in the detail, a cliché
usually applied to small print at
the back of contracts, or more recently
to rescuing failing Eurozone economies
and the political horse trading which
seems to be an essential pre-requisite
to applying sticking plasters to gaping
financial wounds.
In the world of turnaround and
restructuring, complexity is far more
dangerous than the temptations of
Beelzebub, both in terms of devising
rescue strategies and implementing them.
Every business rescue expert has at some
stage looked at a structure chart and
wondered which twisted mind could have
invented such a tangled and unhelpful
web, bemoaning the extra time and cost
unravelling it would involve, just when
neither commodity was in plentiful supply.
Sadly, it isn’t just complexity that causes
problems, it’s also the lack of transparency
that comes with it which makes
restructuring so difficult and the period
prior to a formal insolvency so dangerous
for company officers, their advisors and the
many stakeholders with whom they have to
deal. There is an unholy alliance between
convoluted corporate structures and
inadequate financial disclosure.
And a key issue both before out-ofcourt restructuring or formal insolvency
commences and afterwards in a rescue
scenario is the willingness of stakeholders,
whether they are lenders at one end of the
pecking order or trade suppliers at the other,
to continue to do business with the debtor
Corporate Rescue and Insolvency
and on what terms. Their decisions are
based on an assessment of risk, which
in turn depends on knowledge of the
financial and commercial situation of the
company concerned.
The recent history of UK corporate
failures which were part of international
structures is littered with examples of
opacity, not least the refinery group,
Petroplus. It remains a mystery how any
counterparty can have had an adequate
grasp of the risks they were running in
trading with the UK components of the
group, or indeed their overseas siblings.
Suppliers to Petroplus Refining &
Marketing (PRM), the main UK trading
entity, who looked at the last set of accounts
made up to December 2010 would have
discovered that it had declared a profit of
$9m after tax and that its net assets were
$1.2bn. If they had then obtained a formal
credit risk assessment on their customer
in September 2011, the suppliers would
have been given an H-Score® rating of 91
out of a maximum 100 for PRM based on
its own financial profile, but would also
have been advised to check the health of
its ultimate parent company, Petroplus
Holdings AG (PH) which they would
have found was in Switzerland.
Analysing the accounts for PH would
represent a serious challenge for all but the
most financially sophisticated, requiring a
trawl through almost 200 pages of dense
financial reporting, but the core numbers
are straightforward. This company made a
loss of $413m after tax in the nine months
to September 2011 but had net assets of
$1.6bn. Its risk profile was substantially
different to its principal UK subsidiary,
PRM, particularly once it had breached
its banking covenants in late 2011. This
development drove down the H-Score to
only 14 out of 100, putting it well into the
warning area below 25, which indicates
a one in four chance of declaring formal
insolvency or undergoing a financial
restructuring. PH filed for insolvency in
January 2012, taking PRM down with it.
None of this is even remotely apparent
from the information available in the
UK public domain, least of all the
complicated corporate structure below
PH, involving 41 subsidiaries and 16
associates in 14 countries, including
entities in such luminaries of the financial
transparency world as Bermuda, Cyprus
and Luxembourg.
Neither could the tangled web of multibank funding facilities be seen from the UK
data. Many of the facilities were crossguaranteed by various group subsidiaries,
but nowhere either in the UK or the Swiss
accounts is it disclosed exactly which
subsidiaries guarantee which facilities
and on what security basis. In all honesty,
most suppliers and many other creditors
were flying blind.
There is no suggestion that there was
anything underhand or illegal in the design
or creation of this structure, which is in no
way unusual in the corporate world. Indeed
the PH accounts were available via the PH
Group website. But it becomes an entirely
different matter once potential or actual
insolvency is involved, especially when
significant losses are suffered by creditors.
Another unsatisfactory scenario
can be seen in the collapse of the steel
manufacturer Thamesteel Limited (TL)
which went into administration in February
2012. This company was part of a simple
August 2012
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In PRACtICe
In Practice
UK structure, one of four subsidiaries of
Thamesteel Holdings Limited (THL).
TL had an H-Score of 5 out of 100 on
the basis of its 2010 accounts, down from
an equally unimpressive 10 out of 100
the year before. It lost £33m in 2010 and
had negative net worth of £31m at the
end of the year. Its principal assets were
£77m in debts owed to it by other group
companies.
Sensible suppliers would have looked
further up the structure and reviewed
the financial position of THL, where the
picture was equally grim. Its H-Score was 3
out of 100 based on its 2010 accounts, it had
posted losses of £33m and had a negative
net worth of £32m. It owed £120m to
other group companies, predominantly
to members of the Al Tuwairqi Group
(ATG) located in Saudi Arabia which
owned 50% of THL’s immediate parent
company HAT Holdings BSC in Bahrain.
There is little point in speculating about
what public domain data might have been
available to the suppliers and creditors
of the Thamesteel’s UK businesses as
regards the financial position of ATG
and its many subsidiaries and associates,
nor the reliability of the information.
Suffice to say that exploring this would
have been beyond the means and ability
of most, if not all of them. And there was
no UK bank held security over the THL
Group’s assets, imposing any control or
discipline, which may or may not have
escaped the notice of its creditors. So here
too, creditors were left in the dark about
the risks they were taking in dealing with
Thamesteel in the UK.
A further issue is the development in
recent years of the private equity business
model, where leverage has been used to
magnify equity returns. This is of course a
high risk, high reward business model which
has generated some spectacular failures in
recent months, most obviously illustrated by
the collapse and partial rescue of the retail
group Peacocks in January this year.
Compare and contrast the financial
positions of the operating company,
Peacocks (PGL) and its ultimate parent
company, Henson No 1 Limited (HNo1).
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August 2012
Biog box
Nick Hood is head of External Affairs for Company Watch. He is a Chartered
Accountant and licensed insolvency practitioner. He had a wide ranging
professional and commercial career in the UK and overseas including 15 years
in various senior management positions before moving into the insolvency
sector in 1990.
PGL was loss making and paid interest of
£11m in its last set of accounts, but had net
assets of £47m, no debt and cash of £27m.
However, the debt of £67m owed elsewhere
to other group companies and the implied
interest rate of nearly 20% gave a hint of
the flawed financial structure but there was
no meaningful disclosure. Fortunately, the
H-Score methodology picked this up,
putting PGL deep into the warning area
with a rating of 13 out of 100.
The balance sheet of HNo1 is where
the full horror story is written: losses of
£59m, interest costs of £78m, gross debt
of £626m (around £1m per store) and
negative net worth of £187m. It had been
in the warning area ever since its first set
of accounts in March 2006, with a peak
H-Score of 5 out of 100. It was balance
sheet insolvent as from March 2007,
unlike PGL which maintained a positive
net asset position throughout the period
of ownership by HNo1.
What were the ordinary trade suppliers
and service providers supposed to make of
this? Not all of them had access to modern,
sophisticated credit information, nor
could they be expected to understand and
interpret the financial data available at
Companies House. “More fool them” is an
easy response, or perhaps “caveat vendor”.
But shouldn’t they be able to expect a more
open and morally honest presentation of
the financial position?
The fundamental point coming out of all
of this is the reality that current accounting
disclosure standards in the UK are
woefully inadequate and leave most major
stakeholders without the ability to judge
the risks they are taking, either at all or
else without having to pay for credit data
and credit ratings.
But why should the restructuring and
insolvency profession care? The answers are
various and compelling. Most obviously,
maintaining credit in a turnaround or an
out-of-court restructuring situation is vital
and experience says that poor disclosure
leads to more caution on the part of
suppliers and less credit capacity for the
debtor. Faced with an under-performing
customer and the arrival of restructuring
experts, never mind the appointment of
Administrators, suppliers and their credit
insurers can find many reasons to reduce or
withhold credit. Complexity and a lack of
transparency are near the top of a long list.
Persuading potential third party buyers
to come on board with a rescue, whether
outside insolvency, through a pre-pack or
via a sale after a post-appointment trading
period can depend on the degree to which
the purchase price has to be augmented
by dollops of extra working capital needed
to keep wary suppliers sweet by agreeing
to aggressively low credit limits. Indeed,
the price itself and therefore the return to
creditors may be depressed by these added
working capital demands.
Insolvency practitioners should also see a
benefit in more open disclosure, if it exposes
problems at an earlier stage and allows
them to deliver more positive outcomes,
saving more businesses and jobs. If nothing
else it would make the business review
and restructuring plan design stages of
assignments so much more straightforward.
The resource spent on understanding
structures could be re-directed far more
productively to examining the vital
commercial issues in greater depth than
time and circumstances often permit.
There must also be a growing risk that
sooner or later, a group of UK directors and
their advisers will find themselves on the
painful end of a wrongful trading decision,
or an expensive piece of inbound litigation
based on allegations of deliberate thickening
of the corporate veil, or causing loss through
withholding information. This has become
close to a blood sport in the USA since the
start of the global financial crisis.
But whatever other reasons there
may be, restructuring and insolvency
professionals should surely see it as wise
to support efforts to improve corporate
disclosure. We are living suddenly in a world
where the media are shining their spotlight
with great enthusiasm into some very dark
corners of the financial world. Public opinion
has clearly shifted from accepting that things
are legally compliant to asking whether they
are morally defensible. And nothing excites
suspicion of evil deeds more than secrecy. 
Corporate Rescue and Insolvency