DealMakers - Q1 2021 (May 2021)
Independent escrow and treasury intermediary support vital during financial restructuring
by Brendan Harmse
Companies that are financially restructured, as well as funders, lawyers and other interested parties, can avoid pitfalls and benefit from independent escrow and treasury intermediary services.
The ongoing effect of COVID-19 has led to an increasing number of companies requiring financial restructuring, with some potentially needing to enter business rescue. According to the latest available Companies and Intellectual Property Commission’s figures, 233 companies started business rescue proceedings between April and October 2020, up from 216 in the same period 2019. As the fall-out from COVID-19 becomes clearer and potentially more dire in certain industries, these figures are expected to further spike in 2021.
Statistics SA figures, released in January 2021, showed that the total number of liquidations increased by 20.5% in the fourth quarter of 2020, compared with the fourth quarter of 2019. There was a year-on-year increase of 14.2% in December 2020.
Restructuring can be an emotive process
Typically, many parties, often with differing objectives and agendas, are involved in financial restructuring. This is a high-stakes and emotive environment, with business owners, management, employees, funders, other interested parties and their representing lawyers understandably under pressure and taking strain.
The financial restructuring process can be highly complicated. The execution risks are high and require timeous, precise and complete sequential execution of detailed financial steps in order to ensure all rights and obligations are fully established and settled as planned. It is crucial, therefore, that detailed planning and testing takes place in advance, and that the work of all parties is well coordinated. Confident, calm and collected teamwork, as well as clear, proactive communication are needed to ensure success.
Escrow and treasury intermediary support services are an invaluable toolkit of financial restructuring options. Such services are ideally outsourced to a third party. This is because they can both be administratively burdensome, and an independent and neutral corporate fiduciary and agency service provider, with substance and operational continuity, can bring protection to all parties and help reduce some emotion and uncertainty from the equation.
How escrow and treasury intermediary support work
The key purpose of an escrow is to help each party perform its contractual obligations when it is not possible to have certainty as to various matters at completion. Cash placed in escrow evidences the serious intent of such party to complete the financial restructuring, whilst cash held in escrow can be distributed to the relevant parties as compensation, in case the restructuring falls through. A major benefit of holding funds in escrow is thus that it offers the parties protection from default, fraud or misconduct, whilst conditions or representations and warranties are being fulfilled. If one party does not fulfil its obligations, the other party is protected by the escrow agreement.
It is fairly common for escrow agency services to be provided through bespoke escrow special purpose vehicles (SPVs), each one incorporated for the purpose of the particular transaction. These escrow SPVs are bankruptcy-remote, and legally ring-fenced for clear risk mitigation and balance sheet, accounting and taxation separation purposes.
Not all escrow agency providers, however, are able to act as treasury intermediaries as well. The latter requires approval from the South African Reserve Bank to act as a Treasury Outsourcing Company for foreign exchange denominated transactions. To deal with local currency, the intermediary would generally be best placed if it operated an efficient corporate cash management platform, with related processes and procedures. Best-practice governance and compliance is further needed when it comes to managing FAIS and FICA related roles and responsibilities.
Escrow and treasury intermediary services often left too late
In a financial restructuring scenario, escrow and treasury intermediary services are sometimes, unfortunately, only considered at too late a stage. This can lead to serious bottlenecks when it comes to obtaining, reviewing and signing off on all regulatory requirements ranging from KYC, AML, FATCA, and CRS requirements, and potentially even related roadblocks to opening required new bank accounts. Parties often do not factor in that a minimum of seven business days from the completed bank account application submission date should further be allowed for the relevant banks to complete their related internal processes. It goes without saying that the source and application of funds need to be substantiated and verified as part of these requirements and processes.
Maitland was recently involved in a high-profile restructuring transaction, in which we acted both as the escrow agent for foreign-based funders in a different time zone, and as the treasury intermediary for the escrow agent, the company being restructured and the new funding company. Funds had to flow locally and abroad in a large number of local and foreign-denominated currency steps, in less than two days. The stakes and execution risks were high, as the detailed restructuring steps needed to be followed in exact sequence and, in all instances, with speed, completeness and accuracy to fulfil all the various legally documented requirements. We successfully assisted the restructuring agent with the restructuring related cashflows and, together with the bank with which we worked, we managed to meet all time frames and other requirements.
In conclusion, having the same escrow and treasury intermediary services provider, with roles clearly defined and team members accustomed to working together and cohesively, can complement and streamline the financial restructuring execution process. Combining escrow and treasury intermediary services can help to reduce the extent of initial requirements, as well as improve the required timing, external communication and, most importantly, the execution risk on financial restructuring day.
Harmse is Head of Corporate Services (South Africa) | Maitland.