Navigating Uncertainty

These are uncertain times. COVID-19 continues to have a huge impact globally on everyday life and business. We continue to see significant volatility in the markets and large parts of the world population are on lockdown. Predictions vary about how much the global economy could slow, and for how long we will see these effects, but many businesses will already be seeing the impacts of the disruption on performance. We suggest in this article some considerations for companies and mutual funds, and their fiduciaries, as they navigate these challenging times. Cash Flow Management Cash flow management in volatile times is critical; as markets fall and there is sustained uncertainty, many investors will seek to withdraw funds in an attempt to minimize losses and to generate liquidity. In addition, cash demands may increase due to margin calls and liquidity requirements of subsidiary or portfolio companies. Some thoughts from us:

• Review your asset portfolio and assess the liquidity of assets in the short to medium term and identify which assets could be realized to improve cash flow; this needs fluid decision making and regular reassessment;
• Consider increasing the frequency of financial / management reporting;
• Review governing documents to confirm what actions are permitted; for example suspending redemptions to avoid a fire sale of assets to meet liquidity needs. Consider taking professional advice before any significant decisions are made;
• Consider whether there are any other sources of funding available (debt/equity etc.) and the proposed terms and impact on the longer term business;
• Review where monies and assets are held in custody and consider a risk assessment of these providers. Consider the concentration risk if held all with one institution; and
• Draw on experienced professionals used to handling business issues in an economic downturn.

Business Continuity Plan

Many clients will have a business continuity plan but these should be urgently reviewed in light of current circumstances. Matters to consider:

• Communication is key. A good communication plan can give stakeholders confidence that you are anticipating issues and have a plan to address them. Your plan should identify key stakeholders for example investors, employees, service providers, prime brokers and leverage providers, underlying asset managers/ boards and LPACs. The plan should highlight the type and frequency of communication to each group;
• Consider employee morale and health, changes to hours and working conditions, remote working etc. and any employee retention concerns;
• Consider the impacts on off balance sheet / contingent liabilities such as guarantees;
• Review contracts for any insolvency/default clauses together with any financial covenants trigger points and model these with new forecasts;
• Consider requirements to notify insurers of any litigation exposure and whether there could be any regulatory impact for example inability to hold board meetings in specific jurisdictions due to travel restrictions; and
• Obtain timely updates on emerging risks and threats. Increase the frequency of board meetings and update calls during the period.

Zone of Insolvency

Often referred to as the cash flow test, a company is treated as unable to pay its debts if it fails to satisfy a valid statutory demand, execution on a judgement is returned wholly or partially unsatisfied, or if it is proved to the satisfaction of the Court that the company is unable to pay the debt. For example an unpaid redemption creditor could be a basis to wind up a fund. The Court can also wind up an entity on just and equitable grounds. Some thoughts for fiduciaries when solvency is a concern:

• Review the value of investments and assess the impact on the balance sheet / net asset value (and conduct sensitivity analysis) in light of potentially deteriorating underlying assets;
• Consider the solvency position of the company / fund and reassess this frequently;
• If you determine that the company / fund is insolvent the economic interest will shift to creditors rather than investors;
• Carefully review any transactions during this period and consider taking professional advice to avoid entering into transactions which could constitute a preference or a transaction at an undervalue (for example selling off assets at a reduced value);
• Consider restructuring options such as the engagement of advisors or enhancement of the board with an experienced restructuring professional (e.g. CRO); and
• Consider appointing advisors or liquidators to carry out a controlled wind down and whether any court protection is required to facilitate an orderly wind down.

How We Can Help R&H Restructuring is a multidisciplinary team with offices in the Cayman Islands and the British Virgin Islands, with a diverse range of restructuring and insolvency experience and specialist skills in distressed situations. About us:

• Independent and generally conflict free;
• Innovative approach;
• Global reach;
• Broad range of expertise; and
• Flexible Solutions.

In addition to the Rawlinson & Hunter affiliation, their ongoing strategic international partnerships provides them with immediate access to resources for effectively servicing clients anywhere in the world. This expertise includes restructuring, fund fiduciary, trust, corporate, accounting and fund administration professionals who hold relevant financial industry licenses in their respective jurisdictions, holding us to the highest of global regulatory standards. We regularly work with our colleagues in these affiliated companies to provide clients with a team tailored to their needs. Our Services include:

• Financial Restructuring and Working Capital Management advice
• Acting as Restructuring Directors (CROs)
• Acting as Wind Down Agent and Voluntary Liquidators
• Set up and administration of Liquidating Trusts
• Acting as Court Appointed Liquidators and Receivers
• Schemes of Arrangement
• Forensics Accounting Support