Monitoring agents and debt negotiations

As credit tightens in economies across the world, so the frequency of debt renegotiations becomes a more frequent issue – both for companies seeking to restructure outstanding credit and investors seeking to ensure repayment and optimise yield.

Any time these issues require negotiation between corporate debtor and investor creditors there is a need for monitoring agents (MA) – sometimes referred to as “watchdogs”.

While creditors select and companies mandate MAs, all parties in debt discussion benefit from the increased confidence the watchdog provides about the underlying financial position of the company in question. Generally, all sides receive the same reports from the MA and so the appointment of an MA that is credible to all parties is critical. After all, the watchdog’s reports, which provide full transparency across a range of metrics, as well as detailing historical data that helps parties to understand the direction of the company’s finances, need to trusted to be a solid basis for debt renegotiation.

Specifically, the MA is responsible for creating and distributing reports that outline – in detail – the financial and operational performance of the company in question, as well as monitoring the financial and non-financial covenants that were predefined between the debtor and its creditors (either in specific debt instruments on the broader scope of the watchdog’s services agreement).

An important task that the watchdog undertakes – for all parties – is monitoring the company’s cashflow, the composition of its capital structures, as well as information relating to the company’s senior managers. It is also critical that the MA monitors the company’s liquidity events regularly. These include the following:

• the company’s financial situation (updating of key metrics)
• its operational performance according to pre-agreed parameters
• analysis of the formation of prices and costs
• measurement of corporate progress against key budgetary and operational targets
• monitoring of other company assets that have been provided as guarantees or contingencies.

The company itself benefits from this oversight role as it generates investor confidence and trust in the transparency that is being provided as the basis of debt renegotiations. For the company, this promotes improvement in cashflow – often by lengthening the tenor of financing costs – as well as other beneficial arrangements between the parties.

Confidence in the specific MA providing these services is clearly critical: mandating a watchdog that can create a very high degree of confidence is the leading objective. One of the clearest traps to avoid is, therefore, mandating an MA that might be seen as partial by any individual party. Great care should be taken to avoid hiring an MA that has any conflict of interest, or even the perception of such a conflict.

It is also important that the company doesn’t simply duplicate the auditing function: a critical element of the MA’s work is to complement the existing auditors work, and therefore investors often appreciate it when the watchdog role is conducted by a non-auditing firm, which can bring a fresh approach to methodologies and analytical strategy. A large part of this can simply be flexibility – the ability of the MA to engage with very customised situations and adapt to the expectations and needs of all parties.

MAs also need to be global organisations, with a geographical footprint that generates credibility with international investors, as well as with other international entities such as banks, lawyers and other participants in the debt negotiations.

Lastly, MAs need to have a demonstrable track record in managing corporate debt transactions, ensuring that they fully understand regulatory frameworks, disclosure requirements, transactions’ covenants and filings, as well as being able to point to a broad-based financing specialism.

So while MAs are the bridge to successful debt renegotiations, some bridges are clearly more resilient and enable parties to reach out to conclude mutually beneficial debt renegotiations. Success clearly requires that MAs can build the confidence of all parties – not just in the reporting accuracy they provide about the underlying company, but also when it comes to their professional competence and capabilities as financial partners and advisers in what can potentially be fraught and complicated discussions. Ultimately this depends on hiring credible, capable professionals who understand corporate finance and debt transactions, and are seen as neutral experts by all parties involved.

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TMF Group is an independent provider of a full range of agency services for capital markets transactions. Our global footprint offers clients a significant advantage on multi-jurisdictional secured bonds and loans, with our capital markets group providing services in more than 30 countries worldwide.

Our clients and partners include banks, borrowers, corporates, funds, industry bodies, lenders and sovereigns. Within our agency services offering we have 11 subservices, covering all capital markets products.

Our agency services include acting as administrative agent, collateral agent, calculation agent, custodian, facility agent, monitoring agent (exclusively in Brazil), paying agent, loan agent, registrar, security agent and transfer agent. In addition, we offer process agency services in more than 30 locations.