“The fundamental goal of our mission in the planned reorganization of Arca Investments is to maximize compensation for creditors. If we will be able to acquire more for them, then we will seek out how to achieve this goal, regardless of whether it’s according to Czech or Slovak law,” PwC’s Petr Smutný said in an exclusive interview. PwC is participating in the reorganization plans, and we discussed them with Smutný and Arca Investments’ representative Peter Janiga.
The key meeting of Arca Investments’ creditors will take place in less than two weeks. According to the insolvency proposal that Arca filed in January at the Prague City Court, the company owes a total of CZK 18.6 billion to some 1,900 creditors who will learn how the company will pay off these debts at the meeting.
We discussed the preparations of these plans with Peter Janiga, the representative of Arca Investments responsible for restructuring, and PwC partner Petr Smutný, an expert on restructuring that is part of the team participating in the process.
“What is good for creditors is also good for the companies that are part of Arca. The risk of uncertainty about whether it will go the Czech or Slovak way is greater than the potential benefits from one jurisdiction or the other,” Janiga said in the interview. “If we don’t reorganize, then the compensation for creditors will be dozens of percentage points lower,” Smutný noted.
What is the state of the Arca Investments case? It has billions in debts and there is the question of compensating creditors…
P.S.: To start with, I’d like to mention that we need to differentiate between Arca Investments, which the media sometimes confuses with Slovakia’s Arca Capital Slovakia. Arca investments is the parent company of more than 100 subsidiaries that filed for insolvency with the goal of reorganization, saying the centre of interest is in Czechia and the process will take place in the Czech Republic.
However, there is also a process underway in Slovakia according to local jurisprudence, but the court has not ruled where the main interest is located and whether the insolvency process will take place according to Slovak or Czech law.
And what state is the Czech part in now?
P.J.: The process has advanced a bit as an interim creditor committee has been established. Also, we have prepared a summary of the conditions for our reorganization in confluence with the interim creditor committee. It gives a clear direction, goals, and conditions for the reorganization plan we are putting together.
In Slovakia, the process was suspended, and a 60-day period is underway where an appraisal is being prepared by the Slovak insolvency administrator.
How important is the location of the process?
P:S.: It has an influence on creditors. Groups of creditors have a much weaker position in the Slovak process than in the Czech one. That can influence how much creditors receive. We mainly need to know which jurisprudence will be used.
It’s also necessary for any investor that would purchase assets to know which laws will be used. The processes are very different, which is why we need clarity in this matter – both for creditors and investors. That must be unconditionally transparent. In terms of the timeline, then they are very similar. The end of the process and the approval of the program are about the same. As most of Arca Investments’ creditors are in the Czech Republic, Czech law is more comprehensible for them, and they can better orientate themselves.
P.J.: The risk in the uncertainty of the Czech or Slovak process is by itself greater than the potential benefits of one or the other jurisdiction.
Is the creditors’ point of view key for the reorganization plan, or is it what would be better for Arca Investments?
P.S.: The fundamental pillar of our mission is to maximize creditor compensation. It’s not about satisfying shareholders at all. That’s what the law says. If we will be able to acquire anything more for creditors, then we will seek out how to achieve this goal regardless of whether it’s according to Czech or Slovak law.
P.J.: What’s good for creditors is also good for the companies that are part of Arca, which is the maximizing of value of individual projects. That’s a common interest.
Is reorganization the best way to satisfy creditors?
P.S.: Yes, most definitely. And if we don’t reorganize, then the compensation for creditors will be dozens of percentage points lower. The idea behind reorganization is to allow for a transformation, specifically to consolidate assets. For example, we can transfer assets from investment companies in Malta and Cyprus to Arca Investments, and Arca will appraise these claims and stakes. An investor will be brought into some projects to provide capital for their completion, such as development projects.
The difference between the best and worst bankruptcy solution is in the hundreds of millions of euros. Creditors could receive in order of hundreds of millions more in compensation with reorganization. If the company were to go into bankruptcy, the assets with potential will only be sold off, but they won’t be further developed. Arca’s problem was that it invested into a series of good projects but financed them with short-term money. That’s clear in those development projects. Arca purchased lucrative building plots that were finance by five- to ten-year loans, but not even zoning decisions could be secured in that period…
P.J.: As part of reorganization, we want to negotiate the sale of the group’s non-development projects. On the other hand, development projects will continue in the case of reorganization and their continuity, progress, and increase in value for creditors will be assured. Only afterwards will their value be assessed.
Can you quantify the difference between bankruptcy and restructuring in detail?
P.S.: As per law, we will seek to satisfy 50% of claims, which is €350 million. We’re at a value of €150 million in the case of bankruptcy using a rough estimate that doesn’t include all costs. But that’s only a rough appraisal without an official quantification. We believe we can reach €350 million in the case of reorganization.
What are the other main goals besides satisfying creditors?
P.J.: The group had three main weaknesses that in combination with the COVID-19 shock led to the current state, and we are trying to correct them as part of the plan. First is the structure of the group, specifically the connection of stakes and claims where reorganization will bring greater transparency.
The second deficiency was corporate governance, and the third was the poor structuring of financing. All three of these problems would be corrected by restructuring. There is no point in changing one thing without changing the others. The fragmentation was partially a result of the condition Arca found itself in. The focus and vision of Arca gradually transformed with changes in management.
Will the consolidation create one big company or separate larger units?
P.S.: The principle we proposed and the creditors’ committee agreed to has a basic scenario where all of Arca’s assets will be placed into a new legal entity. That entity will then create individual sub-holdings or units for which it will be easier to seek financial partners or investors.
Is the case of Arca exceptional in the Czech investment environment, or in Europe perhaps?
P.S.: It’s exceptional in Central and Eastern Europe. For me personally, it’s a very complex and structurally difficult project that took some time to understand. It took a while to comprehend the flows and relations within the group. It’s a bit of a Czech-Slovak variation on Lehman Brothers. It’s under two legal jurisdictions, and there are more than 100 companies.
What’s your opinion of creditors banding together and defending their interests together? Will this make the process simpler or more complicated?
P.S.: We welcome the grouping of creditors under a pair of law offices that understand the matter. They are represented by professionals that understand the topic and can offer constructive ideas that could benefit the entire process.
However, we must remember that not everyone has the same interests. Some want quick money and don’t care about value. Some have an appetite for investment that could go against the interests of other creditors. But if intentions are positive and there is a common interest among creditors, then our project has a chance for success. On the other hand, there are several entities in the process with other priorities.
How long can the reorganization take?
P.S.: We planned the legal reorganization for 2-3 years, and then it can continue outside insolvency. It cannot take longer than 5 years according to Slovak legislation. It also cannot take too long to win support from creditors.
P.J.: Two interests are at odds. One is the highest level of compensation and the second is to receive compensation as fast as possible, which go against one another. There are many development projects in Arca that demand time. The optimum time to sell some projects isn’t dependent on the given phase of development, which isn’t optimal either. They can appreciate once the projects are stabilized and left in a certain form. Less compensation is achieved sooner, but delaying brings greater returns.
Can you give us an example?
P.S.: For example, we have the Manuvia employment agency that was affected by COVID. The number of agency workers was around 12,000 in pre-COVID times, and now it’s about half. If it comes back to the 12,000 level during the economy’s and the labour market’s rebound, then Manuvia can double or triple in value in a couple of years. That’s an example why it’s good to “sit” on this type of project, stabilize it, acquire financing for its partial development if needed: It creates much greater value. The principle isn’t just sitting on something, either. On the contrary, we must be active by bringing in a financial partner that will create a certain capital structure that we can use to request a bank loan to develop the project, which will add several tens of percentage points to the project.
P.J.: We also have a series of development projects and land that we can only add value to with a zoning decision. Or we can develop the project and bring even greater value. We also have projects we launched 3-4 years ago that need to be stabilized or completed, i.e. a tourist resort and something in the financial sector.
How will the external environment affect restructuring, specifically COVID, rising real estate prices, an abundance of capital in the market, etc.?
P.S.: Inflation will have an effect. Project costs will increase. Or, for example, Arca has a stake in loan company Silverside, which has been hit by COVID. Participation in the energy business in Slovakia or the automotive industry are more COVID neutral, except for chip shortages.
P.J.: The current situation where there is enough capital in the market plays into our hands, but we need to create positive conditions for investors. A good reorganization plan will remove risks not just from the insolvency process itself, but also in the currently overcomplicated structure of the company.
Is there a reputation risk for investors?
P.J.: The restructuring plan must be detailed and credible enough to win the trust of creditors and then investors.
P.S.: I’d add two other elements at play. The first is that our proposal includes hiring interim crisis managers that haven’t been associated with Arca up to now and have moral credit. The second principle is that proceeds from divestments will only be used to pay creditors and not for reinvestment. Reinvestments will be financed by capital from incorporated investors, which will prevent Arca from repeating its mistakes.
Have Arca’s problems affected the market and investors, making them more risk averse?
P.S.: A series of projects that were financed by bonds failed this way. Today, several projects are financed by tokens, cryptocurrencies, or blockchain operations. The appetite for risk hasn’t improved after with these, either.
Our task is to return as much money to creditors as possible. Let’s not deal with the past, but the current crisis at Arca Investment. Past and potentially problematic transactions will be dealt with by the insolvency administrator within the legal guidelines.