Safe Harbour Demystified

Joseph Hayes recently spoke to Paul Sanger at the Finance News Network, about developments in Safe Harbour protection and recent Wexted experiences.

Paul Sanger: I am Paul Sanger for the Finance News Network, and today I'm talking with Joe Hayes, manager, director of Wexted Advisors. Wexted Advisors is an independent and specialised restructuring advisory firm that assists clients facing or exposed to business challenges, or confronting complex transactions or situations. Joe is also an ex-partner of KPMG and founding partner of McGrath Nicol. 

Welcome, Joe.

Joe Hayes: It's my pleasure, Paul. Thanks for having me.

Paul Sanger: Joe, we're going to talk about Safe Harbour today. Before we do that, can you explain exactly what Safe Harbour is and how does it work?

Joe Hayes: Indeed, I can. It's a piece of legislation that was introduced in 2017 following a Productivity Commission report. The government in particular were concerned that companies were entering administration far too soon and were entering administration for the wrong reasons. That is to say that directors were worried about personal exposure and were putting that issue well ahead of company performance and company outcome. Safe Harbour is a defense to insolvent trading that gives a company breathing space to continue to operate whilst it's potentially insolvent, as long as there is a qualified advisor who's providing A, that protection, and B, developing a plan that is a better plan than the company entering insolvency too quickly.

Paul Sanger: Wexted is clearly a leader in the Safe Harbour space. Safe Harbour can be applied to many areas within the financial and corporate universe. What are the key areas where Wexted has applied their expertise?

Joe Hayes: Yeah. Well look, thank you. Safe Harbour is an excellent product in our view. It's really added to the group of restructuring tools available. It essentially helps directors who are struggling with financial challenges find a solution and give them breathing space that doesn't involve insolvency. That's really important because the Australian insolvency laws are so prohibitive and what we really need is solutions that help people restructure with safety. Safe Harbour performs that role really well, and my firm operate mainly in the top end of that market, but it's a product that really applies quite broadly across the market, excellent product, and we find it's really giving directors confidence to restructure safely and without the threat of insolvency.

Paul Sanger: Gotcha. And can you give us an example of how Wexted has assisted in constructing a Safe Harbour solution?

Joe Hayes: Yeah, indeed. It begins with the directors being committed to a restructure and the director is wanting to avoid insolvency. Our plan, and we have a careful plan that we go through. You ensure that a company is eligible for Safe Harbour protection, and then you work with the board, primarily the chairman and management to say, "Well, what is the plan that you wish to do? Are you seeking to raise capital? Are you looking to restructure a particular division? Do you want to restructure management? Is there performance improvement initiatives that you can undertake?" And we will look at a financial model with management and we'll focus on what's possible. That timeframe generally takes about a month or so, and we find if we can work constructively with boards and give them the breathing space they need without the threat of insolvency, then that general results in a good solution and a better outcome.

Paul Sanger: In regards to the clients that you help, are they more focused in the mid-cap, small-cap, micro-cap space?

Joe Hayes: Yeah. Well, Safe Harbour really applies across the board, but it's most often used in the small and mid-cap space. Those are businesses that have enough muscle and enough infrastructure around them to properly undertake the process. You need good management. You need a board who are focused, you need a proper product, and generally, you need the availability to raise either debt or equity capital. So I personally found it's a difficult product to operate in the micro-space, but it's very good in the small and mid-cap space.

Paul Sanger: And with regards, you look at a company, you think, look, the board probably has some weakness and just need to bring some new blood into it. Do you help seek the expertise to build onto that board?

Joe Hayes: Indeed, and this is one of the real good features of Safe Harbour, it's actually permitting a process where boards can introduce new people without those people being worried about the threat of insolvency. So we found quite often that a chairman might come to me and say, "Well, as part of this process, we would like to bring new directors on board, but they need to be comfortable that they're not joining a business that's potentially insolvent." And so Safe Harbour gives those directors a sense of comfort that there's a plan and a process and protection. This is one of the real important features because we do find that directors are disincentivised from joining companies that are struggling. And one of the real features I feel of Safe Harbour moving forward as we go into increasingly challenging times is can we actually give the product sufficient credibility to ensure new directors feel comfortable joining boards and people with real capability should be able to join boards that are struggling.

Paul Sanger: Gotcha. And how do you see the demand outlook looking for Safe Harbour work and solutions?

Joe Hayes: Yeah, well, I feel obviously we're moving into a market with more challenges. Capital markets are increasingly hard to access. Debts becoming more expensive and insolvency is a complex solution for people because it's usually value-destructive rather than value-accretive. What we want to try and do is retain going concern value in businesses. We form the view, if we can keep a company quoted and working, that's obviously a better solution for creditors than otherwise. So we feel as the product gets more visibility, it's been five or six years in the making now, but I think finally getting credibility. We do expect that in the small mid-cap market, we'll get increased inquiry, and I do hope that we can find solutions to give the product more meaning lower down the curve as well.

Paul Sanger: Got you. And to finish up with what other areas other than the Safe Harbour does Wexted provide and solutions in?

Joe Hayes: Yeah. Well, Safe Harbour is our core product and we're happy to be a market leader in that product. We also do traditional insolvency work, and we also provide general advisory consulting services to business. But the consistent feature in our work is that all the companies we work for are facing some sort of financial or strategic challenge. And so that's the basis of our work. What we principally try and do with businesses though is find a solution that keeps them out of insolvency because we find that's the best way to obviously create value for equity holders.

Paul Sanger: Joe Hayes, many thanks for your time today.

Joe Hayes: Thanks, Paul. It's been my pleasure.

Paul Sanger: Thank you.