Key ruling in ECM insolvency case: developer allowed to reorganize

Following almost a year of speculation as to whether the developer ECM would be declared bankrupt, or given a chance to restructure, the Prague Municipal Court has decided on the latter. Astin Capital, which represents a group of holders of ECM’s Eurobonds with a face value of over Kč 3 billion, has been given 120 days to present a restructuring plan. If it fails, individual creditors, including ECM itself, will be given a chance.

Insolvency proceedings were launched against ECM on April 11, 2011, on the initiative of the bank Česká Spořitelná, and on July 20 the developer’s creditors voted to send the company into administration. Among those in favor of the radical move were the PPF group and the insolvency administrator Ivo Hala. 

ECM was founded in 1991 by Milan Janků and in the Czech Republic is perhaps best known for several tower blocks which dot the Prague skyline. A decisive factor in the vote to send ECM into administration last summer was that Hala did not recognize the voting rights of the largest group of creditors — the holders of the eurobonds represented by Astin Capital — precisely those who favored restructuring over bankruptcy proceedings. ECM’s creditors last July declared a total of Kč 9.44 billion in receivables from the real estate developer to the Prague Municipal Court.

End of uncertainty

The Prague Municipal Court cancelled the administration proceedings last October on the grounds of procedural irregularities, and thus the creditors convened again on Nov. 22. They failed, however, to reach a consensus on whether to initiate bankruptcy proceedings or allow a go at restructuring, so the decision was left to the court. ‘It’s a key ruling, and I’m convinced reorganization is the right and very best solution.’

The decision by the court announced on Thursday to allow ECM to restructure ended almost a year of uncertainty: “It’s a key ruling, and I’m convinced that reorganization is the right and very best solution,” ECM’s founder and majority shareholder Milan Janků told Czech Position.

Janků says he is convinced the protracted uncertainty over the firm’s future will not affect revenues for the creditors or influence the future fate of the company. “It’s true that as from July last year when the company was sent into administration until last October when the decision was overturned by the court, the continuity of management was disrupted,” he said. But as of October ECM’s statuary organ has led the company instead of the insolvency administrator, “and the restructuring process resumed,” Janků added.

The ECM founder presented his restructuring plan prior to the meeting of creditors last November, according to which “a trustworthy and independent professional” would be appointed CEO, and recommended conducting a detailed analysis of the firm’s assets and projects and only thereafter a tender organized to find buyers.

Strategy under preparation

According to Janků’s proposal put forward last autumn, following proper restructuring the firm’s creditors could get around €54.5 million (about Kč 1.3 billion) from the sale of property, whereas if the firm was declared bankrupt, they would only collect around €39.3 million. ‘Of course this doesn’t mean we won’t support a reasonable plan put forward by the creditors.’

Janků declined to say whether his plan dating from the time is still valid. “At the meeting of creditors last November the participants resolved that ECM will not have priority rights to present a reorganization plan. That option was given to Astin Capital,” Janků said. Nevertheless, ECM’s founder and his management team are preparing their own strategy. “Of course this doesn’t mean we won’t support a reasonable plan put forward by the creditors,” he added.

From boom to brink

Five years ago, all was still rosy as investors rushed to buy shares when part of the company was floated on the Prague Stock Exchange (BCPP) as ECM Real Estate Investment (ECM REI) in 2006. Janků was said to have pocketed a tidy fortune from the successful floatation.

A harsh dose of reality for the firm came with the real estate crash and credit squeeze of 2008. The following year, it appeared a lifeline had been thrown to the developer when the PPF investment group and ECM Group, which still held an 84 percent shareholding in ECM REI, announced the creation of a joint venture.

The great expectations for the real estate joint venture never came to fruition, however, and the ambitious early plans shelved. Holding 75 percent of the joint venture, PPF announced at the end of 2010 that it was pulling out of joint projects and would go it alone on the real estate market under the PPF Real Estate Brand. PPF then turned out to be the main force seeking ECM’s bankruptcy.

A number of observers of the Czech real estate sector concluded that PPF’s aim was to see to it that ECM was declared bankrupt in order to be able to snap up its assets at knock-down prices.

Apart from the Czech Republic, ECM still has assets in Poland, Russia and China.