Interview of the Month with Petr Smutný

You are the leader of Business Recovery Services team at PwC in the Central & Eastern Europe region (CEE) with almost 30 years of consulting experience, specialising in independent business reviews and preparation of restructuring plans. Your team is widely regarded as the leading insolvency advisory practice in the Czech market. How did you get into this professional field and how has it evolved over the years?

I started working in 1992 and right at the beginning I got a few clients that nobody knew how to handle. During my secondment in the USA, this was pretty standard, a sort of “newbie, here’s a difficult client, show us what you can do” approach. And I always managed somehow. In 1999, when I was considering what to do next, two departments opened at PwC Czech Republic: forensic audit and restructuring. So, I transferred to restructuring and my first assignment was the restructuring of Nová huť, where I spent three successful years of work.

The milestone was when LG.Philips went bankrupt in 2007 due to an investment in bad technology. Although everyone gave up on the company, we were able to propose a solution and negotiate settlement with the director of the factory in Hranice. Approximately 32 factories around the world fell into insolvency and it was the best showcase globally. Afterwards, when the crisis hit in 2009, I had a top team of experts at PwC with unparalleled experience, which is why we won all the big contracts.

The next major one was the restructuring of Kordárna, the first contract under the new restructuring law. New concepts were tested, the new law was applied, the company was successfully sold, and students are still writing their theses on this topic today. Thanks to this, we have become a benchmark of quality and reliability not only for creditors, but also for debtors, who know that we don’t play any games and that we want to achieve a good result for both parties. The basis of our success is the stability, clarity and competence of our team.

After the crisis, new opportunities emerged, for instance in Slovenia, where we won all restructuring cases and sales. The banks there were in trouble, the percentage of non-performing loans (NPLs) was around 25% and the whole country was on the verge of bankruptcy (in comparison, our NPLs are around 2-3%). I figured that the New Ljubljana Bank could sell the outstanding loans for €800 million.  And while the market standard was that the prices were around 5-10% of the portfolio value, we reached almost 30%. After this success, we were approached by other banks to apply this strategy in their case as well. I was almost living in Slovenia at that time and we had most of the business on the market. Therefore, the crucial element of this business is also the creativity of solutions – seeing opportunities where others only see obstacles.

Could you please elaborate on what the business recovery services are actually about and how it can help companies, especially those in financial troubles?

Approximately half of our business comprises insolvency advisory – we prepare reorganisation plans, manage sales processes and advise either debtors or insolvency practitioners, such as now at Liberty Ostrava. The other half focuses on non-insolvency restructuring. We help companies in payment difficulties to rebuild the confidence of banks and creditors, propose transformation measures and ensure their long-term viability. Last year, we successfully completed a number of distressed M&A transactions, mostly with strategic investors. In general, I would say that we specialise in non-standard situations under time, financial or other pressures – where methodical approaches are not enough.

What are the major differences between the business recovery services in the Czech Republic and other CEE countries?

The main difference is the complexity of the services we offer in the Czech Republic. The most advanced market besides us is Poland and Romania; other markets are small and significantly less sophisticated. In Poland, the insolvency business is not as well-developed as in the Czech Republic, but there are a lot of restructurings due to the size of the country. On the other hand, in Romania, creditors are not used to requiring IBR; it is one of the few countries where we operate as insolvency practitioners. In other countries, especially in former Yugoslavia, contracts in our field are very rare. We have had a number of successful projects in Slovakia. We have worked on modernising legislation there and, in general, the Slovak market is potentially very interesting. However, there are not many contracts or distressed transactions there.

As regards your consulting practice, which major trends have you registered since the pandemic period in 2020?

Some firms, especially in healthcare and retail, succeeded during the COVID-19 pandemic but were not prepared for such massive growth and ran into problems afterwards. Even though many countries have since created the institute of preventive restructuring, there are not many contracts in this area. Banks have healthy portfolios and low NPLs. While during the crisis we reached almost 10% of NPLs in the Czech Republic – in some places even 25%, today we are within 2%. These are isolated cases, perhaps driven by failed investments or generational change. Inflation has also played a role, with large price increases meaning higher demands on working capital. There are also companies that have been negatively impacted by anti-Russian sanctions or other reasons, but we do not observe a systematic trend. Occasionally, we deal with sales of distressed companies, for instance, recently with an owner with no heirs and a tax dispute, but even these tend to be rare cases.

Are there any significant general differences between large corporations and SMEs as regards their financial troubles and subsequent debt advisory/restructuring efforts provided by your team?

If a Czech company is a subsidiary of, let’s say, a German automotive group and the parent company goes into distress or insolvency, the implications can be huge. Implications such as the relationship between the parent company and its subsidiary and also the relationship of different legal regimes are addressed. Foreign groups also often use cash pooling, which can be lethal for the subsidiary, which thus has no cash in the account but only receivables from the parent company in distress. And if one does not know all the local rules and regulations, one can make bad decisions. Currently, we’re working on a multi-billion-dollar company with offices in a number of countries. The size of a company does not automatically mean better processes or more transparency. Even large companies with billions in turnover can have very complex structures. For small companies, the work is similar, but with less financial potential.

What is your current typical advice to your clients in general to solve their excessive financial leverage? EBITDA enhancement, net working capital (NWC) optimisation, CAPEX optimisation or asset disposals? Or is it usually a combination of these actions which are generally aimed to boost free cash flow (FCF) generation?

One of the main priorities is cash – as they say “cash is the king”. Then, of course, it depends on the specific situation. The company needs to be stabilised and set up properly to be viable in the long term. Another tool is finding an investor. If the owner doesn’t have the strength, financial reserves and sufficient working capital, the banks no longer trust him. Sometimes it takes a dramatic move, such as selling even a part of the core business. And most owners don’t want to do that.

You have led some of the largest restructuring projects in the Czech Republic. What are usually the biggest challenges within these projects?

I have long proclaimed that the biggest obstacle is usually the owner in the company management. When they get into trouble, they tend to complicate finding the optimal solution and turning the company around. I usually advise owners to take a holiday, go somewhere to get a tan and let us work. However, instead of listening to us, they often hold onto the company until the very end, when the working capital is consumed, minimising the possibilities of where else to reach, and making it all the more challenging. Complications can include a difficult legal structure, inappropriate ownership, liability or some instruments that are difficult to get out of.

Based on your professional experience, what are the key specifics of financial management in Czech companies? Are there any significant differences between CFOs of Czech companies and CFOs abroad?

I don’t think there are significant specifics. For instance, many of our clients don’t have a cashflow management system in place. They live in comfort, without addressing working capital surpluses or optimisation. In western countries, there is more pressure to maximise optimisation and make good use of resources. Many companies in our country are managed in an unsystematic way and the processes don’t meet the 21st-century standards. When they run into difficulties, these outdated systems and processes are often the source of additional difficulties.

Your team is also responsible for non-performing loans (NPL) portfolio transactions in the CEE region. What are the key characteristics and the key players involved in this business?

The main wave took place in 2015, when banks were cleaning up and selling portfolios after the crisis. Not many NPLs could be found in the Czech Republic – rather single cases (single tickets). Large transactions were dealt with in Slovenia, Croatia, Romania, and Serbia; international firms set up branches there to service the NPLs. There were not many investors, perhaps up to ten. Some transactions were local, but most were funded from London or Western Europe. There were also banks, such as Deutsche Bank, which had teams buying portfolios. And then local platforms were created to service the portfolios. Today, the NPL transaction segment is virtually non-existent; the market has changed significantly. Banks used to sell loans for which they obtained 5% to 10% of their value, but now they often dispose of significantly more creditworthy loans, sometimes at face value. The situation in retail is different; banks sell non-performing loans regularly and the market is quite saturated.

You are also the President of the Turnaround Management Association (TMA) in the Czech Republic, which serves as an interdisciplinary platform for exchanging knowledge and experience between restructuring and insolvency practitioners. Under the auspices of TMA, you have been involved in the training of bankruptcy specialists at major banks, as well as a number of judges involved in insolvency proceedings. What is the mission and major goals of TMA under your leadership?

I want to bring together experts and create a platform for sharing experience. Then when these people meet on a case, they can communicate with each other and find consensus quickly. The fact that we have standardised resolution processes has proven to be very beneficial to the market and to creditors. Over the years, we have managed to create a community, practices and mechanisms for interconnecting bank creditors, legal advisers, economic advisers and the whole chain within the insolvency process. The Czech TMA is the longest and best functioning association in Central and Eastern Europe. It is also essential that we recruit people by mutual consensus who meet not only professional but also moral and ethical credentials.

Bio 

Petr Smutný is a Partner at PwC in the Czech Republic and a leader of the Business Recovery Services team in CEE. Petr has over 30 years of consulting experience, specialising in Independent Business Reviews and preparation of restructuring plans. Petr has led some of the largest restructuring projects in the Czech Republic, operating in a wide range of industries including steel & machinery, automotive, mining, consumer goods and other industries. He has also participated in major restructuring projects in Slovakia, Poland, Croatia and Slovenia. Petr’s team is widely regarded as the leading insolvency advisory practice in the Czech market. Petr has been engaged in all recent major insolvency cases in the market.  

Petr led the project of financial restructuring of Hidria Group that was perceived as the landmark restructuring project in Slovenia. Petr also led two restructuring cases, which were both selected as the project of the year by the Europe Turnaround Management Association (TMA Europe) – complex restructuring services in insolvency trustee support of SAZKA a.s. and complex restructuring services in insolvency Preparation of distress M&A of company Kordárna a.s. Petr’s team is also responsible for NPL portfolio transactions in the region, developing the NPL / NPA portfolio market and cooperating closely with local financial institutions and international investors. Among others, Petr has been involved in the project of €800m corporate NPL disposal in Slovenia and Croatia.  

Petr is the President of the Turnaround Management Association in the Czech Republic, which serves as an interdisciplinary platform for exchanging knowledge and experience between restructuring and insolvency practitioners. Under the auspices of TMA, Petr has been involved in the training of bankruptcy specialists at major banks, as well as a number of judges involved in insolvency proceedings. As a member of an advisory body to the Czech Ministry of Justice, Petr is involved in reviewing and proposing legislative changes in the field of corporate insolvency.