Global—On 21 November 2012, a U.S. district court ordered Argentina to pay $1.3 billion on defaulted restructured debt no later than 15 December when it pays other bondholders. In the last issue of EuroResource, we reported on an important ruling handed down by the U.S. Court of Appeals for the Second Circuit that may impact sovereign debt restructurings. In NML Capital, Ltd. v. Republic of Argentina, 2012 BL 283459 (2d Cir. Oct. 26, 2012), the court upheld a lower court order enjoining the Republic of Argentina from making payments on restructured defaulted debt without making comparable payments to bondholders who did not participate in the restructurings. Broadly speaking, the decision reflects judicial dissatisfaction with a sovereign debtor that for many years has flouted judgments entered by U.S. courts, notwithstanding the debtor's possession of resources sufficient to pay such judgments in whole or in part. Argentina has stated that it will seek to appeal the ruling to the U.S. Supreme Court. The full text of the opinion can be accessed here.
The Second Circuit remanded the case to the district court for the purpose of clarifying how the injunction was to function. On 21 November, U.S. District Judge Thomas Griesa did just that, ordering Argentina to pay holders of the original defaulted bonds in full—approximately $1.33 billion—on 15 December when interest payments are due to holders of Argentina's restructured debt. "It is hardly an injustice to have legal rulings which, at long last, mean that Argentina must pay the debts which it owes," Judge Griesa concluded. "After 10 years of litigation, this is a just result." If Argentina refuses to pay, the judge noted, the Bank of New York, which processes Argentina's bond payments, will also find itself in violation should it decline to withhold payments to other bondholders. Argentina's Economy Minister Hernán Lorenzino announced at a news conference on 22 November that Argentina will appeal the ruling.
Argentina received at least a temporary reprieve from its obligation to make payments to old bondholders pursuant to Judge Griesa's order on 28 November, when the Second Circuit Court of Appeals stayed the ruling until it has an opportunity to hear the merits of Argentina's appeal, which has been scheduled for argument on 27 February 2013. The emergency stay quelled investor fears of a default by Argentina in December when some $3.3 billion in debt repayments are due. On 4 December, the Second Circuit denied an emergency motion by old bondholders to modify the stay by requiring Argentina to post $250 million in security in order to maintain it.
Global—On 28 November 2012, the U.S. Court of Appeals for the Fifth Circuit upheld a U.S. bankruptcy court's decision refusing, as a matter of U.S. public policy, to enforce releases of non-debtor affiliates contained in the reorganization plan of Mexican glassmaker Vitro SAB de CV ("Vitro"). In In re Vitro SAB de CVV, No. 12-10542 (5th Cir. Nov. 28, 2012), the Fifth Circuit ruled that such releases could be enforceable in the U.S. under section 1507 of the Bankruptcy Code as a form of "additional assistance" to a foreign representative in a foreign bankruptcy proceeding recognized by a U.S. bankruptcy court under chapter 15 of the Bankruptcy Code, but only under "exceptional circumstances" not present in the case before it.
The evidence showed that, under Vitro's reorganization plan, equity retains substantial value whereas creditors will receive 40 cents on the dollar. Moreover, the affected creditors did not consent to the plan but were classified together with (and outvoted by) insider voters manufactured by reshuffling Vitro's intercompany obligations. Because the plan was clearly repugnant to the distribution scheme under U.S. law, the Fifth Circuit ruled that the releases should not be enforced as a matter of comity.
Spain—On 28 November 2012, the European Commission approved a payment of €37 billion ($48 billion) from the European Stability Mechanism, the bailout fund for the eurozone, to four Spanish banks, on the condition that the banks lay off thousands of employees and close offices as part of their restructuring plans. The largest workforce reduction is expected at Bankia, the giant lender whose collapse and request for €19 billion of additional capital in May forced the Spanish government to negotiate a banking bailout of up to €100 billion. Joaquín Almunia, the European Union antitrust commissioner, said that approval of the restructuring plans of the four banks—BFA/Bankia, NCG, Catalunya Banc and Banco de Valencia—was "a milestone". The next step in Spain's efforts to contain its banking crisis is expected in December, when Spain will establish a "bad bank" to which banks will transfer their most toxic property assets. Overall, Spain's ailing banking industry could need as much as €59.3 billion in additional capital, according to an independent banking assessment report released in September by consulting firm Oliver Wyman.
Germany—On 9 November 2012, the German Bundestag (the lower house of Germany's bicameral legislature) resolved that the current definition of "overindebtedness" in the German Insolvency Code shall apply indefinitely, notwithstanding legislation enacted in 2008 providing for a return to the previous definition of the term in insolvency cases commenced on or after 1 January 2014. The change will enter into force before the end of 2012, unless the German Bundesrat (the legislature's upper house) intervenes. Pursuant to the current definition, a company is overindebted if its liabilities exceed the value of its assets, unless, given the circumstances, continuation of the business is highly likely. As a consequence, a company with a going concern prognosis is not obligated to initiate insolvency proceedings despite being insolvent on a balance sheet basis. The current definition came into force on 17 October 2008 as a result of the financial crisis.
Previously, a debtor was deemed to be overindebted if its liabilities exceeded the value of its assets, with assets valued on a going concern basis if continuation of the business was highly likely. However, a going concern prognosis was relevant only for purposes of asset valuation. If a company satisfied the old definition, it was obligated to commence insolvency proceedings despite receiving a going concern prognosis. The German legislature had originally intended to reinstate the previous definition of "overindebtedness" from 1 January 2014 onward. The change is supported by the majority of insolvency practitioners and is expected to promote legal certainty for the companies concerned.
France—On 20 September 2012, the French Government issued a decree (the "Decree") amending the requirements for the commencement of an accelerated financial safeguard proceeding (procédure de sauvegarde financière accélérée ("SFA")). An SFA combines the elements of a "conciliation" (an out-of-court pre-insolvency proceeding involving a court-appointed mediator that is widely used to restructure distressed businesses in France) and a "safeguard" proceeding, which is a court-supervised proceeding culminating in the implementation of a plan restructuring a company's debt. An SFA is a pre-packaged financial restructuring that can be approved by the court with the consent of a 66-2/3 percent majority of creditors. The court can impose the restructuring plan on dissenting creditors within a maximum of two months following the commencement of an SFA.
Prior to the Decree, an SFA was available only to solvent companies having more than 150 employees or turnover in excess of €20 million. Accordingly, an SFA could not be filed by a holding company, which typically has neither the required number of employees nor adequate turnover. Since the issuance of the Decree, an SFA may also be commenced by a solvent company with either: (i) a balance sheet surplus exceeding €25 million; or (ii) a balance sheet surplus exceeding €10 million, provided it controls a company satisfying the 150 employee or €20 million turnover thresholds. Thus, an SFA will now be available to most holding companies. Because LBO transactions are typically structured with acquisition debt at the holding company level, the Decree will clearly facilitate financial restructurings in distressed LBO scenarios.