RESTRUCTURING FOCUS ON 2019
JANUARY 2019
RESTRUCTURING: FOCUS ON 2019
CONTENTS
1
VIEW FROM THE TOP NEW MONEY CONSIDERATIONS SOMETHING FOR ALL INVESTORS? THE INTERCREDITOR MINEFIELD LESSONS FROM CLAIRE'S STORES GOVERNANCE THE SPECTRUM OF OPTIONS CHAPTER 11 FOR THE UK? BREXIT AND UK INSOLVENCY REFORM EU INSOLVENCY REFORM: A CHANGING LANDSCAPE INDEPENDENT RECOGNITION WEIL CONTACTS
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VIEW FROM THE TOP
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With the spectre of Brexit looming large, the challenges and opportunities facing players in the restructuring market are both considerable and nuanced. Even outside the scope of Brexit, a number of complex commercial and legal developments are afoot which will require consideration when dealing with distressed situations in 2019.
With a flourishing DIP financing market in the US, financiers are increasingly looking to Europe's distressed situations and presenting innovative structures to find another market in which to invest their capital and to explore new ways to enter the distressed credit market.
The effect of standardised intercreditor agreements has not solved the uncertainty of how to deal with key provisions in a restructuring. Stakeholders should be looking to identify the pitfalls and opportunities such provisions afford, at an early stage, in order to reduce significant risk or increase advantage.
A notable development in global restructuring is the increase in dissenting stakeholders seeking to use governance concerns to attack unfavourable restructuring proposals. The Claire's Accessories bankruptcy highlighted debtor tactics that can be used to mitigate such claims. On the other side of the same coin, creditors focus on governance and the spectrum of options that can be considered is broad. In these circumstances the impact of negotiation is critical to the restructuring.
The long overdue movement to reform UK insolvency rules has taken a significant step with BEIS issuing its response to certain consultations in the Autumn of 2018. Weil's view is that such reform is necessary if we are to protect the economy from another Carillionstyle failure. A Chapter 11-like alternative to a CVA or Scheme has been suggested.
Brexit, if there is one, provides an added complication. Although a moving target, our take is that the UK is at risk of losing its status as a desirable restructuring hub if every effort to find a suitable replacement to the EC Insolvency Regulations is not made during the transition period. A hard Brexit will be very damaging in this respect.
cram-down mechanism and, new money protection.
In 2018 our team: W as called on by Westinghouse Electric company,
a subsidiary of Toshiba Corp, in relation to is $9.8bn Chapter 11 proceedings, together with our US and European colleagues
A cted for an ad-hoc committee of bondholders on the restructuring of ENQUEST, the largest UK Oil producer in the North Sea
P layed a leading role on the restructuring of Claire's, the accessories and jewellery retailer
A dvised on EDCON'S high yield bond restructuring and exchange offer, backstopped by a South African Scheme of Arrangement
W as instructed by the joint provisional liquidators of Abraaj Investment Management Limited
A dvised long-time client Pillarstone on the restructuring of health care services provider Famar SA and its subsidiaries
Acted for the Ad Hoc Committee of noteholders in relation to the Dana Gas high-profile sukuk restructuring
A dvised Netcare International SA in relation to the restructuring of General Healthcare Group
At the same time the EU is introducing new reforms, with some member states pushing these changes through early in the three year implementation period. Key changes include: a new chapter 11-style process, a
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NEW MONEY CONSIDERATIONS SOMETHING FOR ALL INVESTORS?
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L IQUIDITY AS FL ASHPOINT
Cov-Lite / Bond deals with minimal covenant protection mean the liquidity/ maturity wall is often the flashpoint for negotiations
The maturity wall can be brought forward if auditors
need visibility on refinancing / repayments to be able to provide a "going concern" opinion There is now a burgeoning market for third party financiers to play a role in delivering bridge financing providing such investors with potentially significant strategic and / or economic advantage
MAXIMISING THE STRATEGIC OPPORTUNITY
R econsidering information rights and flows when new money is provided
Conditioning new money on reformed governance of debtor, minimising disruption from uncooperative sponsors / other creditors for the benefit of the restructuring process
D ictating a timeline of process going forward, and veto rights over process (governance, contingency planning, etc)
Ensuring a `seat at the table' which different investors use in different ways (e.g. loan to own investors, strategics)
From the point of view of the company / board it is crucial to secure a supportive creditor in a strategically relevant position of the capital structure (e.g. to remove potential default triggers and gain the benefit of positive undertakings to support a company-led transaction)
TYPICAL STRUCTURING CHALLENGES
F actual circumstances determine the ability of a distressed group to incur further indebtedness. However, given the increased degree of standardisation in terms of debt documentation across the market, there tends to be a number of common solutions presented:
r aising debt at non-obligors, which debt would rank structurally senior to the existing debt and secured over separate collateral
r aising debt at an "unrestricted" subsidiary outside the restricted group after transferring assets to the unrestricted subsidiary using investments baskets in the existing debt (the "J. Crew" Option)
r aising debt at obligors secured by assets that do not form part of the security package securing the existing debt
t apping existing baskets and refinancing / upsizing super-senior facilities
Visibility on the restructuring process, or at least
certainty of repayment of bridge, is often difficult as liquidity needs may arise early in a process when a restructuring plan is not yet developed or agreed D irector duties can also drive the approach to the new money, including in relation to: t he commercial terms of such new money and
the identity of the provider h ow such funds are distributed to other group
entities e ven the question of whether new borrowing
is preferable to simply defaulting on financial indebtedness (together with a formal or de facto standstill) or other routes to access funds (disposals, capital raise, etc)
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THE INTERCREDITOR MINEFIELD
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Despite the LMA producing standardised intercreditors for the most commonly used capital structures, many of the key provisions in intercreditors are not predictable and can be complex to negotiate. Notably, distressed disposal provisions can vary significantly and this can present either great opportunities to advance preferred implementation routes or can operate so as to completely restrict options. The challenges presented by these provisions are often not clear from the descriptions provided in Offering Memoranda. Therefore, the ability to diligence these matters ahead of acquiring a position in the debt can be limited.
DISTRESSED DISPOSALS
Typically, the distressed disposal provisions appear to authorise the Security Agent to release security / guarantees and liabilities provided the criteria for a "Distressed Disposal" are met and provided any value protection provisions (e.g. market testing) have been adhered to. However, we have seen over the last 12 months a surprisingly broad range of divergence including ICAs that:
Require further instructions from the
Instructing Group to release guarantees
R equire further instructions from the Instructing Group to release security Require no further instructions from the
Instructing Group for any matter and indeed allow for a Distressed Disposal to be implemented by the Group with only the support of one class of creditor D o not allow in any instance the release of primary borrowing liabilities without consent of all relevent creditors
These idiosyncrasies have proven to be significant and the ability to implement transactions has turned on these provisions, either by enabling a workaround by disenfranchising a dissenting class of creditors or by ensuring that the Instructing Group have the final sale in any sale process
VALUATION ISSUES
D espite the development of standardised debt documents, issues around the acceptability of noncash consideration, the need for market testing and / or a valuation in the case of a distressed disposal for cash, and on what terms a Security Agent is entitled to demand reliance on valuation work are not uniform and can prove to be significant hurdles when approaching a restructuring
I n addition to these documentary items, ensuring the Security Agent is comfortable with the process, and in the case of any valuation, has reliance on it, ensures a smooth transaction and provides a greater degree of certainty of execution
T here are two, seemingly contradictory trends, that we have noticed emerging when considering the role of the Security Agent. The first is that there have been a number of incidents where it appears that Security Agents have been persuaded to take steps that favour the sponsor or the company which have later impacted the ability of creditors to execute an optimal restructuring process. The second is that, perhaps as a response to that first point, other Security Agents are becoming excessively conservative in their approach and are holding-up implementation of fairly standard restructuring steps in order to obtain indemnification and other protections. It is not really a surprise to us that, against this backdrop, the identity of the Security Agent in any transaction is now a matter of key importance and that newer entrants to the agency market, who focus on acting both pragmatically and commercially, are routinely being appointed on new deals and replacing agents on deals in restructuring situations
OPTION TO PURCHASE
Although a provision that has recently received attention from the LMA to remedy some historic ambiguities, older Intercreditor Agreements often include option to purchase provisions which suffer from drafting issues that render them almost impossible to implement, for example: i w hether the right is granted to junior creditors collectively or individually; ii the call option exercise notice period being longer than
the period of any junior creditor consultation / notice of enforcement, iii b eing drafted such that compliance with the senior facility's transfer provisions (including, e.g. the requirement where applicable for borrower consent) is required making them inoperable post-default
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LESSONS FROM CLAIRE'S STORES
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Claire's is a leading mall-based retailer with approximately 7,500 worldwide locations and more than 17,000 employees. By late 2017, Claire's was facing liquidity issues and a potential "going concern" default in connection with its more than $2bn of debt. At the time Claire's was held by a private equity sponsor who also held more than $50m in debt following a liability management exercise. In March 2018, Claire's filed for Chapter 11.
THE CHALLENGE
LESSONS
D issenting Creditors seeking to de-rail the Chapter 11 process sought to claim that the decision-makers at the debtor were not independent and were essentially acting in the interests of their sponsor not their company or the company's creditors
C hallenges raised were not simply around the substance of decisions but also attacked the process by which decisions were made
Underpinning the challenge was NY jurisprudence that bankruptcy proceedings should not only be conducted correctly but must be seen to be conducted correctly
I n the UK there has been increased focus on governance and recent case law has considered claims of shadow directorship and self-dealing / fair-dealing when junior creditors sought to attack senior driven governance reform as a proxy for attacking the proposed restructuring
TIMING Be proactive. Independent governance should be
established as early in the process as possible
L O C AT I O N In a distressed situation identifying key boards
(which may not be the usual management board) will be critical
D irector duties across jurisdictions are not identical and understanding these differences is critical to developing proper procedures
SCOPE T he extent to which authority is delegated to a
committee or board will need to be carefully judged in each situation
The scope of appropriate authority may need to evolve over time governance should not be viewed as being static
CLAIRE'S RESPONSE
Recognising the distressed state of the business would likely lead to the making of difficult decisions, the board formed a committee consisting of the CEO and the most senior independent director
T he committee was tasked with evaluating,
developing and ultimately recommending restructuring matters
A junior creditor sought to claim that the committee was acting in the interests of the equity sponsor
T o ensure the integrity of its restructuring process, Claire's added a further independent director to the committee and delegated full decision-making authority to the committee
EXPERIENCE B oard duties in the context of a restructuring
can often escalate beyond normal director responsibilities
Appointing independent directors with specific restructuring or financial experience can often provide substantial value
PRECEDENT A "one size fits all" approach to corporate
governance will not be successful
A proactive but nuanced strategy can facilitate outcomes for stakeholders
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GOVERNANCE THE SPECTRUM OF OPTIONS
SUMMARY DISRUPTION
ENHANCED INFORMATION COVENANTS
BOARD OBSERVER / ADVISORY COMMITTEE
13 week cash flows; litigation reports; regulatory and other stakeholder communications
Least disruptive
One or more non-director, stakeholder-appointed advisors whom the board is obliged to consult
Low disruption
VISIBILITY AND CONTROL
Greater visibility but not control
Greater visibility and `soft control'
OTHER
Typically creditors provide slate of candidates and Company chooses
GOVERNANCE ISSUES
S ponsors and incumbent directors may seek to use their control / visibility over a business to direct or hinder a much-needed financial restructuring
C reditors of a distressed business are focused on enhanced information flows and may wish to frustrate disruptive sponsors' control O ther stakeholders, such as regulators and supervising courts, may be focused on ensuring information
integrity and good stewardship
KEY FACTORS FOR OPTIMAL GOVERNANCE
VISIBILITY / CONTROL Information flow, quality / integrity of information, identity of recipients, public vs. private side considerations
L IABILITY Mitigate director liability or shadow directorship risks alongside other lender / sponsor liability issues (including reputational issues)
IMPLEMENTATION Ensure management attention is focused on operational issues and that the restructuring is managed by people with appropriate expertise and enhances confidence / trust of other stakeholders in the restructuring process. Governance changes can be consensual as part of a negotiation or can be achieved by creditors exercising security rights to change boards and vote pledged shares.
NON-EXECUTIVE DIRECTOR / RESTRUCTURING COMMITTEE
CHIEF RESTRUCTURING OFFICER
SELFAPPOINTMENT
APPOINT INSOLVENCY PRACTITIONER
One or more directors appointed, often as part of a committee, which lead restructuring discussions with stakeholders
Stakeholders nominate professional chief restructuring officer
Stakeholder personnel appointed as directors
Stakeholders appoint insolvency practitioner
Moderate to high disruption
High impact; likely to be disruptive; more likely to attract concern / publicity
High impact may result in change of control and publicity
Typically terminal for board / sponsor control
Enhanced visibility typical; often used to oust sponsor appointees
Enhanced visibility typical; often used to oust sponsor appointees
Maximum visibility and control
May not provide visibility or control, but insolvency practitioner typically owes duties to creditors
Typically creditors provide slate of candidates and Company chooses
Nature of role dictated by business need, eg operational, financial creditor interaction; appointment and tenure can be imposed
Management of conflicts may be challenging
Director and shadow director liability issues
Senior creditors may have some input into the choice of insolvency practitioner
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CHAPTER 11 FOR THE UK? BREXIT AND UK INSOLVENCY REFORM
NO DEAL BREXIT
As things currently stand on the date of publication, a no deal Brexit remains a real risk. The potential loss of UK participation in the EU Insolvency Regulation, whether in a no deal Brexit, or expiry of the transition period, is a real threat to the UK debt restructuring regime, particularly for EU high yield issuers.
W EIL VIEW
UK insolvency proceedings and schemes (including obtaining US Chapter 15 recognition) will become more difficult, COMI shifting may no longer be attractive. There is a real risk of parallel insolvency proceedings in EU jurisdictions and interference by foreign officeholders in assets held abroad. However, recognition for schemes of arrangement for restructuring of EU companies should be available based on comity and reciprocity, as was the case pre-EU regulation. Attention is likely to focus on the use of other EU jurisdictions where recognition measures are designed to facilitate restructuring of EU debtors, such as Ireland.
UK INSOLVENCY REFORM
In 2018, the UK government also put forward its own proposals for insolvency reform, introducing the following concepts:
A NEW RESTRUCTURING PLAN PROCESS WITH A CROSS-CLASS CRAM DOWN MECHANISM
A new type of restructuring plan providing a way to cram-down classes of non-consenting creditors (not possible under a CVA or scheme)
W ill not replace the CVA or scheme but will be an alternative / additional restructuring route S imilar to a scheme (i.e. 75% by value), but instead of the scheme's further voting threshold of `a majority in
number', a majority in value of unconnected creditors test (similar to the CVA rules) will apply I n terms of a comparator, approach is similar to the approach taken in US Chapter 11 (e.g. is based on the `next
best test'), rather than the traditional approach in English schemes of using a liquidation comparator which may give rise to disputes on the often controversial question of valuation D ifferent to Chapter 11, it is not intended to be available for capital markets companies, limiting the value of the reform. Also has yet to be decided whether process available to companies with no COMI in England
SELLING A DISTRESSED BUSINESS
I nsolvency Service to get new powers to investigate directors of dissolved companies and to disqualify directors "who unreasonably sell insolvent companies"
MORATORIUM
E stablish a standalone moratorium for pre-insolvent companies (i.e. not yet insolvent but will become insolvent if action is not taken)
Criteria to include a requirement that the company is able to carry on its business, meet its current obligations as they fall due during the moratorium and new obligations that are incurred in the moratorium; and prospect of rescue more likely than not
N ot available if company has been in an insolvency process within 12 months Moratorium duration 28 days, extendable to 56 days
Will require a court application. An insolvency practitioner and officer of the court will be appointed as `monitor'. Such monitor will not be able to act as administrator or liquidator in any subsequent insolvency process (but can act as a CVA supervisor or advisor in relation to a Restructuring Plan)
INSOLVENCY EVENT TERMINATION CLAUSES (IPSO FACTO CLAUSES)
A prohibition on the enforcement of insolvency event termination clauses in contracts for the supply of goods and services and contractual licenses when a company enters a formal insolvency proceeding, the Restructuring Plan process or a pre-insolvency
moratorium I n any subsequent administration or liquidation, counterparties will be entitled to super priority (including pre-insolvency
moratorium costs) for post-insolvency claims and, in cases of hardship, may seek the court's permission to terminate a contract
T his will not prevent counterparties' from exercising other termination rights
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EU INSOLVENCY REFORM: A CHANGING LANDSCAPE
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EU INSOLVENCY REFORM
It is anticipated that the EU will formally adopt a new Insolvency Directive which will bring about changes to the EU restructuring landscape in 2019. Member states will have three years to implement, but it is widely expected that this will happen sooner. Key changes include:
NEW CHAPTER 11STYLE PROCESS
CRAM-DOWN MECHANISM
NEW MONEY PROTECTION
B ased on Chapter 11. It is intended to enable proceedings to be opened for the benefit of solvent debtors who find themselves in financial difficulties. The debtors will remain in possession. Appointment of restructuring practitioners will be optional. The company to benefit from a moratorium preventing creditor action for a period of 4 months, which (provided certain conditions apply) can be renewed twice up to a maximum of 12 months
T he Directive introduces or confirms (for countries where similar provisions are already in place) the concept of creditor classes. Cross-class cram-down will be possible if certain conditions are met
T he directive mirrors the safe harbour model to encourage new financing already adopted in France, Spain, Italy and Germany, such that those creditors who provide new money in order for the debtor to implement the restructuring plan or to preserve value during the moratorium will not be adversely effected by any subsequent opening of insolvency proceedings. Member states will also be able to elect to provide for a priority ranking for such creditors in their implementing legislation
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INDEPENDENT RECOGNITION
COMMENDED FOR RESTRUCTURING AND
INSOLVENCY
THE TIMES BEST LAW FIRMS 2019
Band 1 for High-End Private Equity
FINALIST LEGAL EXPERTISE INNOVATION IN MANAGING COMPLEXITY AND SCALE
FT INNOVATIVE AWARDS 2018
Band 1 for High-End Private Equity
FINALIST RESTRUCTURING TEAM
OF THE YEAR
BRITISH LEGAL AWARDS 2018
Band 1 for High-End Private Equity
FINALIST RESTRUCTURING TEAM
OF THE YEAR
WINNER LARGE LAW FIRM THAT IMPRESSED
WINNER RESTRUCTURING TEAM
OF THE YEAR
LEGAL BUSINESS AWARDS 2018
Band 1 for High-End Private Equity
GLOBAL RESTRUCTURING REVIEW'S GRR 100 AWARDS 2017
Band 1 for High-End Private Equity
LEGAL BUSINESS AWARDS 2016
Band 1 for High-End Private Equity
RESTRUCTURING: FOCUS ON 2019
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ADAM PLAINER PARTNER Business Finance & Restructuring +44 (0)207 903 1030 adam.plainer@weil.com
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17
MARK LAWFORD PARTNER Business Finance & Restructuring +44 (0)207 903 1050 mark.lawford@weil.com
GEMMA SAGE PARTNER Business Finance & Restructuring +44 (0)207 903 1419 gemma.sage@weil.com
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Business Finance & Restructuring +44 (0)207 903 1206 alexander.wood@weil.com
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CLARE COTTLE COUNSEL Business Finance & Restructuring +44 (0)207 903 1048 clare.cottle@weil.com
TOM MCKAY COUNSEL Business Finance & Restructuring +44 (0)207 903 1107 tom.mckay@weil.com
PATRICK BRIGHT PARTNER Capital Markets +44 (0)207 903 1135 patrick.bright@weil.com
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