The European High Yield Association (a trade association representing participants in the European leveraged finance market) is calling for new restructuring laws, warning that the existing regime makes it more likely that a company in financial difficulties will collapse.
Libby Elliott looks at the proposals, which are designed to create a formal procedure for restructuring distressed companies.
The need for change
On 4 March 2009 a round table discussion took place in London between representatives from Government, the judiciary, professional bodies, company directors, industry and investors. While participants expressed several different views, all agreed there was a need for change.
The proposals of the EHYA, if implemented, will have significant implications for banks and other financial creditors.
The key features of the proposals are:
- Larger companies will be able to obtain an automatic stay against enforcement by their financial creditors for a limited time period to negotiate a restructuring. The stay will prevent lenders enforcing their security, starting insolvency proceedings, accelerating or terminating their facilities and calling in any guarantees. It will also make unenforceable any contractual clause which gives a lender the right to terminate if the automatic stay occurs.
- Any restructuring will take place through a company voluntary arrangement (CVA) or a scheme of arrangement (scheme). A court-appointed monitor will supervise management, which will remain in place. The monitor will be an insolvency practitioner or turnaround professional who is independent of the company and its advisers.
- The court will take part in valuing the company for the restructuring. The company should be valued on a going concern basis, assuming its successful restructuring. Regard should be had to the extent to which the restructured company might require new financing and the degree of uncertainty attaching to the business plan of the company after restructuring. Establishing “fair value” is important. The value of the company will determine the creditor group/class that will suffer a partial loss and, thus, which creditors have a proper economic interest in the outcome of the restructuring. The proposal is that any scheme or CVA will then bind any “out-of-the-money” stakeholders.
- Companies applying for an automatic stay may also ask the court to disapply any contractual negative pledge. This will enable the company to get financing while it puts together a reorganisation plan. Any new money provided will be on a “super-priority” basis.
Implications for lenders
The banking community is examining these proposals. The proposed stay is much broader than the administration moratorium. At the recent round table discussion, Angela Knight of the BBA expressed concern over the proposal for overriding negative pledges and the idea that new funding should take priority over existing funding. She said that she did not want these proposals to lead to funding becoming more expensive or even unavailable.
The proposal on valuation might lead to a greater number of interested creditors at the table than would be the case if valuing the company on a break-up basis with the creditors’ entitlement to participate in the restructuring linked to being “in the money”. However, the ability to “cram down” those creditors without a real financial interest (thus preventing them from derailing the restructuring) is something that will find favour with banks.
These proposals are still in their infancy. Eventually the aim is for the Insolvency Service to launch a formal consultation on them. However, it is important for lenders to be alive to the potential for significant changes.
While lenders may have concerns about some of the proposals, there are bank representatives taking an active part in the current consultations. The proposals are not designed to frustrate the senior secured creditors in a restructuring. The aim is to find a regime which will enable more efficient and cost-effective restructurings and which will benefit all stakeholders.