The English High Court has sanctioned a restructuring plan in respect of EUR 3.2 billion of bonds issued by the German real estate business, Adler Group. The main objective of the plan was to avoid Adler's imminent insolvency by facilitating access to EUR 937.5 million of new money funding and thereby providing a stable platform from which Adler Group can pursue a solvent wind-down by asset sales over time in recovered market conditions. This represents a novel use of the restructuring plan procedure, which has previously been seen exclusively as a corporate 'rescue' tool. It also demonstrates the continued pre-eminence of England and Wales as a venue for significant cross-border financial restructurings.
The plan was vigorously opposed by a group of creditors, who alleged that the plan unfairly deprived them of pari passu treatment and that the valuations on which Adler's plan was based were materially overstated. Ultimately, the Court sanctioned the plan, having found that it did not offend the pari passu principle and preferred Adler's valuation evidence. Although the plan was implemented immediately after sanction, the opposing creditors have indicated their intention to pursue an appeal against the High Court's decision before the Court of Appeal.
Restructuring plans under Part 26A of the Companies Act 2006 are a relatively recent addition to the English restructuring landscape1 and offer a means by which the English Court can order a compromise or arrangement of debt obligations, even if there is one or more dissenting class of creditors (this power is referred to as "cross-class cram-down").2 The Court may do this if it is satisfied that (among other things) none of the members of the dissenting class(es) would be any worse off than they would be were the restructuring plan not sanctioned by the Court. This is known as the "no worse off test" (referred to below as the "NWO Test").
There are few decisions in this area. Each decision offers insight as to the applications and boundaries of what has, until now, been used as a 'corporate rescue' tool. From this perspective, the English Court's recent decision to sanction the plan proposed by Adler Group is particularly significant as, here, the restructuring plan mechanism has been used to achieve a platform for a solvent wind-down (rather than a going-concern-rescue) of an entire corporate group.
Background to the Plan
Adler Group operates a real estate purchase, management and development business, principally in Germany. The group's ultimate parent is a Luxembourg entity (the "Parent Company"). The group has various debt obligations but certain key debts for present purposes are:
- six series of senior unsecured notes (maturity dates ranging from 2024 to 2029) originally issued by the Parent Company (with an aggregate principal value of EUR 3.2 billion) (the "SUNs"); and
- three series of senior unsecured notes (maturity dates ranging from 2023 to 2026) issued by a key subsidiary of the Group, Adler Real Estate AG (with an aggregate principal value of EUR 1.1 billion) (the "Adler RE SUNs").
In late 2022, Adler Group faced severe financial difficulties brought about by a combination of challenging market conditions, adverse reporting about the group, subsequent regulatory investigations and the related resignation of the group's auditor. The group's expected inability to repay the 2023 series of the Adler RE SUNs, maturing on 27 April 2023, would have likely led to defaults and cross-defaults throughout the corporate structure and resulted in group-wide insolvencies.
The Parent Company therefore pursued a consent solicitation in December 2022 to amend the terms of the SUNs, so as to allow the Group to meet its upcoming debt obligations (including payment of the Adler RE 2023 SUNs) (the "Consent Solicitation"). The Consent Solicitation was supported by a steering committee of certain SUN holders (the "SteerCo") who had entered into a lock-up agreement and commitment letters with the group, by which they confirmed this support and stood to receive certain benefits (fees) in return for their agreement to provide new money funding to the group. Although the Consent Solicitation achieved significant noteholder support, it did not succeed. Therefore, the group was required to pursue alternative means to amend the bonds. It ultimately resolved to do so by promoting a restructuring plan under Part 26A of the Companies Act 2006.
So that the English Court could exercise its jurisdiction under Part 26A, the Group incorporated AGPS BondCo PLC (the "Plan Company", a UK company) and substituted it for the Parent as the issuer under the German law SUNs. This "Issuer Substitution" was undertaken in accordance with the terms of the SUNs in January 2023 in anticipation of a restructuring plan being proposed.
The Plan Company issued its claim form on 20 February 2023 seeking the sanction of its restructuring plan in relation to the SUNs (the "Plan"). Key terms of the Plan included:
- an extension to the maturity of the 2024 SUNs (the shortest-dated series, and the only series to be extended under the Plan);
- new covenants including, most importantly, a covenant to preserve the loan-to-value ratio of the Group's assets (the "LTV Covenant"), upon breach of which all the SUNs could be accelerated;
- suspension of interest payments on the SUNs for two years with an uplift in interest in return; and
- amendments to allow the Group to incur additional indebtedness (the new money to be provided by SteerCo and other SUN holders who elected to participate in the funding).
The Plan also envisaged that a "Double Luxco" security structure would be put in place in favour of the SUNs. Under this structure, the SUNs were to be given security over the shares in two newly-interposed Luxembourg holding companies, with the security governed by an intercreditor agreement. Were the group to default on the SUNs at any time in the future, this security structure would provide the creditors with a single point of enforcement, enabling them, if necessary, to take control of the group's assets in an efficient manner. This would avoid a suboptimal realisation of those assets via a disorderly insolvency or complex enforcement process. In this context, the Plan also included the appointment of a "Notes Representative" to exercise the rights of the SUN holders under the intercreditor agreement, instruct the security agent and take any action upon an event of default under the SUNs (among other things).
In support of its application, the Plan Company submitted various evidence including an explanatory statement and a report by Boston Consulting Group ("BCG"). The BCG report forecasted outcomes for SUN holders if the Plan was sanctioned versus the outcome if it was not (the latter scenario being identified as the "Relevant Alternative"). The report relied on the latest available valuations of the Group's assets produced by CBRE and NAI Apollo (Q2 2022), and concluded that the Relevant Alternative to the Plan was insolvency, in which SUN holders would stand to recover 63% of the face value of their notes whereas, under the Plan, all creditors would recover 100%. The 63% figure factored in the likelihood that, in the Relevant Alternative, asset values were likely to attract a considerable 'insolvency discount'. Therefore, in the Plan Company's submission, the NWO Test was satisfied.
Shortly after the Plan Company issued its claim form, a convening hearing took place before Sir Anthony Mann who directed that meetings of SUN holders be convened to vote on the Plan. A majority of each class of SUN holders approved the Plan, with over 90% of those voting in each of the 2024-2026 series and over 80% in the 2027 series voting in favour of the Plan. However, only 62% of the 2029 series (the longest-dated series) supported the Plan. As this was below the 75% statutory threshold required for such series to authorise the Plan, the Plan Company had to seek an order sanctioning the Plan under section 901G of the Companies Act (utilising the cross-class cram down mechanism in respect of the 2029 SUNs).
The Ad Hoc Group's Objections
During December 2022, an ad hoc group of SUN holders (the "AHG") came out in opposition to the Group's proposed restructuring. The AHG was formed of creditors with holdings concentrated in the 2029 SUNs. The AHG agreed with the Plan Company that the Relevant Alternative to the Plan was insolvency. However, they argued that, in an insolvency, the maturities of all of the SUNs would be collapsed, and claims under them would rank as pari passu unsecured claims. By contrast, under the Plan, the maturities of all the SUNs (except the 2024 SUNs) would be preserved. The AHG argued that this amounted to an unjustified departure from the pari passu principle, and treated the 2029 SUNs unfairly as they would not be repaid in full under the Plan while earlier-dated SUNs would. The AHG emphasised that the Plan Company could have easily structured the Plan to ensure that all SUN holders shared pari passu in the proceeds of asset sales.
The AHG sustained its opposition and formally contested the Plan, launching a 'root and branch' attack on the Plan Company's proposals. In addition to the pari passu point above, the AHG argued (and adduced evidence seeking to establish that), among other things:
- the Issuer Substitution was invalid as a matter of German law and so the English Court had no jurisdiction to sanction the Plan;
- the CBRE and NAI Apollo real estate asset valuations (upon which BCG's Plan and Relevant Alternative forecasts were based) were significantly overstated;
- the conclusions in the BCG report were incorrect and unreliable, and, as a result, the NWO was not satisfied. In particular, the AHG criticised the fact that BCG had neither: disclosed the market model it had used to forecast property values (and alleged therefore that its methodology was a "black box"); nor undertaken a "sensitivity analysis" to stress-test its conclusions in different hypothetical scenarios (e.g., by increasing interest rate forecast inputs);
- The Plan allegedly distributed benefits unfairly to the SteerCo;
- the Plan was defective because it did not account for the fact that certain holders of 2029 SUNs had accelerated their SUNs, following the Plan Company's commencement of proceedings (they had done so seeking to characterise this as an initiation of insolvency proceedings, which is an event of default under the SUNs); and
- the Plan's appointment of a Notes Representative was unfair because the Notes Representative would have far-reaching powers to affect the rights of the SUN holders without their consent, including waiving any future breaches of the LTV Covenant.
The Plan Company contested each of these arguments, and submitted comprehensive evidence in reply.
A sanction hearing took place before Mr Justice Leech on 3 to 5 April 2023. Given the impending maturity of the Adler RE 2023 SUNs, there was significant urgency in the timetabling of the hearing: unless the hearing went ahead in time for the group to utilise the new money to repay the Adler RE 2023 SUNs, the very liquidity crisis the Plan was designed to avoid would materialise irreversibly. Over three days, the Court heard evidence from seven valuation and foreign law experts and witnesses (out of the 16 individuals who had given written evidence), as well as submissions from the Plan Company, the SteerCo and the AHG.
Impressively, the following week, on 12 April 2023, Mr Justice Leech sanctioned the Plan, and went on to provide his reasons for doing so in a 164-page judgment handed down on 21 April 2023. The AHG sought permission to appeal from Mr Justice Leech, who refused the application. It is anticipated that the AHG will seek permission to appeal from the Court of Appeal.
The Judge accepted the Plan Company's evidence that the Issuer Substitution was valid. The substitution took place pursuant to a clause which the Judge found to be market-standard in German bonds and, indeed, similar clauses appeared in bond documentation drafted by the German firm acting for the AHG. Therefore, the Court concluded that it had jurisdiction to sanction the Plan.
2. NWO Test
The NWO test needed to be met on the balance of probabilities (i.e., more likely than not). The Plan Company had submitted that the proper test was to ask which party's evidence as to outcomes under the Plan versus the Relevant Alternative was "the most reliable evidence". However, the Judge disagreed and observed it would have been open to him to conclude that the NWO Test was not satisfied had both sides failed to establish their case on the balance of probabilities.
In any event, applying the balance of probabilities test, the NWO Test was satisfied:
- The CBRE and NAI Apollo valuations relied upon by BCG were, on the balance of probabilities, accurate.
- BCG's forecast of property price developments represented a "rational and considered view" and there was no need to undertake any sensitivity analyses of its conclusions. The AHG's criticisms of the BCG report as unreliable or uncertain largely stemmed from the inherent uncertainties of forecasting generally. Further, BCG's forecasts of price movements were materially corroborated by subsequent valuations of the Group's assets performed by CBRE.
- Even if the valuations relied upon by BCG were wrong (and the much lower valuations the AHG contended for were correct), then the Plan Company and the Parent Company would breach the LTV Covenant (a key protection to be introduced through the Plan) by 31 December 2024 and the SUN holders would be entitled to accelerate the SUNs. There was no evidence that the Notes Representative would prefer the interests of the new money providers or SteerCo over the interests of the holders of 2029 SUNs – rather, it was necessary as a practical matter to put a Notes Representative in place and this was a normal feature of German bonds. The Judge accepted the Plan Company's evidence that the realisation of assets following security enforcement would not carry the stigma of insolvency (and so the 'insolvency discount' applying in the Relevant Alternative would be avoided).
Mr Justice Leech considered that the Plan justified the exercise of his discretion to sanction it:
- The Plan had received support from a great majority of creditors (indeed, twice over, taking into account the Consent Solicitation) including holders of longer-dated notes. Ultimately, the creditors were the best judges of the Plan and the merits of the restructuring proposals that it sought to implement.
- The Plan did not involve any departure from the pari passu principle since (i) it preserved maturity dates for all holders (bar for those holding notes maturing in 2024), and (ii) under the Plan, all creditors were likely to be repaid in full.
- The AHG had argued that, because the pari passu principle was so fundamental, for the Plan to be fair the Court had to be satisfied that the 2029 SUN holders would be paid in full under it. The Judge rejected this and found that it was permissible to require the 2029 holders to accept a greater level of risk than the holders of the shorter-dated SUNs because, among other things: (i) this reflected the risk priced-in for a buyer of longer-dated notes; (ii) even if the Plan Company's primary case did not materialise, the next most likely scenario was an enforcement exercise following a breach of the LTV Covenant, in which all SUN holders would rank pari passu and stood to recover more than in the Relevant Alternative; and (iii) even if neither of these scenarios were to occur, recoveries were not likely to be materially below 63%3 (and creditors would therefore not be worse off under the Plan than in the Relevant Alternative). In other words, the Court did not need to be satisfied that all creditors would be repaid in full in order to conclude that the pari passu principle would be respected.
- Although the Court did not attribute much weight to this point, another reason for exercising the Court's discretion was the fact that the Plan was ultimately the only restructuring plan, following negotiations with the SteerCo, which commanded a sufficient level of creditor support to be implementable. The Judge accepted that, in exercising his discretion, he did not need to be satisfied that this was the best plan available or that another plan might be fairer.
- The Judge rejected the AHG's arguments that various other aspects of the Plan were unfair. In particular, the Judge found that the new money and related fees were fair, proportionate and reasonable and, as above, that the appointment of the Notes Representative was practically necessary and also fair in view of the relevant norms under German law.
4. Acceleration of certain 2029 SUNs
In the context of their opposition to the Plan, AHG members had purported to accelerate their 2029 SUNs on the grounds that the commencement of restructuring proceedings amounted to a default under the SUNs. Mr Justice Leech found that it was unnecessary for him to decide whether or not the purported acceleration of certain of the 2029 SUNs was valid or not as a matter of German law, in order to sanction the Plan. The AHG had not suggested any reason why the Plan could not take effect while the validity or not of their acceleration was resolved by the German courts.
Significance and practical points
England jurisdiction of choice: the decision highlights the availability of the restructuring plan to international corporates and those in need of urgent relief via a cross-border restructuring solution. Although issuer substitutions (and co-issuer accessions) have been seen previously in the context of schemes of arrangement, this was the first time an issuer substitution has been used to support the implementation of a restructuring plan.
The decision also highlights the potential speed of the process. From application to sanction, the procedure ran for approximately 50 days. The English Court's ability to hear and decide on such a fact-intensive, complex and contested plan (with evidence and submissions running into multiple tens of thousands of pages), on such an efficient timetable should attract other debtors and creditors whose objectives need to be realised swiftly. Indeed, this had been one of the key attractions for the group in selecting the English restructuring plan over possible solutions in other jurisdictions.
Solvent-wind down: this is the first plan proposed before (and sanctioned by) the English Court for the purpose of enabling the solvent wind-down of a group-wide enterprise (as opposed to rescuing the group as a going concern for continued trading into the longer-term). Although there is nothing in the statutory framework that excludes this purpose, the fact that the Court has now sanctioned such a plan should give confidence to directors of companies looking to realise similar objectives that this is achievable under Part 26 or Part 26A of the Companies Act.
Threshold for NWO Test: as set out above, the decision also clarifies that the proper threshold to apply in assessing the NWO Test is a balance of probabilities. It will not be sufficient for a company to establish that its anticipated outcomes under that plan as compared to the Relevant Alternative are the better of the views presented to the Court. The Court will need to be satisfied that such outcomes are more likely to materialise than not – which may be challenging, given the uncertain and prospective nature of that exercise.
Valuation challenges: the case was the first in which a full valuation challenge had been levelled against a restructuring plan. Judicial commentary in earlier restructuring plan cases had highlighted a concern that an efficient and streamlined use of the procedure may be hampered by lengthy and expensive valuation challenges of the kind that are a common feature of Chapter 11 proceedings in the US Bankruptcy Courts.4 In the present instance, the Court's willingness to accommodate argument and detailed evidence on valuation topics within an already compressed timetable is testament to the fitness of the English Courts to handle the most complex and challenging financial restructuring cases.
However, this aspect of the decision also underscores the practical difficulties which dissenting creditors face in constructing 'outside-in' challenges to the valuations of underlying assets, especially where, as was the case here, the application is urgent and must be heard on a rapid timetable. One of the reasons why the Court preferred the Plan Company's evidence as to its properties' value was that the CBRE/NAI Apollo valuations were far more detailed and comprehensive (and orthodox in terms of method), than the more limited valuation exercise undertaken by the AHG's expert. The Judge fairly acknowledged that the AHG's expert simply had not had the time to undertake an equivalent exercise – he had been limited to a desktop appraisal relying heavily on personal judgment. In this regard, the information asymmetry which the plan company enjoys will perhaps always give it a 'head start' when it comes to valuation disputes in restructuring plan cases.
Unequal recovery risk vs pari passu in Relevant Alternative: the decision demonstrates that a plan which poses a greater recovery risk to one group of creditors does not by itself mean that the plan is unfair (so as to preclude cross-class cram-down), even where all creditors would be treated equally in the Relevant Alternative. In this case, it was key in the Court's conclusion that the preservation of staggered maturity dates did not offend the pari passu principle, that: (i) all creditors were likely to be paid in full; or, (ii) in the next most likely alternative, more than in the Relevant Alternative, where lower property price realisations would lead to an LTV Covenant breach and, importantly, pari passu ranking of the SUNs upon an enforcement. Had these conditions not existed, the Plan might have been unfair.
Majority influence: the decision emphasises that the courts will give due regard to the views of creditors as a whole when assessing the merits of a plan. As above, Mr Justice Leech found that the best judges of a plan and the merits of its restructuring proposals are its creditors and, with this in mind, it was significant that the Plan had received a majority of creditor support in each creditor class.
The nature of the Court's discretion: one of the key points that Leading Counsel for the AHG put to Mr Justice Leech in seeking permission to appeal was that the boundaries of the Court's discretion to sanction a plan were uncertain – the scarcity of case law meant that it was left with a "blank canvass" when exercising its discretion to sanction a plan. The Court could not, the AHG argued, simply apply existing case law on schemes of arrangement to restructuring plan cases in order to fill this lacuna (as the AHG submitted Mr Justice Leech had done). This was inappropriate, the AHG submitted, given that schemes do not allow for cross-class cram-down. Specifically, the AHG argued it had been wrong for Mr Justice Leech to have applied the "honest and intelligent man" test, which had emerged from scheme case law, to assess the Plan (i.e., Mr Justice Leech had asked, would an honest and intelligent person have approved the plan – to which he had found the answer was 'yes'). Mr Justice Leech rejected the AHG's argument. Each case and each plan is fact-specific and plan-specific and, as a result, Mr Justice Leech agreed with the Plan Company's Counsel that the Court of Appeal was unlikely to lay out a "crib sheet" for first instance judges to apply in future cases. The legislation deliberately conferred a broad discretion on the Court. There was no real prospect of success in arguing that Mr Justice Leech had strayed beyond this. However, Mr Justice Leech did observe that, should the Court of Appeal wish to 'fill the gaps' of the discretion, then it could itself elect to hear an appeal of his decision.