Current Trends in the Restructuring Market

Transcription

1 Current Trends in the Restructuring Market The use of UK Restructuring Procedures in European Restructurings and an Update on Italian Insolvency legislation Milan Lunchtime Briefing 17 November 2015

2 Speakers Madeleine Horrocks Structured Finance Partner, Milan Stephen Phillips Restructuring Partner, London Daniela Andreatta M&A and Private Equity Special Counsel, Milan

3 Introduction This presentation considers: The current Restructuring Market Certain English Insolvency and Restructuring Procedures Administrations and Pre-Packs English Scheme of Arrangement EU Regulations on Insolvency Proceedings and "COMI shifts" Case Studies Italian Insolvency Update 3

4 Restructuring Market Low default rate in Europe Emerging market stress Focus on commodities High yield bonds the next wave? 4

5 Restructuring Market Defaults in Europe at a near all time low European High-Yield Default Rates Trailing 12-months (%) Q02 4Q02 2Q03 4Q03 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14 2Q15 *end of quarter values, by volume of bonds defaulted Source: Fitch, Bloomberg European Leveraged Loan Default Rates (%) By number of deals By value 0 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 LTM Aug 15 Adjusted YTD Aug 15ª a Adjusted YTD is pro forma for C*/CC* rated issuers Source: Fitch Leveraged Credit Database 5

6 Restructuring Market Emerging Markets Debt 6

7 Sector Focus - Overview Key industries have deteriorated in the last year 120% European HY Price Indices by Industry (Rebased, 4-Week Moving Avg.) 110% 100% 90% 80% 98% 96% 92% 90% 86% 85% 70% 68% 60% Nov-14 Feb-15 May-15 Aug-15 Nov-15 Communications Consumer, Cyclical Consumer, Non-cyclical Energy Industrial Basic Materials European HY (ex. Financial) Source: Bloomberg on 9-Nov-15. Each sector index is composed of the high yield bonds with (i) Western Europe country of risk, (ii) maturity date beyond 01-Jan-17, and (iii) issue date prior to 09-Nov-14. Where there was multiple bonds outstanding per issuer, the average was used 7

8 Sector Focus Natural Resources Oil & Gas Metals & Mining Issues Oil prices expected to remain below $65 / barrel for the foreseeable future (bear case as low as $20) Increase in defaults in the US not transferred to Europe yet Larger companies either have sufficient flexibility or have implemented short-term solutions (asset sales, A&Es, covenant resets, etc.) Expect changes in 2016 due to (RBLresets, hedges coming off, additional CF deterioration) Issues Substantial uncertainty driving environment challenges to business model, Chinese impact Large cap dis-/stressed opportunities, though unclear whether any will restructure (rights issues keeping them afloat for now) % 100% 90% 80% 70% 60% Issuance ($bn) EMEA Energy HY Issuance Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q EMEA Energy HY Issuance Metal Prices 1 Brent Crude Oil - ICE $/bbl oil 50% 54% Oct-14 Jan-15 Apr-15 Jul-15 Oct % 74% 73% Aluminium - LME Steel (Hot Rolled, US) 1. Source: Bloomberg, Quarterly average oil price Copper - LME Zinc - LME 8

9 Administration Purpose of UK administration a) Rescuing the Company as a going concern b) Achieving a better result for creditors as a whole than a winding up c) Realising property for benefit of secured or preferential creditors Can only be (b) or (c) if (a) is not reasonably practicable to achieve or (b) would be better for creditors as a whole. If (c), it must not unnecessarily harm the interests of creditors as a whole. 9

10 Administration An administrator may be appointed: out of court by a holder of a qualifying floating charge ("QFC") appointing an administrator a company or directors appointing an administrator by an application to court by the company or a creditor A QFC is a holder of a floating charge which expressly gives the power to appoint an administrator and which creates security (or the holder holds additional security) over the whole or substantially the whole of the company s property Role of Administrator Officer of the court Duties to all creditors Agent of the company 10

11 Power of administrators and effect of administration Powers Directors powers subordinated to administrator Has the power to sell and purchase property, raise and borrow money, grant security, bring or defend any action, execute any contract, deed, receipt or other document, can appoint or dismiss directors, call a meeting of shareholders, investigate the conduct of the company and its directors and distribute money to secured and preferential creditors and, with the court s permission, unsecured creditors Effect of administration Moratorium - stay on certain creditor actions against company or its property No winding up petitions No appointment of administrative receiver No enforcement of security No litigation No repossession of goods in company s possession No forfeiture by re-entry Court or administrator can consent to some of these actions 11

12 Administration Pre-packs Not part of the administration legislation but a practice has developed whereby a deal is negotiated with a purchaser prior to the appointment of the administrators and is effected by the administrators immediately following their appointment Pre-packs have been recognised as a legitimate restructuring tool Re Kayley Vending Limited [2009] EWHC 904 (ch) The court reviewed academic and other commentary on pre-packs and concluded that the administrators must consider the following factors: - whether a pre-pack achieved the best deal for the assets sold whether the trading of the insolvent company whilst negotiations took place cost the creditors more (in terms of debt incurred by the company) than the amount by which they benefited from the sale price achieved whether the inability of creditors to influence the transaction before it completed was outweighed by the benefit to them of the deal achieved 12

13 Administration Pre-packs Pros Enhances intrinsic value of the business Less disruption to the business Cheaper than a trading administration while a deal is negotiated More likely to result in the sale rescue of the business Cons Creditors have no control over the process No transparency with respect to sales process or potential buyers Reputation of Phoenix companies 13

14 English Scheme of Arrangement "The inherent flexibility of a scheme of arrangement has proved particularly valuable in such cases where the existing financing agreements do not contain provisions permitting voluntary modification of their terms by an achievable majority of creditors, or in cases of pan-european groups of companies where coordination of rescue procedures or formal insolvency proceedings across more than one country would prove impossible or very difficult to achieve without substantial difficulty, delay and expense". Mr Justice Snowden in the Van Gansewinkel Groep Scheme 22 July

15 English Scheme of Arrangement What is it a Scheme of Arrangement? A procedure under Companies Act 2006 (not an insolvency procedure) Compromise or arrangement proposed by the company with its creditors and/or members or any class of them Company must have a "sufficient connection" to the UK market trends have resulted in a number of European companies using schemes, sometimes moving their COMI or changing the governing law of debt documents to achieve a "sufficient connection" - Apcoa Parking (German), Magyar Telecom (Dutch / Hungarian), SEAT (Italian), Zlomrex (French), La Seda (Spain), Yüksel (Turkey), TORM (Denmark), Russian Standard Bank (Russia). Note English law governed documents plus a few English creditors likely to achieve "sufficient connection." 15

16 English Scheme of Arrangement (contd) Will be binding on ALL relevant scheme creditors and or members if the scheme is approved at a creditors/members meeting by 75% by value and a majority in number present and voting Each class of creditors/members must approve the terms of the Scheme No constraint as to what can be agreed between the company and its creditors / members (i.e. debt for equity swaps, amending documents, issuance of new debt instruments) Can release third party guarantees Recognised under Chapter 15 of the US Bankruptcy Code Recognised in Europe pursuant to Brussel s convention but some doubt. Process Application to court First hearing to consider jurisdiction Meeting of creditors/members Second hearing to consider fairness 16

17 EU regulation on insolvency proceedings Enacted 31 May 2002 Establishes common rules on cross-border insolvencies Uniform conflict of laws rules Does not harmonise substantive law or policy Provides a uniform set of rules to identify where insolvency proceedings should be commenced and determine which country s law is to be applied EU Member State with "centre of main interests" ("COMI") to have primary jurisdiction In general, once proceedings are opened in a Member State, they are to be automatically recognised in all other Member States "without further effect and without further formalities" Applies only when COMI is in EU Exclusions: insurers, banks and investment undertakings Applies on a company-by-company, not group, basis 17

18 EU regulation on insolvency proceedings Company s COMI (Article 3(1) of EC Regulation) "The place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties" Rebuttable presumption that COMI is located in the jurisdiction of the company s registered office (Article 3(1) of EC Regulation) Re Eurofood IFSC Ltd. This presumption, however, can be rebutted only if factors which are both objective and ascertainable by third parties (i.e., by creditors of the company) establish that the COMI should not be in the location of the debtor s registered office, e.g. where a company does not carry out any business in the territory of the jurisdiction in which its registered office is situated COMI is determined as at the date of opening of the insolvency proceedings COMI is a crucial concept and will affect applicable law AIM: universal scope EU-wide, to avoid forum shopping (ironic!) Automatic recognition EU-wide Recast Regulation comes into effect in

19 Case studies for European Companies using UK procedures German Company is restructuring using a UK pre pack administration A.T.U. Auto-Teile-Unger UK pre-pack administration sale for a German Company The restructuring of A.T.U. Auto-Teile- Under (ATU), the German auto car parts reseller, was completed following a prepacked sale of ATU through a UK administration. STEP 1 Company is incorporated as an English company and wholly owned subsidiary of ATU STEP 2 Company purchases the shares of HoldCo pursuant to a share purchase agreement with LuxCo STEP 3 Company is put into an English law administration and its assets are immediately sold to BidCo, free from all previous indebtedness TopCo (Cayman Islands) Prior to the restructuring the group had a 130m of Junior Notes. The junior notes were released using the release mechanics under the (ICA) which provided that the Senior Notes and Junior Notes and their corresponding guarantees and security could be released in the event of an enforcement. There was no need for a COMI shift but a UK pre pack was achieved by incorporating a UK holding company. HoldCo (Germany) InvestCo (Germany) ATU (Germany) Company (England) Company (England) HoldCo (Germany) InvestCo (Germany) ATU (Germany) Company (in administration (England) BidCo (Luxembourg) HoldCo (Germany) InvestCo (Germany) ATU (Germany) 19

20 Case studies for European Companies using UK procedures Germany Company with German law debts changes law to English law to use a UK scheme Apcoa Parking AG Apcoa Parking AG s scheme at the beginning of 2014 involved a three month extension to the maturities of Apcoa s loans. The scheme was sanctioned by the UK High Court in London on 14 April In Germany insolvency laws require companies experiencing payment defaults to file for an insolvency process within 21 days of the occurrence of the default and so the scheme allowed the discussion to continue outside the possible shadow of an insolvency filing. The governing law of the debt subject to the scheme was originally German law. In order to pass the sufficient connection test to allow the High Court to take jurisdiction the lenders agreed to change the law of the documents to English law, a process which could be achieved by a majority lender vote (in contrast to a higher threshold necessary for an extension of the maturities). 20

21 Case studies for European Companies using UK procedures Dutch issuer "Comi" shifts to England to use an English scheme Magyar Telecom BV Magyar Telecom BV is a Dutch business whose operations were focused on Hungary. Following low economic growth in Hungary and adverse tax changes, Magyar Telecom needed to restructure its 425m high yield bonds governed by New York law. The key problem was that, consistent with many New York governed high yield bonds, the percentage required to agree to a compromise of a debt to effect a debt equity swap was 90%. To achieve the statutory threshold for a UK scheme Magyar Telecom BV needed the support of 75% by value and a majority in number of the noteholders present and voting at the meeting a level of support far lower than the 90% required under the terms of the bonds. To obtain a "UK nexus" so that a UK judge would take jurisdiction, Magyar Telecom BV shifted its COMI from Holland to the UK. One key advantage of a COMI shift is that if the English courts were to find that the COMI of Magyar Telecom BV was in England, the New York courts would likely follow suit. The New York bankruptcy courts granted an order under Chapter 15 of the Bankruptcy Code recognising the scheme. Chapter 15 provides that where the main proceeding of an insolvency or debt compromise is in a foreign jurisdiction the US bankruptcy court may recognise the "main proceeding" and hence no bondholder could take action in a New York court to seek recovery under the bonds. 21

22 Case Study: Seat Pagine Gialle Italian debtor restructures its indebtedness using an English scheme Seat Pagine Gialle s.p.a. Corporate and Capital Structure Sponsors (through 2 levels of Lux HoldCos) CVC Capital 29.4% Permira 13.1% Various investors 7% 49.6% SEAT PAGINE GIALLE S.p.A. ( SPG ) Senior debt 630 mln SSB 750 mln + security package guarantee 50.4% market LIGHTHOUSE INTERNATIONAL S.A. (Lux «LH») Subordinated bond 1.3 bln 4 Italian subsidiaries 1 UK subsidiary 1 German subsidiary 22

23 Case Study: Seat Pagine Gialle The overall debt of approx. 2.7 bln was reduced to bln via an Italian out-of-court restructuring (under Art. 67 of the Italian Bankruptcy Law) which incorporated the following actions: 1. Exchange of subordinated bonds with new bonds, some convertible in LH shares and some in SPG new bonds; 2. Conversion of new convertible LH bonds in LH shares; 3. Merger LH/SPG; 4. Issue of new SPG bonds and conversion of LH remaining bonds; 5. Rescheduling of SPG debt; 6. Spin-off of SPG business. To complete the restructuring, SPG filed for a scheme of arrangement in the UK that allowed to «drag» a dissenting minority of senior lenders. The scheme of arrangement was commenced in July 2014 and was sanctioned by the UK court mid August

24 Case Studies Scheme and Pre-pack Step 1: New holdcos owned by senior lenders are incorporated Step 2: Senior Lenders accelerate senior debt and appoint administrators over holding companies in the existing group Step 3: The administrators sell the shares of the operating companies to the new group at the best price reasonably obtainable (consideration for the sale is the release of a proportion of the senior debt). Junior debt is left behind in the existing group and Intercreditor release mechanics are used by the Agent to release guarantees and security in favour of mezzanine lenders granted by the Opcos Step 4: Scheme of arrangement becomes effective to roll over a proportion of the senior debt to the new group (the scheme only includes senior lenders to bind dissenting senior lenders to transfer their debt to the new group) Pitfalls Not a true cram-down of out of the money creditors as their debt is left behind Need for an intercreditor agreement to release junior debt Topco Senior Lenders + Holdco 1 Administrators appointed Newco Opcos Administrator sale of businesses/opco shares Midco Opcos 24

25 Update on Italian Insolvency legislation On 27 June 2015 the Italian government enacted the law decree n. 83 (converted into law on 6 August 2015, the «2015 Reform») that includes material changes to the Italian bankruptcy law («IBL») The changes cover bankruptcy proceedings (fallimento) and in particular incourt proceedings (concordati preventivi) and semi in-court proceedings under article 182bis of the IBL («182bis Proceedings») The rationale behind the changes is to (a) accelerate bankruptcies (b) grant more powers to creditors in in-court restructuring proceedings and (c) eliminate hold-out creditors The changes (especially to pre-packs) may lead Italian debtors to make recourse to UK restructuring proceedings 25

26 Update on Italian Insolvency legislation: bankruptcy proceedings (fallimento) The 2015 Reform aimed at increasing transparency in the appointment of trustees (curatori) and improving the efficiency and speed of sale proceedings. New rules: (i) trustees are requested to have adequate resources and structures to carry out the job and are permitted to retain specialised servicers (ii) payment of any fee to trustee is subject to (partial) distributions to creditors (iii) an on-line national register is created at the Ministry of Justice covering data of trustees, commissioners and liquidators appointed nationwide in bankruptcy or concordato preventivo proceedings; the register will include information on the performance of the trustees, commissioners and liquidators and will be open to the public; (iv) trustees will be requested to prepare a liquidation plan within 180 days of commencement of the bankruptcy proceeding and to complete the liquidation process within 2 years from such date (failure is cause for dismissal of the trustee) (v) bankruptcy proceeding can be closed regardless of pending litigation priority to bankruptcy-related disputes 26

27 Update on Italian Insolvency legislation: Concordato preventivo The 2015 Reform revolutionised the concordato preventivo proceedings by introducing three «creditor-friendly» options: 1. the creditors vote to be expressed (no silenzio assenso) 2. the alternative plans (proposte concorrenti); and 3. the competitive bids (offerte concorrenti) 1. Vote on the restructuring plan (article 178 of the IBL) Creditors must vote in writing on the plan. Non-voting creditors are no longer deemed to have approved the plan. 27

28 Update on Italian Insolvency legislation: Concordato preventivo 2. Alternative plans (article 163 of the IBL) Creditors holding more than 10% of the overall indebtedness are entitled to put forward an alternative restructuring plan, provided the plan filed by the debtor offers to unsecured creditors less than 40% of their claims (if the debtor filed a liquidation plan) or 30% thereof (if the debtor filed a plan on a going concern basis; concordato in continuità) Alternative plans must be filed at least 30 days prior to voting no expert opinion is required under certain circumstances Alternative plans can (possibly) be of any kind and can even provide for capital increases diluting in whole or in part existing shareholders (!) Information on the debtor and its estate are to be delivered by the courtappointed commissioner subject to appropriate confidentiality arrangements 28

29 Update on Italian Insolvency legislation: Concordato preventivo Alternative plans (article 163 of the IBL) - continued Investors that collected information from the commissioner are not entitled to buy-out the estate from bankruptcy (i.e. file a concordato fallimentare) in the event they do not file any alternative plan in the concordato preventivo proceedings All plans are put out for approval by creditors: in the event of parity, the debtor s plan prevails; in the event of parity among alternative plans, preference goes to the plan filed first (creditors filing the alternative plan vote as a class); in the absence of the required majorities, the most voted plan is again submitted to creditors for approval. 29

30 Update on Italian Insolvency legislation: Concordato preventivo 3. Competitive bids (article 163bis of the IBL) Pre-packs filed by the debtor in a concordato preventivo scenario that are based on the transfer/rent of the business or single assets to a pre-selected purchaser are opened to the market as follows: upon filing of the plan the court orders a competitive auction to be run in respect of the assets to be transferrred information on the terms of the auction (including starting price and minimum bid increase) will be made available on the court website and information on the assets will be made available by the commissioner subject to confidentiality arrangements investors that collected information from the commissioner are not entitled to buy-out the estate from bankruptcy (i.e. file a concordato fallimentare) in the event they do not file any competitive bid in the concordato preventivo proceedings 30

31 Update on Italian Insolvency legislation: Concordato preventivo Competitive bids (article 163bis of the IBL) - continued bids must be comparable with the initial plan filed by the debtor and cannot be subject to conditions whatsoever in the event of multiple bids the court orders an auction among bidders the highest bid becomes part of the plan and is submitted to creditors for approval the initial bidder (if different from the winning bidder) is reimbursed of costs and expenses not to exceed 3% of the price set out in the initial bid. 31

32 Update on Italian Insolvency legislation: 182bis Proceedings The 2015 Reform introduced the following features in 182bis Proceedings: a) the debtor s right to «drag along» dissenting financial creditors b) the debtor s right to extend a standstill arrangement to dissenting financial creditors c) the extension of the criminal liability regime applicable in a concordato preventivo scenario to 182bis Proceedings with dissenting financial creditors 1. «Drag along» of dissenting creditors (article 182 septies of the IBL) The debtor can request the bankruptcy court to extend the effects of an executed debt restructuring agreement also to the minority dissenting/nonadhering financial creditors, provided that: (a) at least 50% of the overall indebtedness is owed by the debtor to banks and financial intermediaries (collectively the «Financial Creditors») (b) the Financial Creditors that executed the debt restructuring agreement hold at least 75% of the debts owed by the debtor to Financial Creditors (the calculation to be made in respect of the single classes of Financial Creditors, if any) 32

33 Update on Italian Insolvency legislation: 182bis Proceedings (c) the dissenting/non-adhering Financial Creditors: (i) have been informed and invited by the debtor to participate in the debt restructuring negotiations (ii) have legal positions and economic interests homogenous to those of the adhering Financial Creditors (judicial mortgages registered in the 90 days prior to publication of the debt restructuring agreement are not to be considered) (iii) have been served (notificati) with a copy of the debt restructuring agreement and the petition (ricorso) filed with the court (iv) have been provided with (a) complete and updated information on the economic situation and financial position of the debtor and the contents and implications of the debt restructuring agreement, (b) are offered a treatment that is not worse than the one they would receive in any practicable alternative scenario. 33

34 Update on Italian Insolvency legislation: 182bis Proceedings Dissenting/non-adhering Financial Creditors can oppose the request for extension whenever the conditions are not met by filing a formal objection with the bankruptcy court within 30 days from the service upon them of the debt restructuring agreement. 2. Standstill extension to dissenting financial creditors Whenever a debtor executed an out-of-court standstill agreement with Financial Creditors holding at least 75% of the debts owed by the debtor to Financial Creditors (the calculation to be made in respect of the single classes of Financial Creditors, if any) such standstill applies automatically to the dissenting/nonadhering Financial Creditors, provided that: (a) the dissenting/non-adhering Financial Creditors have been informed of, and invited to participate to the relevant negotiations (b) an independent expert confirms that the dissenting/non-adhering Financial Creditors have legal positions and economic interest homogeneous with those of the adhering Financial Creditors. 34

35 Update on Italian Insolvency legislation: 182bis Proceedings The dissenting/non-adhering Financial Creditors can oppose the standstill extension whenever the conditions above are not met by filing a formal objection with the bankruptcy court within 30 days of the service upon them of the executed standstill agreement. 3. Criminal liability regime The criminal liability regime applicable in a concordato preventivo scenario (report to the public prosecutor of past wrongdoings of the debtor) is applicable to 182bis Proceedings incorporating a «drag along» of dissenting financial creditors or the extension to them of standstill arrangements. 35

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