Restructurings. Use of Schemes of Arrangement

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1 Restructurings Use of Schemes of Arrangement Presented by: Bill Jamieson Partner Copyright Colin Ng & Partners LLP 1

2 Insolvency and restructuring If the company's financial position is not viable, creditors are faced with 2 possibilities: insolvency proceedings or restructuring Any restructuring process requires that: There is inherent value in the company concerned The company's medium to long-term business plan is sound The restructuring has the agreement of the company and its principal creditors. Copyright Colin Ng & Partners LLP 2

3 Restructuring principles Creditors may be able to achieve better returns through restructuring than by instigating bankruptcy proceedings Generally recognised principles for agreeing restructurings between lenders and borrowers under the London Approach and the International Federation of Insolvency Professionals (INSOL International) Global Principles for Multi-Creditor Workouts Copyright Colin Ng & Partners LLP 3

4 Restructuring agreement Creditors will work with the borrower to establish the terms on which they will be repaid. The crucial questions will include whether there needs to be: Deferment or rescheduling of capital payments Extension of maturity dates Capitalisation of interest Debt to equity conversion Copyright Colin Ng & Partners LLP 4

5 Exit s for creditors Debt refinancing Asset disposals Strategic investor Sale of debt Sale of shares following conversion of debt to equity Copyright Colin Ng & Partners LLP 5

6 Types of process The restructuring or insolvency process can be: In-court Out of court Legal procedures Contractual Compromises Copyright Colin Ng & Partners LLP 6

7 Legal regimes for insolvency and restructuring in Asia Singapore, Hong Kong: Developed legal systems; reasonably predictable; competent judiciary China, Thailand, Malaysia: Underdeveloped legal system (especially in restructuring); Government influence; inexperienced judiciary; can be unpredictable India: In theory, appears developed; in practice, intensely slow Indonesia, the Philippines: problematic in practice Copyright Colin Ng & Partners LLP 7

8 Singapore processes Scheme of Arrangement Judicial Management Liquidation/Winding-Up Receivership Set-off Copyright Colin Ng & Partners LLP 8

9 Why use a Scheme of Arrangement? Will not require 100% approval of creditors Avoid costs and uncertainty of bankruptcy / insolvency proceedings If fail to reach the requisite majority vote in favour of the scheme there will be no automatic bankruptcy / winding up order Avoid the costs of a judicial manager/administrator/planner The management of the company is not restricted May avoid triggering termination rights in contracts Copyright Colin Ng & Partners LLP 9

10 Why use a Scheme of Arrangement? A stay of proceedings may be obtained against proceedings brought by creditors once a scheme of arrangement has been proposed The disclosure requirements may be less onerous Can obtain a release of certain claims under the scheme Would be recognised in the US as a foreign proceeding for purposes of US Bankruptcy Code Copyright Colin Ng & Partners LLP 10

11 Schemes of Arrangement CASE STUDY PT GARUDA INDONESIA (2001) (Unreported) Facts: Total debt US$2.5 billion with approximately 80 unsecured creditors. Issue: Implementation of parallel Schemes in Singapore and England. Debtor had branch or representative offices in both England and Singapore new notes with staggered payments of interest and principal. 97.3% of creditors voted in favour. Risk of challenge by local court in Indonesia. the benefits of achieving a restructuring outweighed this risk Scheme: Cancellation of existing claims of unsecured creditors to be replaced with entitlement to receive Copyright Colin Ng & Partners LLP 11

12 Structuring considerations Competing creditors interests Structural and due diligence issues Are the debts subordinated contractually or structurally? Do banks and other financial institutions have security they can actually enforce? Do the shareholders have to be included in the restructuring? Copyright Colin Ng & Partners LLP 12

13 Structuring considerations Solvent or insolvent restructuring will affect the restructuring options available pre-packaged insolvency proceedings scheme of arrangement combination of the two Does the solution involve a new issue of listed securities? working capital issues verification of public document Mis-selling claims Copyright Colin Ng & Partners LLP 13

14 Bond restructurings Who is a Creditor? Scheme must be with creditors Most Indentures and Trust Deeds recognise only the registered holder, not the beneficial owner as a creditor Mis-selling claims are normally claims of the beneficial owner - not the registered holder - yet need to bind them to a release? To be effective you want to bind registered and beneficial holders Copyright Colin Ng & Partners LLP 14

15 Bond restructurings Who is a Creditor? Using contractual provisions to deal with claims Scheme deals with registered holders, contractual agreement with beneficial holders Registered holders vote on the Scheme on instructions of beneficial holders Payments made directly to registered holder or its agent but only after beneficial holder submits deed of release:- Detailing payment instructions Waiving mis-selling claims (a waiver by agreement) Copyright Colin Ng & Partners LLP 15

16 Bond restructurings Who is a Creditor? Using contractual provisions to deal with claims Advantages No need to amend the Trust Deed/Indenture Payments delivered via the system - especially important where Scheme involves issue of new securities Fewer legal concerns if documents do not get to all beneficial owners Disadvantages Have to achieve agreement on an individual as well as class basis Copyright Colin Ng & Partners LLP 16

17 Bond restructurings Who is a Creditor? If all notes in global form, there may only be one creditor, eg, custodian clearing system Proxies count for calculating a majority in the value of votes cast. For purposes of calculating majority in number, votes cast for and against on the same proxy cancel each other out Equitable Life decision - one person cannot constitute a majority in number unless 100% vote in favour of the scheme Solution - create more than one registered holder Copyright Colin Ng & Partners LLP 17

18 Bond restructurings Who is a Creditor? Telewest transaction Issue definitive certificates bondholders voting on the scheme authorise global note converted into definitive notes registered in their names Definitive certificates exchanged back into the global certificate in the clearing systems following the effective date so new securities can be distributed through the clearing systems Copyright Colin Ng & Partners LLP 18

19 Irrevocable undertakings - class issues Impact of obtaining irrevocable undertakings - not automatically a separate class but beware of irrevocable undertakings from holders of over 75% in value of bonds Telewest Voting agreements provided that, if reasonable grounds existed for a change of mind, the bondholders could withdraw from the voting agreements The court noted that, even in the absence of agreed termination events, voting agreements would not create a separate class, although they would be relevant to the exercise of the court's discretion to sanction the scheme Copyright Colin Ng & Partners LLP 19

20 Confidentiality/insider dealing issues Lenders steering committee Bondholders committee - will want to be represented on steering committee Passing information to the committees Confidentiality Restriction on dealings Blow-out provision - requirement to publicly disclose information if agreement not reached by certain date Copyright Colin Ng & Partners LLP 20

21 Takeover offer versus Scheme Offer: the acquisition of the entire issued share capital of the Target can only be assured if the Offeror receives acceptances under the offer or otherwise acquires during the offer period shares which together represent not less than 90% in value of each class of the shares to which the offer relates. Once the 90% barrier is passed, the minority can be compulsorily acquired under the so-called squeeze-out procedure set out in the Companies Act. Scheme: essence is acquisition on the effective date of all the Scheme shares held by the Target s shareholders as at the record date in exchange for cash the threshold level applicable to a scheme is lower, particularly when one takes into account shareholder apathy, since not all of the shareholders may turn up and vote is more time consuming, expensive and cumbersome than a takeover offer, because of need for court approval. Copyright Colin Ng & Partners LLP 21

22 Scheme of Arrangement - alternative to a takeover offer? Advantages Certainty of 100% : court order binding on all Lower acceptance level : majority in number; 3/4ths in value of those voting Timing and control : relaxation of Code Overseas shareholders : US securities exemption Copyright Colin Ng & Partners LLP 22

23 Scheme of Arrangement - alternative to a takeover offer? Disadvantages Lack of control for Offeror : Target s scheme and target could withdraw Inflexibility in face of competing offer: court involvement on timing of any revised offer Treatment of market purchases: cannot vote them at scheme meetings Blocking by minority shareholders: dual test: % & number Costs: court involvement Copyright Colin Ng & Partners LLP 23

24 Thank you. Bill Jamieson Colin Ng & Partners LLP 36 Carpenter Street Singapore DID: (65) Fax: (65) Copyright Colin Ng & Partners LLP 24