The ATU Restructuring and the Judgement of the English Courts

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1 The ATU Restructuring and the Judgement of the English Courts Novel Techniques for Restructuring European High Yield SUMMARY The restructuring of the ATU group as a European high yield issuer (pursuant to which the ownership of the group was transferred to its senior noteholders) provides a useful insight into how the next generation of European high yield issuers could potentially be restructured using English insolvency law and procedure. The restructuring was approved by Mr. Justice Henderson in the High Court on 15 th April 2014 and his judgement makes interesting reading and provides a number of useful learning points that are likely to assist those undertaking similar European high yield restructurings in Europe. BACKGROUND On 23 January 2014 Mr. Justice Henderson heard an urgent application in relation to the restructuring of ATU group whose core business is the installation of automotive replacement parts, tyres and maintenance items, and the sale of automotive merchandise in a number of European countries. The ATU group is headquartered in Germany, and at the time operated 646 branches and employed c11,000 people. From the beginning of 2013, the ATU group had been experiencing serious financial difficulties. During 2013, various attempts were made to secure refinancing of the group s debts, but these efforts all proved unsuccessful. THE M&A PROCESS AND THE INDEPENDENT VALUATION Although a significant marketing process of the ATU Group was undertaken by Lazard & Co., Limited ( Lazard ) in October 2013, no formal indicative bids were made for all or any part of the group. As part of that process, Lazard was also instructed to provide an independent valuation of the ATU group. This New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 subsequently demonstrated that there was a substantial deficiency with regard to the 450m of senior notes referred to in Diagram 1. The valuation process on the evidence was accepted by the court as a valid, reasonable and fair process, and the judge accepted that the 150m of junior notes were in his words worthless with the value breaking significantly into the senior notes. In addition, Mr. Justice Henderson points to a liquidation analysis performed for the Company which estimates that in a liquidation the senior noteholders could expect a recovery of 3.72% on their outstanding claims. THE HISTORIC GROUP STRUCTURE AND CAPITAL STRUCTURE The organogram of the Group prior to the launch of the implementation plan (with its capital structure overlaid) is set out below in Diagram 1. ATU Luxembourg S.á.r.l. Christophorus 3 Ltd (the Company ) Now direct subsidiary of topco ATU Holding GmbH Floating rate junior notes 150m Due date 01/10/2014 Flip up of Company ATU Beteiligungs GmbH Floating rate senior notes 75m Due date 15/05/2014 ATU Investment KG Fixed rate senior notes 375m Due date 15/05/2014 ATU Handels KG Working capital and senior secured revolving credit facility 45m Christophorus 3 Ltd (the Company ) Other subsidiaries Subsidiary Guarantors Guarantees Security provider and guarantor (Obligor) THE APPLICATIONS TO COURT AND THE EXPEDITED ORDERS The case concerned two applications made by the directors of the UK member of the ATU group, Christophorus 3 Limited (the Company ) which had been incorporated in England & Wales in July 2013 for the sole purpose of taking advantage, in due course, of English insolvency law and procedure. -2-

3 The first applications was for an administration order in respect of the Company pursuant to paragraph 12(1)(b) of Schedule B1 to the Insolvency Act 1986 (the 1986 Act ) and the appointment of Peter Spratt and Russell Downs of PricewaterhouseCoopers LLP (the Administrators ) as administrators. The second application was for an order granting the Administrators liberty (as agents for the Company) to enter into an immediate pre-pack agreement for the sale and purchase of all the Company s assets. In order to be able to make the order relating to the pre-pack, the Court also demonstrated a willingness to construe fundamental provisions relating to the release of obligations and security in an intercreditor agreement entered into by inter alia the ATU Group, the note trustee, the security agent, the senior priority lenders and their facility agent (the ICA ). Although the orders were made on 23 rd January, the applications concerned a complex restructuring implementation plan (the Implementation Plan ) and complex submissions and accordingly Mr. Justice Henderson expressed a preference to elaborate on his reasons for making the orders by delivering his written judgement at a later date. This written judgement was delivered last week on 15 th April A particularly interesting feature of the case was that Mr. Justice Henderson was prepared to make the orders and undertake the ICA construction on an expedited basis because he readily accepted that the application was urgent and that the Implementation Plan had been devised as the only practicable means of saving the ATU group from compulsory insolvency given that there was no plan B to fall back upon if the Implementation Plan was for any reason unable to proceed. THE INTERCREDITOR AGREEMENT RELEASES A critical requirement of the Implementation Plan was that the assets to be sold under the SPA to a lender-led vehicle should be sold clean, and released by the security agent, free from all the existing indebtedness of the ATU group secured on them, in accordance with the ICA. There were certain construction issues under the ICA and in order to deliver such a release, the security agent insisted on the protection of a court order authorising it to proceed before it gave the releases, which in turn had to precede entry into the SPA. The ATU case is therefore a very useful precedent and a good example of the willingness of the Courts to address important points of construction in the underlying finance documents as part of its overall jurisdiction with respect to the accelerated appointment of administrators and a pre-packaged sale. Having previously incorporated the Company as a subsidiary of Handels, the Implementation Plan prescribed that the Company would firstly be acquired by ATU Luxembourg Sárl (as shown on Diagram 1) as part of a so-called flip-up (at fair value), before entering into a share purchase agreement ( SPA ) with ATU Luxembourg Sárl itself, under which the Company agreed to acquire all of the shares in Holding from ATU Luxembourg Sárl. At that point, therefore, the Company moved up the group hierarchy and became an intermediate holding company placed above Holding. A further component of the Implementation Plan involved the Company entering into a German law governed pledge of its shares in -3-

4 Holding as security for the existing senior liabilities under the RCF and the senior notes. The Company also became an Obligor under the ICA by executing an Obligor Accession Deed pursuant to the terms of the ICA. The next stage in the Implementation Plan involved the Company being placed into administration, and the Administrators executing the pre-packaged sale of all of its assets, including the shares in Holding, to Bidco for a nominal consideration. As can be seen from Diagram 2 below, Bidco is a wholly owned indirect subsidiary of a company that had recently been incorporated in the Cayman Islands ( Topco ) that will, as a result of completion of a consent solicitation process initiated in January 2014, be indirectly owned by all of the senior noteholders. This sale was conditional on the orders of the Court being made, but as part of the sale process and pursuant to the Implementation Plan, Holdings and its subsidiaries would effectively be released from their current indebtedness and security, the acquired group would receive new investment of 109 million (provided in the form of new senior notes), a substantial proportion of the group s indebtedness will be replaced with equity participation, and other super senior liabilities, including the RCF, would be repaid in full. It was accepted by Mr. Justice Henderson that the restructuring was commercially logical on the basis of the liquidation analysis conducted separately for the Company by Schultze & Braun, which indicated a much lower recovery in liquidation proceedings. The overall effect of the implementation plan and the overall corporate and debt structure of the new ATU Group following the execution of the restructuring is set out below in Diagram

5 New Shareholders New Money Providers CayCo (Cayman) 109m Senior Debt HoldCo (Cayman) Administrators Christophorus 3 Ltd (the Company ) SPA BidCo (Lux) (Bidco acquires Holding from Company via Administration pre-packaged SPA) ATU Holding GmbH New 50m Super Senior term loan and 25m Super Senior RCF ATU Handels KG Other subsidiaries Subsidiary Guarantors As stated above, a key aspect of the restructuring was a release of all liabilities under the senior notes, the existing transaction security and all associated guarantee liabilities. The release by the security agent was to be executed on the instructions of the senior notes trustee, which in turn, was to act on the instructions of the consenting senior noteholders. Distressed disposals by an Obligor after any Enforcement Action effectively entitled the security agent to execute the relevant releases providing that the asset which is disposed of consists of all of the shares (which are held by an Obligor) in the capital of an Obligor owing Liabilities... or any holding company of that Obligor. This, in turn, raised the question whether, at the time of the SPA, the Company was an Obligor within the meaning of the ICA. Although the Company was not an Original Obligor, it properly became an Obligor because it validly acceded as a subsidiary of ATU Handels KG pursuant to an accession deed which was the requirement under the ICA. Whilst it was undisputed that the Company validly acceded as an Obligor and executed new pledge security in that capacity, it was subsequently flipped up (as shown in Diagram 1) to become a direct subsidiary of ATU Luxembourg Sárl, not Handels. The question to be addressed by the court was whether the Company retained its Obligor status after it ceased to be a subsidiary of Handels. -5-

6 THE FIRST CONSTRUCTION QUESTION: DID THE COMPANY RETAIN ITS OBLIGOR STATUS ONCE IT WAS FLIPPED-UP TO A HIGHER LEVEL WITHIN THE GROUP? In addressing this question, Mr. Justice Henderson could find nothing in the ICA which terminated its status, and to the contrary, on a natural reading of the ICA, the condition of being a subsidiary of Handels simply had to be satisfied at the time when the company in question became a party to the ICA by executing an Obligor accession deed. Once it had become an Obligor, its position was governed by the ICA and the terms of the accession deed itself whereby an Obligor validly acceding undertook to perform all the obligations expressed to be assumed by an Obligor under the Intercreditor Agreement and agrees that it shall be bound by all the provisions of the Intercreditor Agreement as if it had been an original party to the Intercreditor Agreement. The Judge noted that this undertaking was not temporal or expressly or impliedly affected by the Company s position in the group hierarchy and so its position as an Obligor continued while the ICA remained in force. It was also recognised (albeit implicitly) that as a commercial matter, the Company (notwithstanding the flip-up ) would have sought a release from its Obligor status if it wished to be discharged from its Obligor obligations. From a similar commercial perspective, Mr. Justice Henderson also noted that it would be illogical for the Company to have to remain a subsidiary of Handels in order to retain its status as an Obligor. Indeed, it was recognised that this construction would result in it immediately losing its status as an Obligor if it were sold to an entity outside the group, or if it remained in the group, but for any reason ceased to be a subsidiary of Handels. Such a perverse result could not have been intended and, if it was, one would expect to find it clearly articulated in the ICA and/or the obligor accession deed, and not left to be inferred from a possible ambiguity in the definition of Obligor. Equally on a purposive construction there was nothing in the ICA which suggested that power of release cannot be exercised by the Security Agent in respect of a sale of assets by the Company, despite it ceasing to be a subsidiary of Handels. Conversely, Mr. Justice Henderson noted that the actual focus of the release provision is to facilitate a sale to be effected free from existing liabilities in order to maximise the return that can be obtained from the assets sold in the context of an actual or impending insolvency. Such a purposive construction was expressed to be entirely consistent with the approach of the Court of Appeal, in relation to such release provisions in Barclays Bank Plc v HHY Luxembourg Sárl [2010] EWCA Civ. 1248, [2011] 1 BCLC 336 and in particular the judgement of Longmore LJ at [18] to [26] where at [25] he stated that the intention of the parties to the ICA (in that case) was that it should be a co-operative document between parties with similar interests, who would want to maximise recovery if at all possible. Finally, it was recognised by Mr. Justice Henderson that there was no requirement that an Obligor should serve any particular purpose or should have traded or existed for any length of time proving that it validly qualified as an Obligor. Moreover, he expressly recognised that it could be formed and accede for the very purpose of being moved up the corporate structure having initially achieved such status in order to -6-

7 serve the very real purpose of facilitating a going-concern restructuring and the maximisation of recoveries. The Judge did however recognise that (whilst not determinative in any way), the Company s existence as an Obligor for some six months was helpful in that it dispelled the notion that its status as an Obligor was fleeting or evanescent. THE SECOND CONSTRUCTION QUESTION: WILL THE SALE OF THE SHARES IN HOLDING BE IMPLEMENTED UNDER ANY COURT-APPROVED PROCESS? Another question of construction that troubled the security agent, the senior note trustee and their advisers was whether the sale by the UK Administrators of the Company (as an Obligor) of Holding was a sale... implemented under a court-approved process pursuant to the ICA. In this regard, Mr. Justice Henderson, following the guidance of Lewison J (as he was then) in Re Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch), [2010] B.C.C, accepted that the pre-pack sale in question was the only realistic prospect of saving the business of the group as a going concern. Moreover, he did not accept that it was necessary for the court to positively approve the principle of, and the terms of, the proposed sale in circumstances where the sale will be made by court-appointed administrators, themselves officers of the court validly exercising powers and functions consistent with paragraph 3 of Schedule B1 to the 1986 Act for the relevant purpose in the ATU case of achieving a better result for the company s creditors as a whole than would be likely if the company were wound up (without first being in administration). THE KEY TAKEAWAYS Over the last few years, the English Courts have shown an increasing willingness to accept jurisdiction in restructurings of companies and corporate groups that are not incorporated in England (a development that included the restructurings of the German groups Rodenstock ([2011] EWHC 1104 (Ch)), Telecolumbus (No of 2010, December 14, 2010) and Primacom (High Court of Justice (Chancery Division, London (Justice Hildyard) [2011] EWHC 164 (Ch)). The ATU Judgement is an important continuation of this development 1. The incorporation of an English Newco pursuant to an intercreditor agreement and a flip-up of that entity to a level where the group can be cut-off as part of a creditor-led restructuring making use of English insolvency law and procedure is likely to be a useful tool in restructuring the inevitable wall of future European high yield deals. The flip-up technique properly implemented, is likely to be a robust alternative to a more expensive, time-consuming and potentially tax-sensitive COMI Shift. The English Court has proved itself amenable to making an administration order in respect of a company formed for the express purpose of facilitating a going-concern restructuring and the maximisation of recoveries, even if its existence is relatively transitory. 1 Another important and very recent development is the decision in re Apcoa of April 2014 in which the English Court accepted jurisdiction over a scheme of arrangement of credit facilities agreements the governing law of which had been changed to English law in order to be eligible for the scheme) -7-

8 Equally, the English Court has again made an order granting administrators liberty (as agents for the Company) to enter into an immediate pre-pack agreement for the sale and purchase of all of the assets of such a Newco. The English Courts have also demonstrated their willingness to make such orders on an expedited and urgent basis where they are satisfied that an insolvent liquidation is the only other option. In order to be able to make an expedited order relating to a pre-pack, the English Courts will also simultaneously undertake expedited construction of the fundamental provisions in the underlying finance documents, particularly where they relate to the release of obligations and security in an intercreditor agreement. Entities that initially undertake a valid accession process to become Obligors with the sole purpose of facilitating a restructuring or enforcement process, will not cease to have such status, even if they are subject to a flip-up to a higher level within the overall group hierarchy. The court again reinforced the key principle that the actual focus of the release provision in an intercreditor agreement is to facilitate a sale to be effected free from existing liabilities in order to maximise returns. In the pursuit of this principle it will continue to adopt a purposive interpretation of intercreditor agreements. A proposed sale made by court-appointed administrators as officers of the court validly exercising powers and functions consistent with paragraph 3 of Schedule B1 to the 1986 Act, will satisfy the requirement in most modern intercreditor agreements of a sale implemented under a court-approved process, in order to enable a release of indebtedness and security by a security trustee. The principles and guidance provided by the ATU case could potentially make it more difficult for note trustees and security agents to resist requests by creditors to cooperate in restructurings and to refuse to execute security releases on the basis of technical construction matters and tenuous or oblique arguments relating to administration sales as a non court approved process or the reorganisation of a group which might, as a consequence, result in the technical loss of status of an Obligor. 2 * * * Copyright Sullivan & Cromwell LLP Sullivan & Cromwell LLP acted for a number of large bondholders on the restructuring of the ATU Group -8-

9 ABOUT SULLIVAN & CROMWELL LLP Sullivan & Cromwell LLP is a global law firm that advises on major domestic and cross-border M&A, finance, corporate and real estate transactions, significant litigation and corporate investigations, and complex restructuring, regulatory, tax and estate planning matters. Founded in 1879, Sullivan & Cromwell LLP has more than 800 lawyers on four continents, with four offices in the United States, including its headquarters in New York, three offices in Europe, two in Australia and three in Asia. CONTACTING SULLIVAN & CROMWELL LLP This publication is provided by Sullivan & Cromwell LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to any of our lawyers listed below, or to any other Sullivan & Cromwell LLP lawyer with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Stefanie S. Trilling ( ; trillings@sullcrom.com) in our New York office. CONTACTS London Christopher J. Howard howardcj@sullcrom.com Presley Warner warnerp@sullcrom.com Frankfurt Max Birke birkem@sullcrom.com New York Andrew G. Dietderich dietdericha@sullcrom.com Michael H. Torkin torkinm@sullcrom.com Christian Beatty beattyc@sullcrom.com -9- LONDON: