The High Yield Restructuring Landscape A European perspective

Transcription

1 The High Yield Restructuring Landscape A European perspective

2 Contents Pitfalls and opportunities 2 European restructuring dynamics 4 Common structures 6 Early warning signs Understanding your rights 22 Stabilisation 28 Negotiation and delivery 34 Clifford Chance quick facts 46 Clifford Chance contacts 48 Clifford Chance 1

3 PITFALLS AND OPPORTUNITIES Pitfalls and opportunities Pitfalls and opportunities The European high yield market is increasingly attractive, accessible and liquid. Many sponsors and European companies have taken the opportunity to refinance existing debt or increase leverage on flexible terms. This is a relatively recent phenomenon and historic European high yield default rates are fairly low. As a result, these structures remain to be fully tested in the context of a European restructuring in the way that European LBO structures have been over the course of the financial crisis. However, a number of European high yield transactions are now being analysed from a restructuring perspective, both by existing creditors looking to protect their positions and by new investors looking for opportunities. While high yield products may have originated in the US, a European high yield transaction, with a European issuer and a primarily European business, is a European deal in restructuring terms. If that deal falters, its restructuring will be largely driven by European considerations. Our European restructuring team (including financing and US high yield specialists based in Europe), looks at how local law issues can be game changers. We provide practical tips based on real life experience of restructuring European high yield deals. We discuss how current European loan and high yield markets can impact restructurings and look at both pitfalls and opportunities. We hope you will find this publication useful and if you would like to know more please contact any member of our team. Philip Hertz David Steinberg Joint Leaders Restructuring and Insolvency Group, London 2 Clifford Chance Clifford Chance 3

4 EUROPEAN RESTRUCTURING DYNAMICS Does the European context change the restructuring dynamic? Yes. While structures in the European high yield market may have their origins in the US, they operate in a European environment. In a US Chapter 11 reorganisation, the process for reorganisation or enforcement is subject to the US Bankruptcy Code which provides for the valuation of the debtor's assets and classification of competing claims in accordance with established distributive priorities. Jennifer C. Demarco Partner, New York Usually issuers are based in tax efficient jurisdictions, such as Luxembourg or the Netherlands, and valuable operating guarantor subsidiaries and assets are often spread across a number of European jurisdictions. While the high yield indenture will be New York law governed, related intercreditor, security and loan documents will usually be governed by English and local European laws. Having a single legal team operating across the right jurisdictions is key. European restructuring dynamics In Europe, there is no common process, law or statutory timetable equivalent to Chapter 11. Understanding the diverse local legal issues and processes is essential. Jurisdiction risk should be at the forefront of a market participant's mind. Philip Hertz Partner, London 4 Clifford Chance Clifford Chance 5

5 COMMON STRUCTURES The European high yield market today Common structures Historically European high yield notes tended to be junior debt instruments. Now European high yield notes are often issued at a senior secured level in the capital structure and volumes have increased significantly. James Boswell Partner, London Issuers will typically need one or more loan facilities alongside their senior secured notes, whether to provide a portion of their term debt or a revolving facility for working capital and other purposes. To accommodate this, European senior secured loan/high yield note structures have emerged. Two common structures are: The dynamic of restructuring a SSRCF deal SSRCF deals are a good point of focus for considering restructuring of European high yield deals. They are currently the most prevalent (and, probably, more settled) of the senior secured loan/high yield note structures. SSRCF deals are also likely to create new rhythms and dynamics in a European restructuring. We look at SSRCF deals while noting that the market is still developing. SSRCF deal structures commonly take the following form. Parent SSRCF deals: super senior secured revolving credit facilities with senior secured notes Guarantee HoldCo Guarantee Pari deals: senior secured revolving credit and term loan facilities with senior secured notes There are of course a number of other types of European high yield notes in the market senior unsecured notes, senior subordinated notes and PIK notes to name a few and many possible permutations and combinations. For example, it would not be unusual for a senior secured note structure to include a senior subordinated note sitting behind the senior secured debt. SSRCF Guarantee OpCo Guarantors Issuer or Borrower OpCo Non-Guarantors Senior Secured Notes Guarantee 6 Clifford Chance Clifford Chance 7

6 Common structures At the outset of any restructuring or anticipated restructuring of a SSRCF deal, market participants will need to ensure that they understand their rights, and those of other counterparties. The key features of a SSRCF deal that are likely to have a bearing on any European restructuring process are shown in the following tables. Structure Relative size Borrower/Issuer Guarantors Security Intercreditor Agreement Ranking of SSRCF and note claims Priority in proceeds waterfall SSRCF typically 5-30% of the total senior secured debt Same top borrower/issuer (although guarantor opcos may also borrow the SSRCF directly) Same guarantors Shared security package; common security agent Yes, governed by English law Pari passu SSRCF ahead of the senior secured notes with respect to proceeds from security enforcement and distressed disposals only Key Term SSRCF Senior Secured Notes Negative undertakings Financial covenants Events of Default Note-style incurrence covenants which may be supplemented with additional restrictions including a note purchase condition restricting principal payments on the senior secured notes (including following a Default/Event of Default) Often a single financial covenant (e.g. minimum EBITDA; total net leverage; interest cover) set with significant headroom May be loan-style or notestyle (typically narrower than loan-style) Note-style incurrence covenants None Note-style 'Standard' documentation? Although the structure and documentation of particular SSRCF deals may differ, in November 2013 the LMA launched a new recommended form of SSRCF and associated Intercreditor Agreement for use in such transactions. This new documentation may mean that elements of the structure and documentation for SSRCF deals take a more common form in the future. Control over enforcement and other intercreditor rights See Understanding Your Rights section Transferability Restriction on transfers without consent (but still transferable following an Event of Default) Free transferability Governing law English law but with incurrence covenants governed by or interpreted in accordance with New York law New York law 8 Clifford Chance Clifford Chance 9

7 ONE EARLY WARNING SIGNS Spotting the danger signs, being the first mover, and getting co-ordinated advice from the right advisers early on will influence the outcome of the process. Sponsors and owners of distressed businesses may seek to front run restructuring processes based on their inherent information advantage, but will the information flows between lenders and noteholders make a difference to a restructuring process? Breaches and defaults Do loans have a more sensitive early warning system than notes? Traditionally yes, but where the SSRCF is largely conformed to the senior secured note indenture in SSRCF deals, the differential will be significantly eroded. A SSRCF may have earlier default triggers than a senior secured note, including: a financial maintenance covenant (although set with significant headroom) "forward looking" events of default such as a Material Adverse Effect and audit qualification events of default a cross-default event of default (as opposed to the senior secured notes' cross-acceleration provision) and shorter grace periods and earlier insolvency triggers Early warning signs Understanding your rights Stabilisation Negotiation and delivery 1 However, the position will vary from deal to deal and even where some or all of these protections are included in the SSRCF, a meaningful "head start" for lenders is not guaranteed. 10 Clifford Chance Clifford Chance 11

8 Information: who knows what? Both SSRCF lenders and noteholders are contractually entitled to receive annual and quarterly financial statements. Often the delivery timeframes are conformed. This financial information will be historic and publicly available. In addition, SSRCF lenders may be entitled to private information such as monthly management accounts, an annual budget and/or an annual presentation from directors. They may also have a contractual right to request information from the company. Some of this may include projections which, if sufficiently detailed, may help the SSRCF lenders anticipate future issues. Certain patterns of behaviour by the company may also be more readily apparent to SSRCF lenders. For example, the use of a SSRCF as "core" borrowing or other unusual patterns of drawing might indicate a more fundamental problem in the financing structure. Noteholders are unlikely to be entitled to any of this additional information and, even if they were, may be unwilling to receive "private information" (which we will explore in more detail in the section). Noteholders and lenders should consider what information they will receive and when. Although a Chapter 11 restructuring can give a debtor time to work with stakeholders towards a resolution, a European restructuring process can be less predictable due to the differing 'jurisdictional risks'. Being aware of financial difficulties and having access to relevant information at an early stage is therefore often crucial. John MacLennan Partner, London 12 Clifford Chance

9 Traditionally, high yield covenants are tested only when the issuer would like to do something; such as incurring new debt or paying a dividend. With traditional loan covenants, a borrower must comply with specific conditions at specific times, like a quarterly leverage test. A borrower's poor economic performance may result in a potential or actual default under the loan covenants but not the high yield. Michael Dakin Partner, London Using the information Understanding each stakeholder's position is a key feature of the early stages of any European high yield note restructuring. Uneven flows of information mean that certain stakeholders may have the opportunity to get a head start on others in influencing any restructuring. However, it is ultimately the way in which information is used that will determine whether an advantage, if any, can be gained. Early warning signs Understanding your rights Stabilisation Negotiation and delivery 1 14 Clifford Chance Clifford Chance 15

10 TWO CO-ORDINATION Reacting to bad news 2 Early warning signs Understanding your rights Stabilisation Negotiation and delivery In the past tighter loan terms have meant that notes have defaulted later than loans and at a point when the financial health of the company is weaker. However, SSRCF lenders may find themselves at the negotiating table at a later stage and with less time to find a solution before the onset of insolvency. If SSRCF lenders do become aware of a company's difficulties ahead of noteholders, they may choose to engage with the company to find a solution without the noteholders. Some lenders may decide they no longer want the credit exposure and trade out of their position. Clearly whoever holds the SSRCF debt can influence the outcome of discussions with the company and may have more flexibility to do so, and different objectives, if they have invested sub-par. As a result, investors taking a position in the notes may also find it attractive to take a piece of the SSRCF debt. If a lender solution is not possible or attractive, then more co-ordinated solutions can be explored. There has long been a set of guiding principles in European restructurings, from the London Approach to the INSOL Principles. One of the cornerstones of those principles is co-ordination amongst stakeholders. While the much expanded universe of market participants has led to varying degrees of knowledge about these principles, they can still provide a useful pilot through the choppy waters of a restructuring. can and often does significantly reduce the cost of a restructuring, both in terms of time and money. It can also provide a degree of momentum that is otherwise hard to achieve. However, stakeholders will not always support a co-ordinated approach; they may have their own strategy or interests. "Absentee" stakeholders can also make co-ordination difficult. 16 Clifford Chance Clifford Chance 17

11 In a European restructuring a co-ordinated process is still likely to lead to a better outcome for most stakeholders but achieving it will require an understanding of who the stakeholders are and the dynamics between them. Key stakeholders in a European high yield restructuring European restructurings involve a wide spectrum of stakeholders CDS providers Credit insurers 2 Early warning signs Understanding your rights Stabilisation Negotiation and delivery Auditors Iain White Partner, London Landlords Security agent Hedge counterparties New money providers Works councils Trade creditors Facility agent Obligor Group Directors Employees Rating agencies Note trustee Sponsor / Shareholder Pension trustees Noteholders Lenders Stock exchanges Identification agents Euroclear / Clearstream / DTC Tax Authorities / Regulators 18 Clifford Chance Clifford Chance 19

12 Organisation of SSRCF lenders and noteholders Our focus here is on SSRCF lenders and noteholders and the dynamics between them, although we recognise that other stakeholders can affect the outcome of a restructuring. Typically SSRCF lenders and noteholders will seek separate seats at the table, with separate advisers (legal, financial and, depending on the underlying credit, possibly others). This will certainly be the case where the interests of noteholders and lenders are not aligned. A further common reason for noteholders and lenders seeking to pursue their interests separately even where lenders and noteholders have some community of interest as a result of, for example, noteholders also holding the SSRCF or vice versa (referred to as "cross-holdings") is the public/private information divide. The notes will be publicly traded and subject to market abuse and insider trading laws limiting noteholders' desire and ability to receive private or "inside" information that will often be generated as part of any restructuring. Public/private divide Often noteholders will not "come inside" the restructuring process until as late as possible or only in the knowledge that they will be cleansed of their insider knowledge in a defined time frame, as their ability to trade would otherwise be restricted. As a result, noteholders committees are often led by financial and legal advisers who will fill the void and, in the initial stages at least, shape the restructuring proposal. Those advisers are likely to be engaged and paid by the obligor group, although their advice can only be relied upon by the (potentially changing) body of noteholders they represent. Participants who are unfamiliar with this concept can become frustrated by a perceived lack of engagement by noteholders and the uncertainty it can bring to the restructuring negotiations. This, however, reflects the reality of noteholders' continued desire to be able to trade their notes. A key factor in the successful co-ordination of a European high yield restructuring will be to ensure that the right stakeholders are represented, and that the advisers appointed to assist them are able to deal with the European jurisdictional issues that will arise, as well as the inevitable US and NY high yield issues. Jelle Hofland Partner, Amsterdam 20 Clifford Chance

13 THREE UNDERSTANDING YOUR RIGHTS You can only exercise your rights if you know what they are relative to the rights of other stakeholders. Even if the primary focus at the outset of a restructuring is on a consensual outcome, discussions will be largely driven by what stakeholders' respective positions will be if consensus cannot be achieved. The main legal focus will therefore be: Who controls security enforcement? To what extent does local law impact on the exercise of such rights? Who is entitled to the proceeds of enforcement? How can liquidity be created? These questions will be familiar to market participants. The answers may be less so 3 Early warning signs Understanding your rights Stabilisation Negotiation and delivery 22 Clifford Chance Clifford Chance 23

14 3 Early warning signs Understanding your rights Stabilisation Negotiation and delivery Who controls security enforcement? Typical SSRCF/senior secured note intercreditor position Voting on security enforcement/ distressed disposals Every deal is different but typically: Majority Super Senior Creditors (being 66 ² ³ % of the SSRCF and any super senior hedging) or Majority Pari Passu Creditors (being 50.1% of the senior secured noteholders and other pari passu creditors/hedging) deliver an enforcement notice Possible consultation period(s) (usually 30 days) If no agreement is reached then Majority Pari Passu Creditors control provided that: security enforcement/distressed disposal has "commenced" within 3 months security enforcement/distressed disposal has been completed within 6 months instructions comply with the security enforcement principles (including a fair value opinion or public auction) What does this mean in practice? The senior secured noteholders will typically control security enforcement/distressed disposals for a period of time, usually up to six months from the date of the initial enforcement notice, as long as they are making progress. Otherwise, the SSRCF lenders can take over. Either way, the creditors must follow agreed security enforcement principles designed to protect the non-controlling creditor group. If the senior secured noteholders are in control, their action must result in a full discharge (in cash) of the SSRCF and any super senior hedging liabilities. If the SSRCF lenders are in control, their action must satisfy a "fair value" requirement (usually a fair value opinion or public auction). As always in restructurings, practical problems may unexpectedly change the balance of control between groups of creditors. Some of the common themes that have developed in our discussions with market participants on this topic include: 1 Distressed disposals: A common strategy in many European restructurings, disposal of some or part of the group (including through a share pledge enforcement) may require the release of security and guarantee claims against the debtor and its subsidiaries on a disposal. If an intercreditor agreement does not permit these releases, a non-controlling creditor group with secured guarantees may have leverage over the direction of the enforcement. 2 Individual rights to accelerate: Individual noteholders typically have the right under a high yield indenture, subject in certain circumstances to intercreditor or other agreements, to make demand against obligors for principal or interest that is then due and payable, regardless of whether an enforcement proceeding has been commenced by the requisite noteholder group. As a result, any enforcement or work-out strategy will need to be carefully managed to avoid instability and value destruction which could occur as a result of the action of individual noteholders. enforcement realises cash proceeds sufficient to repay the SSRCF and any super senior hedging in full Otherwise, the Majority Super Senior Creditors can take over (subject to complying with the security enforcement principles). Control may also flip to the Majority Super Senior Creditors in other limited circumstances (e.g. an insolvency event) Restriction on payments post-acceleration Mutual payment block included in some (but not all) deals Turnover Turnover limited to proceeds from security enforcement or distressed disposals only Ranking of claims Pari passu (subject to proceeds waterfall) Priority in proceeds waterfall SSRCF ahead of the senior secured notes with respect to proceeds from security enforcement and distressed disposals only 24 Clifford Chance Clifford Chance 25

15 3 Early warning signs Understanding your rights Stabilisation Negotiation and delivery To what extent does local law impact on the exercise of security rights? Having established which creditor group controls security enforcement, factors that could influence its direction and timing include: local law limitations on recourse under subsidiary guarantees local law enforcement processes and any limits to them Here are some practical examples of how these points might impact on a high yield restructuring: Spain Under Spanish law, enforcement of guarantees or security requires the prior acceleration of the guaranteed or secured obligation. Acceleration will, however, often lead to the Spanish obligor being obliged by law to commence formal insolvency proceedings, which can be lengthy and not necessarily controlled by creditors. Partial enforcement or, depending on the circumstances, consensual enforcement may be a solution but identifying these issues at an early stage is critical in order to ensure the best possible enforcement strategy is pursued. Germany Where security includes a German law share pledge over the holding entity of the debtor group, enforcing it to effect a going concern sale of the group as part of a restructuring might not be an obvious option to many stakeholders. By comparison to enforcement of, say, English security, German enforcement is often regarded as cumbersome and less practical. For example, the need for a notary-run public auction that can take weeks to execute and can lead to it being ruled out as a restructuring option. The fact that there are very few examples of this type of enforcement might underscore this. Clifford Chance has experience, however, of using German share pledge enforcement to bring about a restructuring. Being able to draw on this experience and understand the true range of options available will help stakeholders chart their way through a high yield restructuring. Who is entitled to the proceeds of enforcement? SSRCF lenders are likely to be entitled to priority in respect of security realisations. This will not typically apply to recoveries made through guarantee claims. Local intercreditor recognition An intercreditor agreement may set out a detailed payments waterfall on enforcement. Whilst local courts may, in the context of an obligor's insolvency proceedings, refuse to enforce some payment and turnover provisions as against that obligor, those provisions should, as a matter of English law (which typically governs them), remain enforceable as between noteholders and lenders. An understanding of the broad insolvency landscape in the relevant European jurisdiction will, however, remain key. Equitable subordination The risk of equitable subordination applying to any lenders and noteholders who are already (or may become) shareholders through a debt-for-equity swap may upset the expected priority waterfall. The risk is, of course, that debt owing to them may be treated as equity and rank behind all other secured and unsecured debt. How can liquidity be created? The options available will be deal specific but the typical questions asked in a distressed scenario are: Can shareholders provide funds? What form should this take? Equity or shareholder loans? Or perhaps as equity injected through the existing debt arrangements? Can loan interest payments and debt amortisations be deferred? Amend to Extends pushing out loan repayment dates are popular in Europe as an alternative to refinancing or to give companies financial breathing space. This may be done through structural adjustment or facility change provisions or through other mechanisms such as Hollow Tranche rollovers or schemes of arrangement. Not all lenders may be prepared to extend in which case the company must still find a way to repay the non-consenting lenders. Can lenders provide more funds under the existing facilities? Are there undrawn commitments under the SSRCF and if so can they be drawn? Is there an accordion or incremental facility and are there conditions to using it such as a leverage test? Can new debt be raised? Loans and notes identify and allow certain limited baskets of debt for example, for capital leases or receivables financing or under the credit facilities basket (which would allow the new debt to sit alongside the SSRCF). Have these been used up to their limits? Can new equity be raised? Any restrictions on raising new equity will have a bearing on the consideration that can be offered to stakeholders in a consensual restructuring. Take out? Existing SSRCF lenders may be looking to exit and new investors come in. Notes typically allow an issuer to refinance the loan facility at any time so long as the new debt satisfies certain parameters (essentially ensuring the noteholders are not worse off e.g. keeping the debt a similar size and not bringing maturity forward). As a result, noteholders looking for additional control/ leverage in a restructuring situation might work closely with the issuer to take out existing SSRCF lenders altogether. Given the consequences that equitable subordination can have for creditors, the risk should always be considered at an early stage of a high yield restructuring. 26 Clifford Chance Clifford Chance 27

16 FOUR STABILISATION Restructuring solutions are not always easily found and distressed debtors can need a stable platform from which to implement those solutions. Standstills ie, a period during which stakeholders agree not to take action inconsistent with or affecting the delivery of a restructuring are widely used in European restructurings. Will this remain the case? Key points to consider are: The factors that will have a bearing on whether a standstill is necessary or achievable How a standstill might be implemented Whether, and if so how, new money could be injected 4 Early warning signs Understanding your rights Stabilisation Negotiation and delivery 28 Clifford Chance Clifford Chance 29

17 4 Early warning signs Understanding your rights Stabilisation Negotiation and delivery Is a standstill necessary or achievable? A formal standstill arrangement may not always be necessary or indeed achievable. What factors come into play? Payment dates High yield notes are typically only paid every six months. The period between payment dates given the limited other triggers in the notes could be used as a period in which to negotiate and implement a restructuring. Obligation to file for insolvency proceedings (summarised) Voting thresholds Can the necessary levels of creditor consent be obtained to enter a formal standstill? If not, can stakeholders be comfortable that in effect there will be a standstill because of a blocking minority? Are there sufficient creditors interested in stabilisation to mean the voting threshold for acceleration or enforcement action cannot be reached? Contractual agreement Typically there will be no contractual standstill agreement between SSRCF lenders and noteholders and they can accelerate their debts and make demand under guarantees if permitted by their underlying debt documents. However, in practice, the working assumption Location Days Poland 14 Germany 21 Slovakia, Romania 30 Belgium, Luxembourg, Russia, Ukraine 31 France 45 Spain 61 England, Italy, Turkey, The Netherlands, The Czech Republic in SSRCF deals is that they will be deterred from doing so because security enforcement is likely to achieve a better/faster recovery. Legal considerations Local legal considerations will influence whether there is sufficient certainty without a formal standstill. For example, local laws requiring directors to file for insolvency can be an issue. N/A* If a standstill is being put in place, how might it be implemented? Contractual standstills Contractual standstills are a well-trodden path in many European restructurings. In the context of a high yield restructuring, however, a handful of discrete issues will need to be considered at the outset and worked through. These will have a bearing on whether a "negative" standstill will be sufficient (i.e. an agreement not to accelerate/enforce from a blocking minority of stakeholders), or whether a "positive" undertaking from a controlling majority will be needed. Negative or positive standstill? Do noteholders have the right to take individual acceleration action? What consents are otherwise required to accelerate/enforce? Can the issuer locate noteholders in the time available? Are noteholders willing to receive private information and come "inside"? Is it necessary for them to do so? Are noteholders (or lenders) likely to have CDS protection in place which influences their attitude to a standstill?* * A consensual arrangement will not usually trigger a creditor's CDS protection. In the current round of European restructurings, negative standstills have been used to achieve an acceptable stabilisation period. In some cases, events of default have been "turned off" with the agreement of the majority of creditors, whereas the consent of a higher percentage of creditors would have been required to waive the breached provision. While this approach may not provide complete legal certainty for a borrower group, it can provide a degree of comfort. Whether this approach works in respect of high yield deals remains to be seen, particularly given that New York law high yield indentures typically adopt the Trust Indenture Act provisions which allow individual noteholders to pursue payment. John Dawson Partner, London Legal standstills Circumstances may mean that using a local pre-insolvency process becomes desirable. Stakeholders will need to understand the nature and effect of these procedures. For example, are any moratoria on creditor actions available under local laws and could the obligor group, or other stakeholders, use these to their advantage? There is no moratorium for certain common pre-insolvency proceedings in England, France and Germany (such as schemes of arrangement in England, Mandat ad hoc or Concillation in France or preliminary proceedings in Germany). By comparison, there will be a moratorium on some creditor actions in Italy, Luxembourg, the Netherlands and Spain (being Concordato preventivo and debt restructuring arrangements under article 182-bis in Italy, Controlled Management in Luxembourg, Suspension of payments in the Netherlands and article 5-bis in Spain). * No express time period but potential liability of directors can drive timings 30 Clifford Chance Clifford Chance 31

18 New money New money may be provided as part of a stabilisation strategy. Even though there is no formal DIP financing structure available in Europe, it does not mean there are not attractive opportunities to lend in distressed situations. We have already looked at ways of providing new money in the Understanding Your Rights section. In addition, new money could be provided as part of a local corporate rescue process. In these circumstances, the terms of the loans and notes may be overridden and a lower consent threshold may be sufficient (being the voting threshold needed to implement the rescue process). To use this option to provide new money, it is necessary to understand local processes. We look briefly at some of these in the Negotiation and Delivery section. It will be important for creditors, potential investors and the company to get appropriate local law advice to minimise any local risks, such as breaking the laws against abusive lending in Italy and France. In France, a lender or noteholder may be liable for granting or extending credit to a borrower in irredeemable financial difficulties. However, and with exceptions for fraud, disproportionate collateralisation and interference in management, liability is limited where this is done within French Safeguard Proceedings, Rehabilitation Proceedings or Judicial Liquidation. Reinhard Dammann Partner, Paris 32 Clifford Chance

19 FIVE NEGOTIATION AND DELIVERY 5 Early warning signs Understanding your rights Stabilisation Negotiation and delivery One thing that differentiates a European restructuring from one in the US is that its outcome will often depend as much on process issues related to its delivery as on the underlying value of the business. This is often termed "jurisdiction risk". A restructuring of a high yield transaction could be achieved in a variety of ways. It may be a consensual or semi-consensual arrangement between the debtor and its creditors. It could be effected through a pre-insolvency rescue procedure or cram-down which pulls the dissenting creditors along. Finally, the debtor may be subject to formal insolvency proceedings. Contractual delivery mechanics: consensual or semi-consensual A fully consensual restructuring with 100% agreement is often hard to achieve in a large multi-creditor financing. A semi-consensual restructuring is usually more likely. So what level of agreement is needed? This will depend on the voting thresholds set out in the documents which will, of course, vary from deal to deal. As a guide we typically see the thresholds below: Typical voting thresholds Action Loan Voting threshold Notes Voting threshold Injection of new money/ incurrence of new debt Structural adjustment (if included): 66 ² ³ % + affected lenders Majority (50.1%) Extension of term/tenor 100% 90%* Debt write down 100% 90%* Enforcement 66 ² ³ % Majority (50.1%) Acceleration 66 ² ³ % 25% (automatic on insolvency) A semi-consensual delivery mechanism may involve a majority of supporting creditors binding a dissenting minority to a new financing arrangement. Alternatively, it may involve contractually amending the terms of the existing debt to make them unattractive to the dissenting minority, thereby encouraging them to participate in the new financing arrangements. One such technique is covenant stripping. * 100% in some older deals 34 Clifford Chance Clifford Chance 35

20 Covenant stripping involves amending the documents to water down the covenant protections that non-consenting creditors will have. Typically a covenant strip will be coupled with an exchange offer to allow consenting creditors to participate in the new or revised financing. Fabio Diminich Partner, London Should notes be managed through a note purchase or exchange program? A note purchase or exchange program (or exchange offer) may be a viable alternative delivery mechanism if there is a consensual agreement between the issuer and the relevant noteholders, but that is likely to apply only in a few situations. Even if such a structure is viable, there are a number of additional factors to consider, including: whether the issuer has sufficient capital to facilitate such a transaction if there are any disclosure or disclosure related issues that would prevent the issuer from completing such a transaction whether there would be any significant tax implications. Legal delivery mechanics: semi-consensual cram down or rescue procedures Pre-insolvency corporate rescue procedures enshrined in local law are increasingly a feature of European restructurings. In these processes, the dissenting minority are "crammed down" and required to participate in a restructuring or other rescue without their consent. For a detailed analysis of the different procedures, who can trigger them and the threshold of consent needed from creditors, stakeholders in a restructuring will need to obtain local advice. 5 Early warning signs Understanding your rights Stabilisation Negotiation and delivery In respect of the US, consideration will also need to be given to whether protection under Chapter 15 of the US Bankruptcy Code could or should be sought. We have summarised the availability of cram down procedures in some of the key European jurisdictions on the following pages. We have also set out some of the other key legal issues in major European jurisdictions in a map in the annex. 36 Clifford Chance Clifford Chance 37

21 In practice, the creditors needed to support a new financing may be less than the required majority. For example, European loans typically contain "Snooze and Lose" provisions whereby all lenders can vote but those who do not respond are disregarded when calculating whether the threshold is met. Emma Folds Partner, London Cram down procedures in Europe For more detailed information on the European cram down procedures noted below, we refer you to the Clifford Chance European Insolvency Procedures Guide. This is produced in conjunction with our European offices and edited by Adrian Cohen, co-ordinator of our European practice. Belgium Pre-insolvency only In judicial reorganisation proceedings a recovery plan must be approved by more than half in number and value of all creditors. It must also be approved by the court. It binds dissenting creditors, including secured creditors, subject to certain limits on their claims to interest and principal. The Czech Republic Post-insolvency only In a reorganisation the approval of a majority in number and by amount of claims in each class is needed. The court may also confirm the reorganisation plan if not approved by all classes subject to specific criteria being met. England & Wales Pre and post-insolvency Schemes of arrangement under Part 26 of Companies Act A majority in number of creditors, three quarters in value of claims can be used to bind dissentient minorities. Schemes may be used in conjunction with a formal insolvency process or separately. Company voluntary arrangements (CVAs). CVA proposal needs to be approved by more than half in value of the shareholders and more than three quarters in value of the creditors. Subject to these majorities being achieved, they can bind the dissenting minority, unless they are secured or preferential creditors. CVAs can be used in conjunction with a formal insolvency process or separately. France Pre-insolvency Conciliation and mandat ad hoc are available as pre-insolvency mechanisms but do not facilitate any cram down. For safeguard and accelerated safeguard proceedings (where the debtor is not cash flow insolvent) subject to majority votes by creditors committees representing not less than two thirds of the debt, and the same majorities in noteholders' assemblies, cram down of creditors is possible. 5 Early warning signs Understanding your rights Stabilisation Negotiation and delivery For ordinary safeguard, the same majority of ordinary trade creditors is also required to vote in favour. In addition for ordinary safeguard, the court cannot impose any write down of debt on non-consenting creditors but can impose a rescheduling of the debt. For accelerated safeguard proceedings the court cannot impose any write down or rescheduling of the debt. Post-insolvency In rehabilitation proceedings, the same three classes of creditors as for safeguard must vote in favour with the same majorities. The court cannot impose any write down of debt on non-consenting creditors but can impose a rescheduling of the debt. Germany Post-insolvency Insolvency plan must be approved by majority of creditors in each class who must hold more than half of the claims in value in each class. Court can override if non-concurring group would be worse off without the plan. Italy Pre-insolvency In concordato preventivo, the composition plan must be approved by a majority of the classes of voting creditors. If a minority opposes they can be crammed down by the court as long 38 Clifford Chance Clifford Chance 39

22 5 Early warning signs Understanding your rights Stabilisation Negotiation and delivery as they are no worse off than in a liquidation. In Restructuring Agreement under art 182- bis a majority of 60% of creditors by value is required. Post-insolvency For large companies, only the relevant Minister needs to approve the restructuring plan; in the same context, a settlement can be proposed to creditors and must be approved by the majority of them (or by the majority of classes, if any). Luxembourg Pre-insolvency only Controlled management requires adherence of a majority of creditors in number and more than half in value to the restructuring plan or the draft plan relating to the realisation and distribution of assets. Pre-insolvency composition arrangements require consent of a majority in number of creditors and three quarters in value. The Netherlands Post-insolvency only In the context of bankruptcy and suspension of payment proceedings where a composition is proposed this needs the approval of a normal majority of creditors representing at least half of the total amount of claims. A composition does not affect secured or preferential creditors Poland Near insolvency/post-insolvency A composition plan must be accepted by a majority of each group of creditors whose claims amount to two thirds in value of those entitled to vote. The judge-commissioner can in the event of each group not voting in favour, approve the plan if the majority of groups approve it and any dissenting groups are no worse off than in a liquidation. Russia Pre-insolvency Not pursued in practice. Post-insolvency A voluntary arrangement if sanctioned by the court, after it has been approved by a majority of registered creditors and received the unanimous consent of any registered secured creditors, will bind the company and its registered creditors irrespective of whether they voted against it or not voted at all. A debtor repayment schedule in financial rehabilitation and a plan for restoring solvency in external administration must be approved by a majority of the total number of registered creditors by claims and then must be approved by the court. Romania Pre-insolvency/near insolvency The possibility to engage in extrajudicial negotiations for the restructuring of debts is recognised by Romanian law, however such negotiations are governed only by a set of principles which are not mandatory to follow. An alternative to the insolvency proceedings, are also the moratorium ( concordat preventiv ) and the ad-hoc mandate, contractual mechanisms for a company in distress to reorganise its activities with limited involvement from the court. Post-insolvency In a judicial reorganisation a majority in number and amount of creditors in each class is needed to approve a reorganisation. There are five classes of creditors: creditors with secured receivables, creditors for salary claims, creditors for budgetary claims, creditors for unsecured claims of suppliers which are essential to the debtor's activity and other unsecured claims. The vote is performed separately by each of these classes of creditors. After approval by the creditors, the reorganisation plan is also subject to the approval of the court. Spain Pre-insolvency In an out of court refinancing, dissenting creditors can be bound into a refinancing agreement subject to the sanction of the court and the support of certain majorities of creditors. Those majorities are different depending upon whether the affected creditors are secured or unsecured, and upon the nature of the refinancing itself. Following recent amendments to the law (March 2014), the approval majorities are now as follows (each by reference to the value of the debtor's financial liabilities): (1) for (up to) a five year postponement of debt 60% unsecured/ 65% secured; (2) for a debt-for-equity swap or other write-off of debt 75% unsecured/80% secured. For this purpose, secured creditors are treated as secured up to the value of their security. Any claims they have in excess of this will be treated as unsecured. Post/near insolvency In a formal process an arrangement (convenio) may be entered into with creditors based upon a vote by the majority (depending on the case) of creditors. Slovakia Pre-insolvency/near insolvency In a restructuring a majority by number and by amount of claims in each class combined with the approval of each class of secured claim and the approval of the simple majority of votes (based on the amount of their claims) of the present creditors is needed to approve a restructuring plan. The plan is then submitted for final confirmation to the court which may confirm the plan or substitute the approval of the plan subject to specific criteria being met. Turkey Pre-insolvency Creditors may propose a composition (adi konkordato) which must be approved by 50% of creditors with at least 66 ² ³ % in value of total claims. The composition must satisfy certain other conditions and must also be approved by the court. It does not affect secured creditors. Capital stock companies and co-operatives also benefit from restructuring by conciliation (uzlaşma yoluyla yeniden yapilandirma) which must be approved by a majority in number of those creditors affected with at least 66 ² ³ % in value, in each separate class of creditors. Post-insolvency A debtor may propose a composition (iflastan sonra konkordato). Creditor approval must be achieved in the same majorities as for ordinary compositions referred to abovei. In addition to certain conditions being satisfied, it must also be approved by the court. Ukraine Post-insolvency Before the commencement of insolvency proceedings, if both the debtor's shareholder(s) and those creditors controlling at least 50% of the debtor's indebtedness consent, the court may instigate the expedited restructuring. The consent of each secured creditor would be required. Post-insolvency In a rehabilitation plan creditors must approve by a simple majority and then the plan must be approved by the court. However, secured creditors' claims may not be forgiven or written off without the consent of each relevant secured creditor. 40 Clifford Chance Clifford Chance 41

23 5 Early warning signs Understanding your rights Stabilisation Negotiation and delivery Restructuring using an English scheme of arrangement Italian case study: English schemes for European groups English court-sanctioned schemes of arrangement have been a key cram down tool for restructuring a company's liabilities. Many English companies have used schemes to restructure not only their English law governed liabilities, but also non-english law liabilities. A scheme can be implemented between a company and any one or more classes of its creditors if, at a meeting of each class of creditors, creditors in excess of a majority in number and 75% in value actually voting approve the scheme and the English court subsequently sanctions the scheme. Importantly, there is no requirement of insolvency or impending insolvency for a company to use a scheme. Schemes can, therefore, be used to avoid insolvency. Where cram down procedures are available in other countries, this is often only within insolvency or other formal procedures. During the financial crisis a well trodden path developed in relation to the use of English schemes for non-uk companies to compromise English law governed debt under conventional facilities. Cases on which we acted such as British Vita (Luxembourg and other countries), SSP (French, Nordics, US and others), Tele Columbus (German) and Rodenstock (German) led the way in this respect. The significance of the use of schemes for non-uk companies is particularly acute in jurisdictions such as Germany where no pre-insolvency cram down for conventional facility debt exists and where company directors face strict insolvency filing requirements. The recent Magyar Telecom BV case was different again as the debt of this Dutch company being compromised via the scheme arose under a New York law governed bond document. Expert evidence as to recognition and effectiveness of the scheme in the US and in the Netherlands and Hungary, where the Magyar group operates, persuaded the English court that the scheme would achieve its purpose and ought to be approved. The issuer sought additional comfort by obtaining an order under Chapter 15 of the US Bankruptcy Code recognising and granting relief in respect of the English scheme which, broadly speaking, prevents action being taken in the US which is inconsistent with the English scheme. As the recent expansion in the European high yield market looks set to continue, the Magyar case represents welcome confirmation that English schemes can be relied upon to deal with future restructuring of these products. There seems no reason why the path to a scheme should not become just as well trodden for restructuring New York law high yield bonds as it is for English law facilities although, each case will turn on the particular issuer, the group of which it is part and the business it undertakes. The restructuring of SEAT Pagine Gialle, the Italian directories business, in 2012 was a valuable lesson in how local law procedures can be used in conjunction with existing contractual provisions and a foreign law cram-down mechanism to deliver a restructuring of senior and junior secured notes and senior debt. SEAT (the Italian operating company) had issued senior secured notes and senior debt. Lighthouse (a sister company SPV of SEAT incorporated in The Netherlands) had issued junior secured notes which benefited from a guarantee from SEAT. Under the restructuring: Lighthouse junior noteholders equitised the vast majority of their notes in exchange for 88% of the ordinary share capital of SEAT and its remaining junior notes were exchanged for new senior secured bonds Senior lenders extended the maturities of the term facilities and RCF, received an increased margin and reset the financial covenants The restructuring was novel because it combined: consent solicitations under the New York law governed terms of the junior secured notes an English law scheme of arrangement proposed by SEAT to compromise the English law governed senior debt the merger of Lighthouse into SEAT pursuant to the Italian implementation of the Cross-Border Merger Directive the hive-down of key assets from SEAT to a newly incorporated wholly-owned Italian operating subsidiary the use of Article 67 of the Italian Bankruptcy Code which can protect a restructuring plan (piani di risanamento) from any subsequent claw-back action and directors from related liabilities 42 Clifford Chance Clifford Chance 43