Mirabela Nickel Limited ('Mirabela' or 'the Company') has just undergone an Australian first in terms of restructuring through insolvency.
Mirabela is an ASX listed nickel miner with all its mining operations in Brazil. Prior to its restructure, it had approximately USD 500 million of debt, predominantly due to US based noteholders.
The Board and the lenders were confronted with the following situation:
- An exposure to a single commodity, the price of which had materially decreased relative to initial investment assumptions
- Negative operating cash flows, exacerbated by a highly leveraged capital structure such that trading through the commodity cycle was not possible.
- Significant unfunded, operation critical capital works at a time when the Company was facing liquidity difficulties.
- A sale and recapitalisation process that failed to generate any material interest.
- Debt trading at a steep discount to par.
A restructuring of the Company was required for it to continue as a going concern, which was achieved through:
- A group of the noteholders entering into a binding agreement to support, fund, and do all things necessary to achieve a restructure of the Company.
- The appointment of voluntary administrators.
- The transfer of 98.2% of existing shares to the noteholders for nil consideration in exchange for the extinguishment of their claims against the Company of USD 435 million through the use of section 444GA of the Act.
- The issuance of USD 115 million of convertible notes, to fund ongoing operations post restructure.
Section 444GA of the Corporations Act and regulatory oversight
Under section 444GA of the Corporations Act ("the Act") a deed administrator may transfer shares in a company subject to a deed of company arrangement ("DOCA") without shareholder consent if leave of the Court is granted.
Section 444GA(3) states that the Court can only grant leave if it is satisfied that:
"... the transfer would not unfairly prejudice the interests of members of the company."
In determining if shareholders would be unfairly prejudiced, a Court is likely to consider:
- Economic interest - does the economic value break in the debt?
- Liquidation outcome - for creditors and shareholders.
- Effect of restructure - the expected effect of the proposed restructuring on the company and its creditors (which includes the share transfer).
- Alternatives - what alternatives are available, whether they achievable and what the likely outcome for stakeholders and the company would be under those alternatives.
The following persons are entitled to appear and be heard at the Court:
- A shareholder of the company;
- A creditor of the company;
- Any other interested person; and
- The Australian Securities and Investment Commission ('ASIC').
Outside of the Court process, there was also significant regulatory oversight to effect the restructure, and the following regulatory approval/relief was required:
- ASIC relief from section 606 of the Act (i.e. the takeover provisions), to allow certain noteholders to pass the 20% threshold through the transfer of shares and/or conversion of convertible notes, without shareholder approval.
- ASIC relief from section 606 of the Act to allow transfer of shares under section 444GA of the Act and conversion of notes, without shareholder approval.
- ASX relief from Listing Rule 7.1 (to allow the convertible notes to be convertible at any time at the option of the holder without shareholder approval) and Listing Rule 10.1 (to permit the convertible notes to benefit from the security which had been granted by the Company notwithstanding that certain noteholders were also shareholders, which ordinarily requires shareholder approval).
- FIRB approval for the predominantly US domiciled noteholders to own equity in Mirabela.
Setting new precedents
The restructure of Mirabela has set a number of new precedents in the Australian restructuring landscape and it is likely to change the way stakeholders view their options. These precedents include:
- A debt for equity restructure of a listed company using section 444GA of the Act.
- ASIC relief from section 606 of the Act to allow the transfer of shares under section 444GA of the Act.
- The issuance of a prospectus to raise new capital in the form of convertible notes whilst being subject to deed administration (to fund ongoing operations post administration).
- ASX relief for a restructure to occur such that the Company's shares return to trading.
Context in Australian restructuring
While section 444GA of the Act is a useful restructuring toolkit, its use will only be relevant for specific fact sets given the Court's considerations to approve the transfer and the regulatory oversight (both set out in section 2 above).
For the appropriate situation, the use of section 444GA of the Act will:
Reduce the leverage position of other stakeholders in distressed situations (especially shareholders).
- Materially lower the voting threshold when compared to a creditors' scheme of arrangement, especially where there are different classes of creditors.
- A DOCA requires 50% in number and 50% in value of all creditors to be approved.
- A scheme requires 75% in value and 50% in number for each class of creditors to be approved.
- Avoid change of control triggers or other negative consequences of a transaction further down the corporate structure by providing for the existing corporate structure to remain unchanged.
- Provide for a more timely and cost effective mechanism than a creditors' scheme of arrangement.
KordaMentha's Restructuring Services practice undertakes formal insolvency and turnaround/ workout engagements in relation to companies in financial distress as well as strategic diagnostic reviews, business viability and pre-lending reviews. Our approach is to explore all avenues to save businesses through restructuring and streamlining operations (and industries). We help identify and explore synergies with potential new owners to realise optimal outcomes for all parties. Our aim is to offer a creative approach to distressed company consulting - in many cases a turnaround is achievable.
Importantly, we provide implementation, monitoring and follow-up services. This is an area many of our competitors neglect but it is essential to the holistic approach of our restructuring practice.
Strategic diagnostic reviews, business viability and pre-lending reviews
We are often engaged by secured lenders or other key stakeholders to undertake a review of a company to determine its ongoing viability.
Detailed reports prepared by our Investigative Accountants typically cover the following areas:
- Background of the company's operations.
- Critical assessment of management's business plan.
- Detailed review of historic trading results, balance sheet and cash flows.
- Critical review of management forecasts and likelihood of forecasts being achieved(including a sensitivity analysis).
- Review of key management personnel.
- Assessment of accounting policies, financial systems and controls.
- Assessment of appropriate debt structure and bank security issues.
- Key recommendations to the company's board on strategic direction and methods to improve cash generation and profitability.
- Key recommendations to the lender on business viability and methods to mitigate risk.
KordaMentha's team has built strong relationships with Australia's leading financial institutions over the years. Testament to the skills of its staff, the firm has been appointed receiver and manager of a diverse range of companies. KordaMentha has proven ability to mitigate the risks faced by secured lenders reducing their exposure to underperforming companies.
When it comes to formal insolvency appointments, KordaMentha challenges the stereotypes. We think creatively when formulating solutions and have even been known for example to recommend that the secured lender take an equity stake in the underperforming company (receiving an equity-type return) when we have believed that to be the most viable solution. In certain cases we may take on a role as director rather than as receiver or voluntary administrator, if that approach would add more value.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.