UK: Causes Of Action And How To Influence A Restructuring Process Through The Credit Documents

Last Updated: 13 August 2018
Article by Paul Durban

Co-authored by Milko Pavlov, Director, Houlihan Lokey

Most contractual remedies available to Junior Creditors appear reactive in nature, in that they rely on the ability to take action, as permitted by the terms of the relevant credit documents. However, depending on the position of the Junior Creditors and the facts and circumstances of the case, minority Junior Creditors may still be able to act in a proactive manner.

There can of course also be a range of complicating factors either embodied in the credit documents or which are a feature of the restructuring market itself that can dilute the strength of contractual remedies available to these stakeholders. These are also discussed briefly below

Amendments to Credit Documents

Credit documents almost always allow covenants and other provisions to be amended, subject to certain creditor consent thresholds being achieved.

Typically, all substantial amendments and waivers under the relevant agreement will require the consent of a majority (typically either more than 50% or 66 2/3%) of the Junior Creditors, except for certain specifically listed amendments and waivers which may require the consent of a supermajority (typically either more than 80% or 90%) or the consent of each lender. At the top end of the spectrum are amendments to the 'money terms' of the debt, such as modifying the principal amount of the debt, extending maturity or changing the currency of the loan. Often these money terms cannot be amended or waived without the consent of all creditors, because they are considered fundamental to the rights of creditors against the debtor.

Where large lending syndicates are involved, obtaining the consent of all lenders can be impractical or even impossible. The flipside is that the requirement for unanimous consent can give leverage to Junior Creditors. There may also be provisions in the credit documents (such as 'structural adjustment' or 'facility change') which allow certain key changes to be made with the consent of all those affected by the modification (sometimes in addition to an overall majority of creditors). This lower consent threshold would likewise permit the debtor group to work with cooperative or proactive Junior Creditors to make amendments.

In addition, the minority Junior Creditors should check the existence of two other key provisions which could affect their and other creditors' rights against the debtor. The first is "replacement of lender" or so-called "yank the bank" provisions which allow certain creditors to be "replaced" if they oppose certain decisions for which a majority of consent by the other creditors has already been obtained. It should be noted, however, that if such replacement provisions require the non-consenting creditors to be taken out by the debtor at par, they may not be of much use in a restructuring context, in particular if the relevant creditors are underwater.

The second is the 'snooze-and-lose' clause whereby failure on the part of a creditor to respond to a request for consent beyond a fixed deadline results in that creditor's debt being disregarded for the purposes of determining whether the appropriate majority has been reached.

Intercreditor Agreement

In the absence of a unified restructuring or insolvency process in Europe that allows for the compromise of creditor claims in a single process, the market has developed other contractual frameworks that bind creditors to pre-agreed outcomes. This rubric is principally set out in the Intercreditor Agreement, which has become increasingly technical and complex since the financial crisis.

Among other things, the Intercreditor Agreement should explain the ranking of the different types of debt in respect of payment and the ranking of the different types of secured debt in respect of security. It should also contain prohibitions in respect of the payment of debt which is junior to the senior secured debt, together with carve-outs for permitted payments.

There are three key provisions common to most of these arrangements which are highly relevant to junior creditors' rights – enforcement of security, release provisions and subordination.

1. ENFORCEMENT OF SECURITY
An important definition in the Intercreditor Agreement for the Junior Creditors is the definition of Enforcement Action. Typically, the definition of Enforcement Action will include: (i) the acceleration of debt; (ii) the recovery (by legal proceedings or otherwise) of debt; (iii) the making of a demand against any member of the debtor's group in relation to the debt and (iv) the exercise of any right to enforce any security under security documents. The general principle within Intercreditor Agreements is that the most senior class of creditors controls the enforcement of security. The scope of the senior creditors' ability to take action and lead an enforcement of security is usually very wide but from a minority creditor perspective, the Intercreditor Agreement should be checked to see whether it contains any obligations for the Senior Creditors to consider the interests of the Junior Creditors when taking any Enforcement Action.
2. RELEASE PROVISIONS
Release provisions are contractual agreements that allow the Security Agent to release security and, in certain cases, to release borrowing and guarantee claims of creditors against the debtor.

Particular attention should be given to the release provisions in the Intercreditor Agreement in case of an asset disposal both pre and post enforcement. Mechanically, the release provisions relating to security that encumbers the asset being disposed of, must work correctly to allow for a "clean sale" free of Junior Creditor claims. It is important to note the precise drafting of the clause, as the trigger event for the release right can be quite narrowly prescribed. On the other hand, loopholes or ambiguities in the drafting of these release provisions could provide leverage to minority Junior Creditors.
Moreover, in certain transactions, the conditions for release aim to ensure that a more senior creditor class cannot release junior claims without some evidence that the value for which the assets are being disposed of is fair. These conditions often require a fairness opinion or transaction based valuation provided by an appropriate expert, which can provide Junior Creditors with greater information and, depending on the situation, bargaining power in their negotiations.
3. SUBORDINATION
Ranking of payments and security are given legal effect through the Intercreditor Agreement in cases where the creditors and the debtor agree contractually that some debts are subordinated to others (known as contractual subordination).

In certain circumstances, it may be worthwhile for minority Junior Creditors to consider challenging contractual subordination provisions contained in an Intercreditor Agreement governed by English law, in particular if the challenge takes place in a jurisdiction outside of the UK (such as Spain or Portugal) where contractual subordination provisions are not enshrined in the local legal framework.
In situations where there are relatively few ordinary unsecured creditors of the debtor and contractual subordination provisions can be challenged, it may also be worthwhile for minority Junior Creditors to consider challenging security documents under local law.

A successful challenge would exclude the assets secured by the security documents from the enforcement provisions under the Intercreditor Agreement. In practice, successful challenges are difficult to achieve. However, the mere threat by the Junior Creditors to institute such a challenge might be sufficient to achieve a seat at the negotiating table.

Challenges to Junior Creditors Taking Action

It is worth noting at this point that taking direct and effective action on the part of Junior Creditors is often not straightforward.

* n = number of respondents.

"CHANNELLING" PROVISIONS
The agency provisions in the Intercreditor Agreement and the relevant operative agreement for the debt of the Junior Creditors should be reviewed to check whether, and to what extent, there are so-called "channelling" (or "no-action") provisions. These provisions limit the right of Junior Creditors to take any individual action themselves, but instead channel such action through an intermediary such as a Facility Agent or Security Agent. In addition, there are likely to be provisions that allow the Facility Agent and/or the Security Agent to refrain from any action until - in their opinion – they are adequately indemnified. In practice, Junior Creditors (and/or Senior Creditors) may have to agree to indemnify the Facility Agent and/or the Security Agent first before any action is undertaken by them. It should further be noted that Facility and/or Security Agents are usually very cautious and reluctant to use their discretionary powers without either clear creditor instructions or directions of the court.
CROSS-HOLDINGS AND CDS
A further aspect that complicates matters is the existence of so-called cross-holdings in the capital structure. With cross-holdings, certain lenders may also have (substantial) positions in other parts of the capital structure of the distressed corporate debtor such as senior secured debt, second lien debt or even the equity. In a restructuring scenario, cross-holdings may – in certain circumstances - create conflicts of interest and have a decisive influence on the voting behaviour within a certain group of creditors. Cross-holdings are particularly prevalent in debtors that were refinanced multiple times in the recent past, which are highly leveraged with complicated capital structures and whose debt is actively traded in the secondary debt market. Minority Junior Creditors in such situations without cross-holdings should be aware of the risk of being disadvantaged in any decision making process or being squeezed out. Another related dynamic for a minority Junior Creditor to be aware of is the risk that certain other creditors in either the same class or a different class may have bought credit protection (such as for example credit default swaps (CDS)). Those creditors with credit protection may have a real incentive to block a consensual restructuring to trigger a Credit Event under their CDS instruments.

One example of these challenges faced was in the restructuring of Truvo – the European yellow pages business.

The initial restructuring proposal failed to achieve the requisite support as numerous bondholders held CDS protection. Not until the company intentionally triggered a credit event – in this case a bankruptcy event as a result of Truvo's Chapter 11 filing – was it able to achieve the required level of creditor support to proceed with the restructuring.

The additional challenge faced by a minority Junior Creditor is that information regarding both cross-holdings and credit protection may not be readily available.

Creditors - Getting a Seat at the Negotiating Table can be downloaded at https://www.mjhudson.com/download/creditors-getting-a-seat/

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions