The recent Thomas Cook refinancing and Cortefiel scheme of arrangement offer contrasting examples to investors of the risks and rewards of adopting a hold-out position in complex multijurisdictional restructurings.
The rationale behind a hold-out strategy is simple enough: A
prospective creditor will seek to acquire a portion of debt large
enough to ensure that the debtor's restructuring, amend and
extend or other objective cannot proceed. In larger situations, the
blocking stake may be acquired by a group of like-minded funds
acting in concert. Such a strategy is, however, beset on all sides
by the risk of cram-down, jurisdiction shopping and specific
industry pressures that may compromise the hold-out creditor's
initial assessment of its position.
An early step in any prospective hold-out creditor's
formulation of its strategy will be the calculation of a
sufficiently large blocking stake. While this can be relatively
high if buying into bonds (between 25 and 34, depending on the
voting thresholds), it can drop to a far more attractive level in
respect of bank debt, with the principal, interest and maturity
provisions often requiring 90 percent or unanimous consent to
amend.
However, as the English court's reach stretches further
and further in claiming jurisdiction over restructurings with a
peripheral connection, at best, to England, so does the risk of
miscalculation of the blocking stake. While a hold-out creditor
might buy on the basis that a small stake will be sufficient to
obstruct amending and extending bank debt, it can quickly find
itself subject to an English law scheme of arrangement, which
allows the majority creditors to compromise its debt with 75
percent support. Such a pitfall has recently befallen the hold-out
creditors in the Cortefiel restructuring, where the
company, a Spanish clothing retailer, reacted to its failure to
reach a 90 percent extension rate across creditors by pushing the
company into a scheme of arrangement to utilise the 75 percent
approval it did obtain.
Although assessing the availability and likelihood of a scheme of
arrangement for a debtor is a difficult and constantly evolving
analysis, it behooves a prospective hold-out creditor to consider
the factual matrix surrounding the debtor.
Global operations may be a key complicating factor in
limiting a debtor's (or its creditors') choice of
restructuring paths. For example, although Cortefiel,
Global Investment House KSC and Icopal
demonstrate that the governing law of financing agreements is
likely to be a sufficient connection to England, global operations
are likely to present recognition problems. In structures where
English law financing is guaranteed and secured by multiple
subsidiaries across a range of jurisdictions, the availability of
cram-down procedures will be severely restricted if some or all of
those jurisdictions refuse to recognise such procedures. This
situation will be exacerbated where the debtor has multiple classes
of debt with differing governing laws. Take, for example, Norske
Skog, which, in addition to English law banking facilities, has
also issued Norwegian and New York law bonds. In highly complicated
debt structures, the choice of restructuring tools will be far more
limited.
Regulatory concerns have also previously impacted upon the
strength of holdout creditors' positions to contrasting effect.
In WIND Hellas in 2010, investors were successful in
acquiring more than 10 percent of the super senior RCF, allowing
them to block an amend and extend if the banks had been minded to
roll their loan. In that case, the hold-out creditors relied on the
company's reluctance to implement a scheme of arrangement at
OpCo level, given its fear of losing its telecoms licence.
Conversely, the time pressures imposed by industry regulation can
influence a court in approving a scheme to the detriment of
minority creditors, as witnessed in MyTravel. Similar
considerations might have applied in Thomas Cook had the
market not reacted positively to its turnaround plans.
Cortefiel also highlights the importance of a proper
analysis of creditor composition. While the hold-out creditors were
partially responsible for the company's failure to hit 90
percent, the presence of CLO lenders also handicapped the
company's efforts to gain consent to extend. Even if supportive
in principle, the investment policies of CLOs frequently prevent
them from extending loans in their portfolios. Commercial lenders
may also behave differently from fund creditors. In WIND
Hellas, the blocking stake of the hold-out creditors proved to
be unnecessary, as the bank lenders bucked the recent trend and
sought a pay-out rather than extended debt. In many other
situations, commercial/bank lender (who typically invest at par)
may be reluctant to take a capital hit or may be more accustomed to
local workout customs.
Not just schemes of arrangement threaten hold-out
creditors' position. They are also faced with the prospect of a
debtor engaging in jurisdiction shopping to take advantage of
debtor-favourable insolvency regimes. The French
sauvegarde (safeguard) procedure is not always viewed
positively by non-French creditors. It features a DIP proceeding
allowing the debtor, in certain circumstances, to restructure its
debts over the course of 10 years, denying the hold-out creditors
the immediate pay-off they seek and ruining the majority
creditors' prospects of agreeing a less painful, more timely
consensual restructuring. Similarly, and as seen in the
Arcapita restructuring, a U.S. Chapter 11 filing may be
forced upon a debtor by hold-out creditors where the debtor feels
compelled to protect its assets from individual creditor action,
leading to a lower return for creditors across the
board.
This can be contrasted with situations where the debtor's
willingness to enter into a formal insolvency procedure is heavily
influenced by the nature of its business. Consumer-facing
businesses, such as the travel industry, gambling or regulated
businesses, are conscious of the value-destructive effect of entry
into insolvency procedures, regulatory controls imposed upon them
and their customers' need for perceived long-term stability
when buying products or services from them.
A debtor's restructuring options may be heavily influenced by
the availability of affordable refinancing. Thomas Cook's
refinancing also demonstrates that the increasingly positive credit
and equity markets may mean that complex restructurings are avoided
completely. Unless the hold-out creditor is seeking a debt for
equity swap, it may consider a repayment in full to be a good
outcome.
The lesson from recent experience is that a creditor seeking
repayment at a scheduled maturity (or seeking a restructuring
outcome) should conduct a proper assessment of its prospects of
being paid out. A far deeper analysis than calculating the blocking
stake required under the transaction documents is required. The
increasingly globalised menu of restructuring methods, the nature
of the debtor's business, the composition of its creditors and
its financing alternatives can all play a strong role in
determining the debtor's response to hold-out creditor
pressure, sometimes leading to unintended and painful
results.
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.