The majority of all 2023 EMEA restructurings involving an equitisation and/or a maturity extension required the provision of new money.1 While equitisation can solve for an over-leveraged capital structure, and maturity extensions can provide runway for business recovery and turnaround, those steps alone are often insufficient without there also being a contemporaneous solution for liquidity. This has been the experience on many of our recent matters, and arguably is a symptom of the covenant-lite debt documents which dominate the market, and which often don't default until there is a liquidity crunch.
Significant restructurings will often require high levels of creditor consent under existing debt documents and across multiple instruments, and it will not always be possible to secure the support of sufficient majorities of creditors to implement the restructuring consensually. In this scenario, debtors and supporting creditors often need to turn to a statutory restructuring tool to facilitate implementation; in the UK, typically via either a scheme of arrangement (Scheme) or a restructuring plan (RP).
In this article, we look at some of the key considerations for stakeholders where new money is required in connection with a restructuring that is being implemented via a Scheme or RP, including the parameters for structuring the new money in terms of creditor participation, economics and other incentives. We also reflect on structuring considerations for situations where new money is required on an urgent or interim basis to bridge through to closing of the restructuring.
Class and Fairness
Schemes and RPs are both court processes that involve two hearings. At the first hearing (the convening hearing), the debtor seeks an order from the court to convene the relevant meeting(s) of creditor classes to vote on the terms of the proposed restructuring. The composition of the relevant classes is addressed at the convening hearing, with the court principally having regard to the similarity of the rights of creditors both pre and post the restructuring. This typically involves consideration of creditors' expected outcomes both following implementation of the Scheme or RP and if the restructuring were not approved by the court.
Once the creditor meetings have been convened, and assuming a sufficient number of stakeholders vote to approve the Scheme or RP2 , the debtor must then return to the court for a second hearing (the sanction hearing), where the court is asked to make an order sanctioning (or formally approving) the Scheme or RP. At the second hearing the court will principally consider the question of fairness.
When the court considers whether the debtor has appropriately composed its voting classes, as well as the issue of 'fairness' of the terms of the Scheme or RP, it will reflect on the terms and structure of any new money that has been or will be provided in connection with the restructuring. It is therefore important that any new money is structured to avoid creating roadblocks to successful implementation of the restructuring.
At the convening stage, the court's focus will be on the question of whether the provision of new money has created "rights" of participating creditors that differ to such an extent that new money providers form a different class to other creditors. The existence of different rights does not in itself cause a problem, the concern will arise when those rights are so different that the creditors cannot consider the restructuring proposal from a common perspective. The focus will be both on the existence of different rights and the materiality of that difference (i.e. the economic benefits attaching to the new money).
On many deals negotiations will be led by a group made up of the larger of the existing creditors, who have a strong motivation to support the proposed transaction and are typically the ones lending or underwriting new money in the restructuring. The negotiation of the new money terms will seek to balance the need to properly compensate lenders for providing finance, in what is usually a highly distressed scenario, with the need to keep equally ranked creditors within the same class and ensure a fair deal. Fracturing a creditor class could jeopardise the successful implementation of a restructuring, were the non-participating creditors to be placed into a separate class and suddenly have a potential blocking vote.
Offering enhanced benefits to creditors in return for new money also risks a Scheme or RP stumbling on the ground of 'fairness'.
Participating creditors could be seen to have a "special interest", leading to concerns that the proposal is not fair or that a class was not fairly represented, if the benefits on offer to provide funding are disproportionality advantageous to creditors who provide the new money versus those who do not, or if the offer were not truly open for participation. Zacaroli J considered this point in New Look3 , where he considered whether certain creditors "had reasons to vote in favour of the scheme that were additional to and not shared with the remaining scheme creditors".4 In that case, he was satisfied that the process around the provision of new money did not give rise to a concern, but it remains a factor for consideration in future cases.
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Footnotes
1. According to research by Reorg.com in EMEA Restructuring Wrap 2023.
2. The approval threshold for a class of creditors is 75% by value (and a majority in number where a Scheme is proposed). Cross-class cram down is possible under a RP, provided that (i) none of the members of the dissenting class would be worse off under the RP than they would be in the relevant alternative, (ii) at least one class who would receive a payment or would have a genuine economic interest in the relevant alternative has voted in favour of the RP, and (iii) the RP is otherwise fair.
3. New Look Financing PLC [2020] EWHC 3613 (Ch).
4. New Look, [21].
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.
