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Transatlantic restructurings: two avenues to restructure US high-yield debt

Madlyn Gleich Primoff, Alexander Adams Rich and Catherine Balmond

Freshfields Bruckhaus Deringer US LLP, New York and Freshfields Bruckhaus Deringer LLP, London

Tuesday 03 December 2019


Transatlantic companies with high-yield, US-law governed debt, face a unique challenge in achieving balance sheet restructurings; any restructuring must usually be enforceable against creditors in at least two jurisdictions. This article explores two avenues for transatlantic companies to successfully restructure their debt. The first is a prepackaged Chapter 11 plan, under the United States Bankruptcy Code, which may even be a ‘speedy prepack’. The second is a UK scheme of arrangement (a ‘Scheme’) filed under the Companies Act 2006 of England and Wales, coupled with recognition under Chapter 15 of the US Bankruptcy Code, to render the scheme enforceable against US creditors.

Option 1: US prepackaged Chapter 11 plans

A prepackaged Chapter 11 plan (prepack) offers debtors with US-law governed high-yield debt a speedy and effective option to effectuate a cross-border balance sheet restructuring. The prepack process mostly proceeds out of court, with the Chapter 11 filing taking place only once key creditor constituencies consent to the proposed restructuring.

Mechanically, a prepack works as follows. The company negotiates with creditors to reach agreement on the terms of a plan of reorganisation. It then locks up creditor votes pursuant to a plan support agreement (RSA or PSA) before filing for Chapter 11 protection. See 11 USC section 1126. To secure creditor approval of the proposed plan, the company must classify claims and obtain the affirmative vote of a non-insider impaired class. For a class of creditors to vote in favour of the plan, creditors who vote constituting one half in number and two-thirds in amount of claims must vote in favour of the plan. If the company does not have assets or property in the US to establish jurisdiction for Chapter 11 purposes, it can establish jurisdiction by setting up a bank account or law firm retainer in the district where the company intends to file for Chapter 11 protection. The Chapter 11 filing includes a proposed Chapter 11 plan and disclosure statement filed on the first day of the case. The company then seeks the bankruptcy court approval of the disclosure statement and confirmation of the proposed Chapter 11 plan. The prepack process traditionally took 30–60 days. As discussed below, recent cases show that the process can be shortened to as little as 24 hours (colloquially referred to as a speedy prepack). The end result of the prepack process is an order (the ‘Confirmation Order’) from the Bankruptcy Court, which binds all creditors. Because the underlying debt is US-law governed, no ancillary proceeding outside the US are likely to be required.

Prepacks are advantageous for several reasons. The restructuring process can be completed in as little as 24 hours, whereas a non-prepack Chapter 11 case (sometimes called a ‘free fall’) can take several months. The short time frame minimises professional fees and disruption to the business. Finally, because the company only needs to secure one-half in number and two-thirds in amount of claims for a creditor class to accept a plan, prepacks may require less creditor support than out-of-court restructurings, depending on the voting thresholds in credit documents (eg, 75 or 90 per cent), in which smaller groups of creditors can maintain a blocking position on proposed restructurings.

The major risk presented by the prepack option is the possibility that a company can become bogged down in the Bankruptcy Court if a creditor constituency (or other interest-holder) opposes the proposed restructuring. This can result in a significant delay before exiting bankruptcy. In addition to increased professional fees for company counsel, the appointment of a creditor or equity committee means that the company must pay the professional fees for the committee, further increasing costs.

The recent case of In re FullBeauty Brands shows just how speedy prepacks can be. On 4 January 2019, the company announced that it had entered into a restructuring support agreement with key creditor constituencies. On 3 February 2019, the company filed for Chapter 11 protection in the Southern District of New York, and on 5 February 2019, just 24 hours after filing, the Bankruptcy Court confirmed the proposed Chapter 11 plan. The plan effective date occurred two days later, on 7 February 2019. The keys to securing such a speedy exit were: (i) overwhelming creditor support locked up through the RSA; and (ii) providing ample notice of the RSA, proposed plan and proposed confirmation hearing, so that the Bankruptcy Court could confirm the plan without a further notice period after filing the Chapter 11 petition.

Option 2: Scheme of arrangement and ancillary Chapter 15 filing

Another option for companies to restructure US-law governed high-yield debt is to undertake a scheme of arrangement in England and then effectuate the restructuring in the US through a Chapter 15 filing in a US Bankruptcy Court, typically the Southern District of New York.

Under English law, the Scheme process is set out in Part 26 of the Companies Act 2006. There are several stages to the Scheme process, which is shorter than a traditional Chapter 11 filing: (i) the company issues a practice statement letter to creditors whose claims the company proposes to address in the Scheme (the Scheme Creditors), which explains the proposed scheme; (ii) a convening hearing, which concludes with a court order to call meetings of the Scheme Creditors to vote on the Scheme; (iii) the occurrence of class meetings to carry out voting; and (iv) a sanction hearing, at which the English Court issues an order (the Sanction Order) approving the Scheme and enforcing its terms. A Scheme can be implemented very quickly, with short notice periods particularly where there is an urgent need to implement the restructuring (eg, because of tightening liquidity and where creditors are well informed of the situation or sophisticated in nature).

Schemes offer several important advantages to companies with US-law governed debt. Perhaps most importantly is that, under English law, Schemes can release guaranties with respect to both Scheme Creditors and third parties. This avoids the need to have multiple affiliate filings to accomplish a release of guaranties. In addition, third-party releases are more expansive and easier to obtain under English law than under US law. These benefits can be enforced in the US by the entry of a Chapter 15 US Bankruptcy Court order enforcing the terms of the Scheme. See In re Avanti Commc’ns Grp PLC, 582 BR 603, 619 (Bankr SDNY 2018) (‘The Court concludes that schemes of arrangements sanctioned under UK law that provide third-party non-debtor guarantor releases should be recognised and enforced under chapter 15 of the Bankruptcy Code.’). Like the Chapter 11 prepack, the Scheme process is much faster than a traditional Chapter 11 filing, as the entire process can be compressed where creditors are already locked up and well informed of the restructuring situation.

The Scheme is a flexible process that allows companies that are not incorporated in the UK to take advantage of it. All that is required is a ‘sufficient connection’ with England. Having a COMI in England certainly satisfies this test (and COMI shifts to England have been undertaken for this purpose, see Re Magyar Telecom BV [2013] EWHC 3800 (Ch)). A somewhat lesser hurdle than COMI is also possible to satisfy the ‘sufficient connection’ test. Where, for example, the governing law of the debt that is to be compromised is governed by English law, this has satisfied the ‘sufficient connection’. Companies have changed the governing law of a contract deliberately to English law to benefit from the scheme (see, for an example of a change from NY law to English law, Algeco Scotsman PIK SA [2017] EWHC 2236 (Ch)). Where a change of governing law is not possible, a sufficient connection has been held to be established where a new English company was inserted into the capital structure, which then acceded to the existing liabilities and becomes the scheme company (see Codere Finance (UK) Limited [2015] EWHC 3778 (Ch) and more recently in Nyrstar, see below Re NN2 Newco Limited [2019] EWHC 1917 (Ch)).

The Scheme process, however, does suffer from some disadvantages. Unlike a prepack or traditional Chapter 11, a Scheme does not include legislative provisions for any debtor-in-possession financing or stay of actions during the scheme process. A scheme can provide for existing contractual hierarchies to be amended and for new money to be injected with super priority ranking, if this is implemented by way of scheme implementation. A scheme has also been used to achieve a moratorium (see DTEK’s ‘standstill scheme’, sanctioned in April 2016). Schemes are therefore better suited to balance sheet, and not operational, restructurings. Another disadvantage of the Scheme process is that a Scheme requires a higher creditor voting threshold. To obtain approval of the Scheme, the company must secure the votes of: (i) a majority in number; and (ii) 75 per cent in value of creditor claims of each class of creditor. The Scheme process thus requires a level of creditor consent greater than that required for Chapter 11 plan confirmation.

Where there is a desire to obtain Chapter 15 relief for the Scheme, for example where the debt is governed by NY law, where there are creditors who are subject to the jurisdiction of the US courts or where expansive third-party releases need to be secured in the US, the company will file a Chapter 15 petition in the US Bankruptcy Court and obtain an order from the US Court recognising the Scheme proceeding and enforcing the terms of the Scheme in the US. Where this is the case, care will need to be taken that the UK court’s jurisdiction is based on concepts required for a subsequent Chapter 15 recognition (rather than sufficient connection due to the governing law of the credit document), such that the company’s COMI is in the UK or that the company has an establishment in the UK. The Chapter 15 process is generally straightforward and can be completed in about 30 days, or shorter if necessary.

One global company recently employed this process to achieve a balance sheet restructuring of approximately €3 billion debt. The Nyrstar Group companies, which operate a global smelting and mining business, completed a Scheme proceeding in relation to its high-yield debt and convertible notes that involved interposing two new English incorporated entities into the corporate structure, one of which became a co-obligor under the underlying credit documents. This was followed by a Chapter 15 petition in the US Bankruptcy Court for the Southern District of New York. The court processes took less than a month.

Conclusion

International groups of companies looking to restructure US-law governed debt should carefully weigh up the benefits of a prepackaged Chapter 11 plan in the US versus the benefits of a UK Scheme (coupled with a US Chapter 15 petition). Both options can offer speed, and can be an excellent tool for achieving a balance sheet restructuring. The best option will depend on the specific circumstances.


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