Association: bank deals - ilauk.com

Insolvency Lawyers’ Association:

Structuring and restructuring new generation bank & bond deals

Ken Baird (Freshfields) and Nigel Ward (Ashurst)

#35195456


• New�generation�structures: how�are�the�latest�European�bank�and�bond�transactions�structured?�

• Lessons�learned�2009�Ͳ 2014�:�what�lessons�have�we�learned�since�2008�and�how�will�those�lessons�impact�restructurings�of�the�new�generation�bank�and�bond�structures?

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GlossarySNs =�Senior�NotesSSNs =�Senior�Secured�NotesSSTLs�=�Senior�Secured�Term�LoansRCF =�Revolving�Credit�FacilitySSRCF�=�Super�Senior�Revolving�Credit�Facility

Secured Bonds dominate post 2008

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• New�generation�structures

• Lessons�learned

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Pre 2008: bank and bond funding structure

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Senior�Notes��credit�supportí security�over proceeds�loan�and�Holdco�2�

sharesí subordinated�guarantees�from�Holdco�2�and�

Opcos

Senior�Notes��payment�blockí permanent�block�on�bondholder�payments�if�

senior�payment�defaultí 179�day�payment�block�for�other�senior�defaultsí typically�operate�on�the�guarantees�(not�the�

notes�themselves)

Senior�Notes�enforcement�standstillí 179�day�enforcement�standstill�on�bond�

guaranteesí no�standstill�period�if�relevant�obligor�in�

liquidationí action�against�Holdco�1�may�be�unrestricted

Senior Notes (2nd)

RCF & Term Loans (1st)

Guarantees

JSP =�a�share�pledge�granted�in�favour�of�both�RCF�&�Term�Loan�lenders�(1st)�and�Senior�Noteholders�(2nd)

SSP�=�a�share�pledge�granted�solely�in�favour�of�RCF�&�Term�Loan�lenders�(and�not in�favour�of�Senior�Noteholders)

Subordinated

JSP

SSP

Senior Notes Proceeds Loan

Senior

Holdco 1

Holdco 2

Opcos

Post 2008: Bank & bond - structure 1 (Super Senior)Super Senior RCF, Senior Secured Notes and Senior Notes

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Key features:

New York law bonds. Publicly listed.

English law RCF and intercreditor.

RCF/SSNs/SNs* share security (including share pledges across the group) but subject to ranking, waterfall and release mechanics in intercreditor.

RCF ranks 1st and SSNs 2nd for securedrecoveries.

RCF and SSNs rank pari passu for unsecuredrecoveries.

No unsecured recoveries waterfall – no turnover provisions

Senior Notes rank 3rd and upstream guarantees subordinated.

• SNs will only have holdco security.

NY law Senior Secured Notes (2nd)

English law Super Senior RCF(1st)

NY law Senior Notes (3rd)

Guarantees*

Subordinated

* Guarantees in favour of Senior Secured Notes and RCF & Term Loans will be secured guarantees. Guarantees in favour of Senior Noteholders will typically be unsecured and subordinated

SN Proceeds Loan

Senior

Senior

Holdco 1

Holdco 2

Opcos

Post 2008: Bank & bond - structure 2 (Pari bank and bond)Pari passu Senior Secured RCF, Term Loans & Notes plus Senior Notes

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Key features:

New York law bonds. Publicly listed.

English law RCF and intercreditor.

RCF/Term Loans/SSNs/SNs* share security (including share pledges across the group) but subject to ranking, waterfall and release mechanics in intercreditor.

RCF, Term Loans and SSNs rank pari passu and 1st for secured and unsecuredrecoveries.

Senior Notes rank 2nd and upstream guarantees subordinated.

* Senior Notes will only have holdco security.

NY law Senior Secured Notes (1st)

English law RCF & Term Loans (1st)

NY law Senior Notes (2nd)

Guarantees*

Subordinated

* Guarantees in favour of Senior Secured Notes and RCF & Term Loans will be secured guarantees. Guarantees in favour of Senior Noteholders will typically be unsecured and subordinated

SN Proceeds Loan Senior

Holdco 1

Holdco 2

Opcos

Restructuring focus: lessons learned 2009 – 2014

• Lesson�1:� security�enforcement�to�eliminate�out�of�money�creditors

• Lesson�2:�� security�agent’s�intercreditor�agreement�authority�to�release�security�and�guarantees�etc =�most�powerful�restructuring�tool

• Lesson�3: nonͲcash�consideration�as�vital�restructuring�tool

• Lesson�4:� English�law�schemes�of�arrangement�provide�an�important�compromise�mechanic�(but�not�a�panacea)

• Lesson�5:� HY�bond�restructuring�has�its�own�challenges�

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Lesson 1: eliminating Senior Notes

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Senior Secured Notes

Structure 1 : Super Senior RCF

Structure 2: RCF & Term Loans

Senior Notes

Guarantees

Subordinated

FinancialSponsor

Holdco 2

Opcos

Holdco 1

Key focus : release of

guarantees

Lesson 1: eliminating Senior Notes

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Newco

Opcos

Holdco

Opcos

SNs

SSD

Guarantees & Security

SP

SSD

SP

Guarantees & Security

A. Pre-restructure B . Post-restructure

Investors SSD

sale

New Owners

SSD = fulcrum senior secured debt (i.e SSNs in Structure 1 and SSNs and SSTLs in Structure 2)

Lesson 1 : Calling the enforcement shots

• Controlling the enforcement process: security enforcement (or the threat thereof) is critical to most European restructuring solutions. The creditor class which controls enforcement therefore typically holds the strongest cards in the restructuring process.

• Unsecured enforcement action: creditor classes can usually each vote to take unsecured enforcement action as independent classes. Each class can press the nuclear button.

• Secured enforcement action: decisions to enforce security are typically subject to an enforcement protocol. This usually provides for discussion before action and avoids a free for all. The protocol varies according to the particular funding components involved.

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Lesson 1 : instructing group protocols

Structure 1 (super senior): enforcement instructions:

• SSNs (> 50% by outstandings) = Instructing Group.

• RCF + hedging (66.66%) = Instructing Group if (i) RCF and hedging is not fully repaid < 3/6 months from issue of instructions or (ii) insolvency event occurs and no enforcement action.

• SNs can enforce after 179 day standstill.

Structure 1 enforcements must accord with “Security Enforcement Principles” (as between SSNs and RCF/Hedging only).

Structure 2 (pari loan & bond): enforcement instructions

• > 50% of bank, bonds and closed out hedging by participation*

• SNs can enforce after 179 day standstill.

* Pre ISTA: Majority Banks (66.66%) usually control security enforcement until the total quantum of bank debt falls below a specified percentage of the total bank and bond debt. The percentage is typically in the 33.33% to 25% range.




Senior Notes

Guarantees

SubordinatedHoldco 1

Note: instructing group regimes on Structure 1 (super senior) transactions do not typically address the deadlock position for voting on matters not related to the initial decision to enforce security.

Holdco 2

Opcos

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• Lesson�2:�� security�agent’s�intercreditor�agreement�authority�to�release�security�and�guarantees�etc�=�most�powerful�restructuring�tool

• Lesson�3: nonͲcash�consideration�as�vital�restructuring�tool


• Lesson�5:� HY�bond�restructuring�has�its�very�own�challenges�

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Lesson 2 : Intercreditor release authorities

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Holdcos

Opcos

Senior Notes


Guarantees

SP

Security Agent release authorities(LMA ICA clause 14.1)

(a) release security;

(b) release borrowing, guarantee and other claims on sale of Opco(s) shares;

(c) release borrowing, guarantee and other claims on sale of Holdco(s) shares;

(d) & (e) dispose of lender/bondholder debt claims and/or intra group debt claims;

(f) transfer/novate intra group debt claims.

Applies on a Distressed Disposal i.e. a disposal (i) at request of Instructing Group when Transaction Security is enforceable or (ii) pursuant to security enforcement or (iii) to a third party after a Distress Event (being security enforcement or acceleration of debt)

If security enforcement involves selling Opcos –need to release guarantees and security (if any) granted in favour of Senior Notes

sale

Lesson 2: Credit support release: bondholder protections

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Release conditions versus Senior Notes

• Sale proceeds – cash or substantially all cash

• Senior secured claims against groupcos sold are:

(i) unconditionally released (or sold concurrently with the sale); and

(ii) not assumed by purchaser or its affiliates

• Sale is by way of public auction or a fair value opinion is obtained

• Sale proceeds applied as per enforcement waterfall




Senior Notes

Guarantees

SubordinatedHoldco 1

Financial Sponsor

Holdco 2

Opcos




• Lesson�3:� nonͲcash�consideration�as�vital�restructuring�tool



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Pre 2008 intercreditor agreements with interpretation issues for non-cash consideration

• Typically no express provision precluding the security agent from transferring claims for nominal or non-cash consideration- Nominal consideration for shares – driven by equity value of transferred business- Non-cash consideration – typically attributable to the debt that is transferred

• Documentation needs to be checked on a case by case basis – are there any provisions that effectively require consideration to be received in cash?- “Proceeds” vs “Amounts” in intercreditor waterfall and related provisions- Obligation on security agent to take reasonable care to achieve a “fair market price”- References to “cash” in e.g. mandatory prepayment and partial payments provisions in

loan agreement

Lesson 3: Non-cash consideration

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Purposive interpretation makes commercial sense

• In the absence of explicit requirements for cash consideration, the market moved towards a purposive interpretation

• Stabilus confirmed that a purposive interpretation is the right approach

- A requirement that the security agent must receive consideration in cash would be a significant fetter on the security agent’s powers

- If the parties intended to impose a requirement for cash consideration, that should have been stated expressly

- References to “price” do not necessarily mean cash only- References to “proceeds” and “amounts” are apt to refer to non-cash consideration- “It does not follow that a sale or disposal must be made for consideration which is

capable of being applied in accordance with the waterfall” (para.[22])

Lesson 3: Non-cash consideration (cont’d)

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But: non cash consideration gives rise to tricky practical issues

• Valuation: - Typically, no explicit regime for valuation of non-cash consideration- Valuation often unnecessary in practice on senior lender-led transactions where the

value of the underlying business breaks in the (senior) debt

• Receipt, holding and distribution of non-cash consideration by the security agent- Typically, no explicit regime for holding of non-cash consideration or conversion of non-

cash consideration into cash


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Post crunch LMA: security agent’s duties

• “…the Security Agent [shall]/ [shall take reasonable care to] obtain a fair market [price]/[value] having regard to the prevailing market conditions (though the Security Agent shall have no obligation to postpone (or request the postponement of) any Distressed Disposal or Liabilities Sale in order to achieve a higher [price]/[value]”

• Deemed satisfaction of all obligations under the debt documents and generally at law if disposal made in any of following circumstances:

- court supervised process- sale by liquidator, administrative receiver, other insolvency officer etc. - “Competitive Sales Process” – auction/competitive sale process with advice or any

enforcement of security carried out by way of auction or other competitive sales process pursuant to requirements of applicable law

- “Fairness Opinion” – an opinion that the proceeds received in connection with the sale are fair from a financial point of view taking into account all relevant circumstances


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Post crunch LMA: non cash consideration regime

• Express framework for security agent to accept non-cash consideration on the instructions of the majority senior lenders- Distribute non-cash proceeds as if they were cash - Hold, realise and dispose of non-cash proceeds and distribute resulting cash proceeds

• Opt out regime for lenders that notify it would be illegal or contrary to their constitution to receive the non-cash consideration

• Non-cash consideration required to be valued by independent financial adviser

• Anti-embarrassment for senior on mezzanine-led enforcement

So, are all issues now resolved?


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- English governinglaw / jurisdiction

- Mostly UK lenders- UK establishment

- English governinglaw / jurisdiction

- Mostly UK lenders- Some UK customers

- English governinglaw

- English exclusivejurisdiction

- No UK lenders - English governinglaw

- English non-exclusivejurisdiction

- No other connection with England

Time

- Change to English governinglaw

- Change to English non-exclusivejurisdiction

- No other connection with England

Lesson 4: Schemes of arrangement and cram down






• Lesson�5:� HY�bond�restructuring�has�its�own�challenges�

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HY bonds are publicly listed, marketable securities as opposed to “private“ loan financings

HY investors tend to be “public“ to enable trading and do not want to receive private information – i.e. information that is not publicly available – this impacts the way restructurings are negotiated by the HY issuer and its bondholders

HY issuers are required to disclose non-public material information to the market

HY bonds' terms don't restrict debt transfers without borrower consent in the way in which sponsor-led leveraged loans or club deal or bilateral loan financings tend to – bond trading continues throughout the restructuring process and can affect deal dynamics

Incurrence covenants – restructuring trigger and timings are different to leveraged debtrestructurings (often no clear event of default)

Lesson 5: High Yield bonds – key features

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Disparate bondholder groupDisparate bondholder group

Loose covenants so no real default/triggers despite financial distress

Loose covenants so no real default/triggers despite financial distress

Creation of ad-hoc groups Creation of ad-hoc groups

No adviser fees commitmentNo adviser fees commitment

Lawyers/FAs as principals in negotiations

Lawyers/FAs as principals in negotiations

• Difficult to identify bondholders as trading occurs into distressed hands away from par investors. Use of Lucid.

• No register of bondholders (trustees have very passive role) and bonds are held through clearing systems

• HY bonds have only incurrence covenants and no financial maintenance covenants

• HY issuers potentially can be compliant with the HY bonds but in a financially perilous state.

• Timing implications• Company needs to build up representative ad hoc group quickly to

create stability (avoid multiple groups/multiple advisers).

• Ad hoc groups tend not to underwrite adviser fees only to agree to ensure payment is condition to the completion of any restructuring or other deal.

• Advisers engage directly with the debtor/issuer for fees coverage.

• Noteholders/ad hoc group don't tend to want private info as they want to remain “liquid”. Insider trading rules applies.

• Lawyers and financial advisers receive private information and negotiate the deal ahead of advising clients.

• Clients need to know they can cleanse / “blow“ private information by certain sunset date if they do agree to receive private information. Entry into NDAs.

Listed securitiesListed securities • Insider trading rules apply, non-public information

Lesson 5: HY bonds restructuring challenges

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Amendments Bank debt NotesDebt write-off 100% 90%/100%

Equity injection/Debt incurrence

Structural adjustment (if included): 66 2⁄3%+ affected lenders

Majority (50.1%)

Debt extension 100% 90%

Acceleration and enforcement

- 66 2⁄3% - acceleration and enforcement

- 25% (and automatic on insolvency)

- Individual rights to accelerate?

- 50% to enforce

Typical Amendment thresholds

Lesson 5: HY bonds restructuring challenges (cont’d)

Preparation for a bondholder restructuring

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•Super senior revolving facilitiestend not to control enforcementahead of HY bonds unless noenforcement after 3 months ofdefault or no cash out of RCFafter 6 months of default

•Pari passu HY bond and bankdebt position is less settled andsometimes bond does not vote €for € with bank debt.

Intercreditordynamics

•Unanimous consent impossible

• UK schemes ? COMI shift issuer to UK (see NWR, BTC) and/or change governing law of bonds (see Mobile8)

•New Accelerated Safeguard or Accelerated Financial Safeguardin France

•Chapter 15? Need Chapter 15 recognition in US because US lawnotes.

Cram down

•More liquid instruments -distressed investors may take scorched earth approach and hold out for improved terms

•Noteholders may be more prepared to litigate - directors of HY issuer have potential tortious liability for misrepresentation under NY law notes and will be vulnerable to claims

Hold outs and aggressors/claims against directors

•Closing and funding restructuring is through clearing systems (need to use specialist information agent to contact bondholders e:g: Lucid)

•KyC checks and internal fund mechanics makes settlement and closing complex

Settlement of restructuring

Lesson 5: HY bonds challenges (cont’d)

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Public BXR

36% 64%

NWR�plc

NWR�NV

Opcos�(Czech/Poland) Guarantee

€500m�SSNs

€276m�SUNs

TwinͲtrack�scheme

A.��SSNs�&�SUNs B.��SSNs�only

• Dual�consent:��consent�from�each�of�SSN�and�SUN�classes

• New�money�equity:��rights�issue,�placing�and�open�offer�at�PLC�level�(BXR�underwriting)

• NWR�NV�COMI�shift:��to�UK�for�scheme��purposes�

• NWR�NV�scheme:��to�restructure�NV�balance�sheet

• Single�class�consent:��Consent�from�SSN�class�only

• New�money�equity:provided�by�SSNs

• NWR�NV COMI�shift: to�UK�for�administration�purposes

• Pre�pack�sale: pre�pack�sale�of�Opco�shares�to�SSN�newco�by�NWR�NV�administrator

NWR Twin Track Restructuring

Lesson 5: HY bonds challenges (cont’d)

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Conclusions

• Bank & bond debt increasingly prevalent (currently the default funding structure for new mid-large leveraged deals + refinancing of distressed leveraged deals).

• Bondholder involvement: bondholders will inevitably have greater involvement in future restructurings of leveraged groups.

• Equity position – equity may have greater leverage than out-of-the money senior notes.

• US v UK restructuring solutions for European businesses? Chapter 11 v Schemes. New European Insolvency Regulation preserves value of schemes going forward.

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Insolvency Lawyers’ Association:


Ken Baird (Freshfields) and Nigel Ward (Ashurst)

#35195456Lon35195456

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Association: bank deals - ilauk.com