One of the most significant developments in the UK restructuring landscape of the last year has been the rapid evolution of case law concerning the courts’ approach to creditors’ rights in restructuring plans, particularly in the context of cross-class cram-down of dissenting creditors. Notable cases in recent months, including Waldorf, Petrofac and Thames Water, have seen the courts engaging extensively with the question of “fair” treatment of creditors and the preconditions to cram-down.
The restructuring plan, introduced in the UK a little over five years ago, can be considered a more onerous tool than the more venerable scheme of arrangement. Unlike schemes that require sizeable majorities in each affected class of creditors to consent before the scheme is binding on all creditors, the restructuring plan permits the court to “cram-down” whole dissenting classes of creditor provided that at least one “in the money” class has approved the plan and the dissenting creditors would be “no worse off” in the likely alternative to the plan (such alternative usually being a form of insolvency process or accelerated M&A). This heightened cram-down power has prompted the courts to scrutinize restructuring plans more carefully to ensure fair treatment of all affected parties.
Successful challenges to schemes of arrangement, at least in recent years, were rare and companies could usually proceed with some confidence that their scheme proposals would be sanctioned. That position is no longer quite as clear-cut with the restructuring plan. Courts are now looking increasingly closely at all aspects of a proposal and their affects on creditors, particularly in respect of how the “benefits” deriving from a proposed restructuring are allocated between parties based on their overall “contributions” to the success of the restructuring, and whether companies have sought to negotiate a consensual deal with creditors before resorting to the restructuring plan. The courts are also developing tighter procedural requirements, as demonstrated by the recent introduction of a new practice statement setting out the courts’ expectations as to adequate disclosure of information and other case management aspects.
This has introduced a degree of uncertainty into in-court UK restructuring processes. These developments have been met with some concern in the market, with companies and their advisors having to think hard about how to demonstrate the “fairness” of any proposal in convincing evidence. However, these developments should certainly not be viewed as fatal to the utility of restructuring plans. The market should view the evolving case law not as a negative development, but as part of the ongoing maturation of the UK restructuring framework.
Liability management exercises, enforcements and distressed disposals in focus
In response to the perceived uncertainty surrounding in-court restructuring outcomes, there has been growing interest in out-of-court restructuring tools. In particular, some creditors have been looking to enforcement tools and other contractual mechanisms to effect restructurings.
A prominent example is the use of “distressed disposals”, which are contractual mechanics included in many English-law intercreditor agreements that allow assets to be transferred on an enforcement to a third-party purchaser or lender-owned SPV free of existing claims and liabilities on the instruction of a particular group of lenders (usually senior/super senior creditors). This mechanic can in practice help to facilitate a restructuring and, potentially, deliver non-pro-rata outcomes in respect of creditors who would otherwise rank pari passu. This approach has been observed in notable cases such as Selecta and Hurtigruten. However, these types of transaction can attract considerable litigation and market concern regarding the fairness of outcomes for all creditors, raising questions about whether the use of the distressed disposal in such a way will achieve widespread adoption.
Separately, the use of liability management exercises (LMEs) as a mechanism to deliver restructuring outcomes has been a high-profile theme in both the UK and European restructuring markets. Examples such as Altice France and, to some extent, Selecta have demonstrated the potential for restructurings to be effected out of court through documentary flexibility. In Europe sponsors have been increasingly seeking to use such documentary flexibility as a means of raising new liquidity, potentially at the cost of priming existing creditors, rather than to drive more aggressive outcomes that deprive lenders or bondholders of their existing rights. This contrasts with developments in the U.S., where some LMEs have imposed more coercive results on non-participating creditors.
Looking ahead, we expect to see continued creative use of baskets and covenants to address upcoming debt maturities. However, it is important to recognize that what appears possible on paper may be difficult to effect in practice, given the constraints imposed by the UK and European directors’ duties regimes, the availability of suitable assets to use as collateral, and broader regulatory and practical considerations in Europe. Not every company with documentary flexibility will be able to deploy it, but there is clearly growing appetite to investigate and utilize these tools.
Opportunities emerge for capital deployment in Europe
Notwithstanding the market challenges, the current environment presents significant opportunities for the deployment of capital across Europe. Ongoing distress in certain sectors, driven in part by macroeconomic uncertainty and geopolitical factors, continues to generate restructuring activity. The European chemical, infrastructure and energy (including renewables) sectors have been particularly affected.
Sponsors seeking liquidity as a bridge to a turnaround of troubled businesses are creating opportunities for funds to provide this capital. The key consideration for capital providers in such situations is ensuring that liquidity extended into a distressed environment is well protected on the downside. This requires careful analysis of clawback risk, the effectiveness of security, and whether secured assets can be properly separated from the remainder of the business.
There are also opportunities for credit providers who can look beyond ordinary senior secured debt to consider inventory financing, receivables financing and other forms of asset-based financing.
The UK restructuring market remains one of the leading international forums for restructurings and continues to thrive. The evolution of the powerful restructuring plan tool, as well as the rise in interest in alternative restructuring and new liquidity deployment mechanisms, together create a deep toolbox of options for anyone considering a possible restructuring in the UK.
