By Susan Moore, Partner, Faegre Drinker Biddle & Reath LLP
Much commentary over recent months has focused on the extent of the debt restructuring likely to be required due to the continued economic headwinds businesses face that have exacerbated the pressures caused by the COVID pandemic.
Except for a few sectors (such as aviation), the pandemic did not trigger the level of restructuring activity that many anticipated, due largely to the unprecedented amount of economic stimulus provided by governments around the world. However, as that stimulus has been scaled back, there has been a gradual rise in restructuring activity.
Whilst many businesses have weathered the storm and are in relatively robust positions, others face challenges in the short-to-medium term, often caused by impending debt maturity dates and the need to refinance against a backdrop of much higher interest rates and a sustained period of economic pressures. There are and have been a whole host of other well-publicised economic pressures.
Against this backdrop, it is important for businesses—and their creditors and other stakeholders—to understand the debt-restructuring landscape. Another feature of recent years is that there have been many changes to restructuring regimes across numerous jurisdictions. Not all changes were COVID-driven; many were planned or in place shortly beforehand. The consistent trend in these changes is the heightened focus on business rescue and a move towards more debtor-friendly regimes.
In the majority of situations in which an adjustment to the debt stack is required, a consensual deal will be the preferred option. However, knowing what can be achieved using a restructuring procedure is usually critical in setting parameters for negotiations and, if necessary, forcing a deal through in circumstances in which it is impossible to achieve consensus. Furthermore, the increased complexities of capital structures mean that in some situations, a fully consensual outcome is not practicable, and a formal process is required to implement the necessary changes.
Given the developments in restructuring regimes worldwide, a business needing to restructure will likely have a choice of formal processes it could use. By the same token, creditors wishing to impose changes—perhaps due to an activist approach, such as delivering loan to own strategy will likely have various options.
The headline is that what can be achieved varies from jurisdiction to jurisdiction.
This article will consider some of the drivers behind selecting regimes and jurisdictions to build restructuring strategies as well as the current landscape, including post-Brexit.
The rise of forum shopping
Over the last two decades, forum shopping by businesses and their stakeholders has exploded. Until around 2000, it was rare for a business based in one jurisdiction to look to a process in another jurisdiction to deliver debt restructuring.
Hand in hand with the increasing complexity of capital structures and sophistication of businesses and stakeholders, global businesses have often turned to Chapter 11 of the United States Bankruptcy Code or the English scheme of arrangement since the early 2000s to implement debt restructuring when a formal process was needed, often due to the inadequacies of local restructuring laws to provide optimal solutions.
This has led to the development of “restructuring hubs”, and forum selection has become a critical part of devising restructuring strategies to deliver optimal outcomes.
The last six years have, however, seen significant changes, and the range of possibilities is now much wider as other jurisdictions have made changes to facilitate business rescues and provide options to encourage companies based there to use domestic processes and/or compete for restructuring business.
The bottom line is that looking beyond one’s own shores is important when considering available options. Clearly, holding a detailed understanding of all regimes worldwide is impractical. However, an overview and an understanding of the drivers for regime choice help formulate the right questions and discover what procedures might be utilised (offensively or defensively) to set negotiation strategies.
So, what has changed?
The pandemic prompted many temporary legal changes—such as relaxations of directors’ duties and restrictions on enforcement actions—to help businesses survive, but there has also been a plethora of permanent changes and improvements to restructuring regimes around the world.
2020 brought significant changes in the United Kingdom, with enhancements to existing procedures and the introduction of a new “restructuring plan” process, which has many similarities to a scheme but also eases the voting rules and facilitates cross-class cram down (CCCD)—by which, broadly, the assent of one class of creditors can impose the plan on dissenting classes.
There has been a great deal of change across Europe. Following a European Union (EU) directive, all EU member states have been required to legislate for restructuring procedures that meet certain minimum criteria to facilitate business rescue. This has led to many changes. For example:
- January 2021 saw the implementation of a new Dutch scheme of arrangement procedure (Wet Homologatie Onderhands Akkoord, or WHOA), based on elements of the English scheme but also borrowing concepts from Chapter 11;
- Germany introduced a new procedure known as the StaRUG (Gesetz über den Stabilisierungs-und Restrukturierungsrahmen für Unternehmen), which has many similarities to the Dutch WHOA;
- Austria brought in a new restructuring scheme to facilitate restructuring and avoid formal insolvency; and
- Spain and Belgium have also seen important changes.
Looking east, Singapore has for several years promoted itself as a restructuring hub—to compete with Chapter 11 and the English scheme—for restructurings of businesses in Asia and beyond. In 2017, it introduced new laws it considered combined the best parts of Chapter 11 and the English scheme, and those laws were further developed in 2020.
There have also been significant changes in India, Hong Kong, Malaysia and the Cayman Islands (often an important jurisdiction due to corporate structures), as well as in jurisdictions across the Middle East.
In contrast, there have been few recent changes to Chapter 11, but a new regime was introduced in the United States in 2019 for small and medium-sized enterprises (SMEs) to meet concerns about Chapter 11’s high costs and complexities, which have made it difficult for smaller businesses to reorganise successfully.
Drivers of choice
With the array of choices now available, how should businesses and their stakeholders formulate strategies?
In essence, there are two categories of considerations:
- the legal features of a regime and the extent to which they will deliver the best solution, and
- a selection of practical factors that will, or should, influence the final choice.
An analysis of the relative merits of possible choices can bring considerable benefits.
Legal features
Some key aspects are as follows:
- Accessibility: A procedure in a given jurisdiction will invariably be available to companies incorporated in that jurisdiction and will have rules to determine how accessible it is to companies incorporated elsewhere. This “entry point” criteria will dictate the range of options. For example, it is very easy to establish jurisdiction for Chapter 11; the mere presence of funds in a bank account located in the United States is sufficient. Likewise, it is relatively easy to access the English scheme and restructuring plan as well as the Singaporean scheme.
- Which creditors need to be engaged?: Sometimes, a restructuring will require revised terms to be agreed with only those creditors holding bank and/or bond debts, so avoiding a process in which commercial creditors must be involved is preferable. In other situations, it may be necessary to involve all creditors. This can be an important factor because some processes, such as Chapter 11, engage all creditors, whereas others (such as a scheme) can target particular debt tranches, making them potentially more streamlined solutions.
- Voting thresholds to compel compromise: Many procedures require creditors to be split into classes to vote on what has been proposed. Usually, each class of affected creditors is required to vote, so an analysis of threshold voting majorities needs to be considered in conjunction with the availability of cross-class cram down (see above). Cross-class cram down was a distinguishing feature (and therefore one of the advantages) of Chapter 11, though it is now relatively common.
- Scope and duration of any moratorium and extra-territorial effects: Different regimes bring differing rules about restricting the ability of creditors and other stakeholders to exercise their rights to provide breathing space for restructuring. The scope of the stay is distinguishing feature of Chapter 11 provides for what is known as the worldwide automatic stay following any filing, with serious repercussions for any parties (in the US or abroad) that breach the stay.
- Availability of rescue (or debtor in possession) finance: Some procedures, such as Chapter 11 and the Singaporean scheme, facilitate injections of new money to enable a company to continue to trade during a restructuring process and/or to meet the costs of the restructuring. Such financing is generally given “super priority status” ahead of other secured lenders.
- Availability and scope of the ipso facto (or executory contract) regime: In essence, this feature restricts the ability of contractual counterparties to terminate contracts or accelerate loans by referencing restructuring situations.
Some practical considerations
In practice, a choice will often be influenced by important practical factors beyond assessing the legal features of a specific procedure.
- Predictability: Reliable precedent provides confidence as to the outcome, and this factor constitutes a major advantage of the well-used processes against the newer, untested procedures, as companies and their stakeholders do not wish to test the boundaries of new procedures.
- Speed and cost: The “runway” to implement a solution is often finite and challenging, based on cash flow, so speed can be key. Speed, as well as other factors, can also impact costs.
- Availability of specialist courts and judges: linked to the preceding points.
- Effectiveness of debt compromise: The Gibbs Rule essentially provides that debt governed by English law can be discharged or varied only under English law. This rule means it can be challenging to effectively reach a compromise on English-law debt without using an English process, such as a scheme or restructuring plan.
- Publicity: Some procedures require significant public disclosures, while others do not.
- Recognition: The restructuring process will need to be recognised or effectuated in key jurisdictions in which the business operates.
- Familiarity: Often, key stakeholders will have a preferred option based on their experiences.
And what about Brexit?
There’s been much commentary about whether Brexit affects the attractiveness of the United Kingdom as a restructuring hub, with the concern being whether an English scheme would be recognised and/or given effect to in Europe. In short, this is not the game changer some commentators thought it might be, and the position has not changed significantly.
So, where does this all leave us?
Notwithstanding the legal changes around the world, one can understand why the notion of restructuring hubs is likely to continue, given the above practical considerations.
Forum shopping continues apace. For example, Germany’s biggest restructuring in recent years, Adler Group, is using an English scheme, as did Malaysia Airlines, to restructure its lease obligations; shipping group Vroon is employing a parallel English scheme with the Dutch WHOA; and UK-based Venator Materials PLC has recently filed for Chapter 11. Meanwhile, German fashion chain Gerry Weber International used the German StaRUG, having previously restructured through an English scheme, while renewables conglomerate Abengoa, S.A. recently employed Spain’s new pre-pack legislation to facilitate the sale of its operating assets. The list goes on.
The takeaway is understanding that different options can considerably impact a restructuring’s breadth and success. Therefore, where a debt restructuring is needed, having an overview of the options and what they can deliver, as well as how effective they will be in consummating a restructuring, is the path to a successful solution.