Insolvency: The rescuers
1 July 2013 | By Joanne Harris
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Royal Decree-Law 4/2014, of 7 March 2014, on urgent matters in relation to refinancing agreements and debt restructuring
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22 October 2013
The Lawyer’s Restructuring Team of the Year shortlisted firms pulled a diverse range of companies – and even a country – back from the brink last year
Distressed work continues to be a busy area for many law firms as companies – and occasionally countries – fight to stave off insolvency. The law firms nominated for Restructuring Team of the Year at last week’s The Lawyer Awards were forced to put their technical legal skills to the test to ensure the survival of their clients, and all came through with flying colours.
Cleary Gottlieb Steen & Hamilton
Greece’s sovereign debt crisis was the catalyst for many of the eurozone woes. In July 2011 the Council of the EU agreed a second bailout for the country and the Greek government turned to Cleary Gottlieb Steen & Hamilton for advice. The firm has advised a number of sovereigns on financial issues in the past, but as London partner Andrew Shutter points out, this was the first time it had been called in to help a country that was part of a monetary union.
A team of partners and lawyers from across Cleary’s network, drawn in for their experience, -advised Greece on the legal aspects of the agreement with Europe, which was eventually finalised in February 2012. Greek firm Karatzas & Partners provided local advice.
The ‘private sector involvement’ transaction (PSI), worth around €206bn (£177bn), is reportedly the largest-ever bond exchange and part of the largest-ever restructuring of sovereign debt.
The PSI deal entailed private sector investors in Greek debt agreeing to write off over 50 per cent of the face value of the bonds they held. Greece enacted legislation to introduce a ‘collective action clause’, which means only majority agreement was required.
“If we hadn’t had the collective action clause we wouldn’t have got the take-up necessary to get to the debt levels the EU and IMF said were necessary before they issued the new money,” explains Shutter, adding that such clauses are now being written into new sovereign bond issuances.
The deal also linked new bonds issued by Greece to a portion of the €150bn loans made to the country by the European Financial Stability Facility through a co-financing agreement.
A cross-border team from Allen & Overy (A&O) was involved in advising German residential property company Deutsche Annington on a -truly innovative deal that involved an English scheme of arrangement being used to implement the restructuring of €4.3bn of listed notes issued by the German Residential Asset Note Distributor (Grand).
When the notes were issued in 2006 Grand used the proceeds to buy real estate finance notes issued by Deutsche Annington, which -matured earlier than its listed notes. However, the market was -incapable of supporting a €4.3bn refinancing and Deutsche Annington decided to renegotiate a rescheduling for the listed notes.
An English scheme has never been used before in such a case. A&O’s team, led by partners Mark Sterling and Olaf Meisen, also managed to extend the maturity dates of the notes and refinance with an -injection of shareholder equity.
Ultimately, more than €3bn of shareholder value was preserved and the market value of the notes rose, while bankruptcy of borrowers was avoided.
Nabarro leveraged a long relationship with UK Coal when it advised on its restructuring last year.
The restructuring was sparked by financial issues caused by spiralling costs and performance issues at key mines, coupled with an increasing pension deficit. Nabarro corporate partner Ben Hendry led a cross-practice team of over 100 people to advise the board as the business was split into three.
Hendry explains the nature of the industry meant the restructuring was “unique” and complex because of the number of stakeholders.
“There was basically a cast of thousands,” he adds.
The restructuring had to address issues such as tax-efficiency, regulatory approval, trade union negotiations, new banking facilities and a restructure of the pension scheme and also joint ventures.
UK Coal moved from a premium listing to a standard listing to assist the shareholder approval process and the pension scheme trustees take an interest in the new property division.
Hendry says the restructure had to be rolled out in a specific order, with Nabarro overseeing an implementation arrangement that saw the new structure take effect in just four days.
The restructure saved 2,500 jobs and ultimately safeguarded the business’s future, ensuring coal production for up to a decade.
Burges Salmon was brought in to advise longstanding client the London Fire and Emergency Planning Authority (LFEPA) in 2011 when it became apparent that Assetco, the company providing maintenance services under a PFI contract signed in 2000, was in financial difficulty. HM Revenue & Customs had issued a winding-up petition against Assetco and successful delivery of the terms of the PFI was under threat.
The problem was accentuated by the looming Jubilee celebrations and the 2012 Olympics, which needed the London Fire Brigade to be at peak operational efficiency.
Burges Salmon partner Patrick Cook, who led the team acting for the LFEPA, says the difficulty was lining everything up so that the -service provided under the PFI -continued, the rights of Assetco employees were guaranteed and the banks were onside.
Matters were complicated when Assetco sold the bulk of the contract to another company without LFEPA’s consent. The process of appointing Babcock as an interim contractor had to be seamless to ensure service provision continued without a break. Ultimately, this happened in November 2012, securing the maintenance of the fire brigade’s assets.
A team of five partners and several other lawyers from a number of departments at Burges Salmon spent over a year on the restructuring, with input from firms including Hogan Lovells and DLA Piper for other parties.
The magic circle firm picked up its instruction on the 2012 restructuring of hotel chain Travelodge from the company’s private equity owner Dubai International Capital (DIC).
Clifford Chance insolvency and restructuring head Mark Hyde was introduced to the company by -existing client DIC and when Travelodge approached Clifford Chance to act on its financial difficulties, DIC gave its approval.
The hotel company was carrying too much debt and also had to address a larger leasehold property portfolio.
“The company was going to hit the buffers quickly,” says Hyde.
Travelodge had two constituents of lender and needed to find new money to pay off a super-senior -facility. That involved gaining consent from both types of lender.
Clifford Chance’s team also had to prepare for the prospect that the company voluntary arrangement (CVA) proposed as the solution to Travelodge’s problems would fail. In that case, they planned for a pre-pack administration. In the end it was not needed and the CVA was structured alongside schemes of arrangement for three group companies which reduced the debt burden and cash-injected £75m. That in turn enabled Travelodge to invest in upgrading its hotels and -rewrite its balance sheet.
The whole process lasted less than eight months. “Time was not a luxury we had,” comments Hyde.
“It was one of the most demanding things I’ve ever worked on,” says Hyde, “trying to make sure all the pieces came together at the same time.”
A cross-practice and cross-border team from Hogan Lovells became involved in the restructuring of Anglo-American company AEA Technology Group in late 2011, when the company put out a profit warning and brought in turnaround specialist John Lowry as CEO.
AEA was facing a liquidity crisis, unable to service its £50m working capital facility, and had a significant pension deficit that was increasing. Hogan Lovells restructuring partner Tom Astle, part of a sizeable team from the firm on the work, says the deficit sat at the top of the UK group. If the scheme’s trustees had chosen to wind it up “it would have been curtains for the company”, Astle explains.
Working with AEA’s board, Hogan Lovells negotiated a solution with creditors and the board involving a standstill agreement, including the injection of new money to support a sale process. Banks and pensions creditors pooled their claims, security and realisations and the business was restructured to make it attractive to purchasers. Eventually, it was sold in three chunks, with -rival Ricardo taking the biggest -portion and the trading name.
There were no redundancies, and the process was over in months.
Astle thinks Hogan Lovells’ profile made it an obvious choice for the job. “There’s probably a handful of firms in the UK that have that experience,” he says, pointing to the need for US regulatory expertise on top of insolvency, corporate, employment and other areas that came into play.
Macfarlanes’ work for the Four Seasons Health Care Group is a perfect example of what needs to be done to solve the problems that arise when boom-time decisions go catastrophically wrong.
Four Seasons, the operator of nursing homes, was acquired by investment company Three Delta in 2006 using a commercial mortgage-backed security (CMBS), which valued the company at 12 times projected EBITDA. The debt package needed to be refinanced in 2008, by which time the financial crisis meant that Four Seasons was unable to meet its obligations.
A Macfarlanes team led by partner Ian Martin was instructed in 2008 by Four Seasons, an existing client, and gave three options to the company. A consensual restructuring was agreed but there were many challenges. These included several layers of debt, each with a number of creditors. There was also little precedent as this was the first major restructuring of a CMBS.
“It was being watched pretty closely by the market because it was the first of its type,” says Martin.
By December 2009 a debt-for–equity swap was completed, reducing the debt burden by nearly £1bn. The following year the Macfarlanes team secured a two-year maturity extension for £600m of listed CMBS bonds.
The restructured group was in much better shape and, in 2012, was acquired by Terra Firma for more than £800m. The sale secured the futures of 30,000 Four Seasons employees as well as the thousands of residents in the company’s care.