Slaughter and May and Cadwalader – old adversaries on workout litigation – have clashed over bondholder rights almost two years after the firms squared up to each other in the Colt Telecom case, in which the US firm was heavily criticised for its conduct.
The two firms went head-to-head on the MyTravel litigation last Wednesday. Mr Justice Mann accepted the company’s scheme of arrangement second time around, but also ruled on the key issue of whether bondholders had sufficient economic interest in the company to block its plans for a restructuring.
The bondholders – Fidelity, Lehman Brothers, New Star Asset Management and Société Générale – had been offered an 8 per cent stake by MyTravel if they agreed to the restructuring. That stake decreased to 4 per cent if MyTravel had to go to court to force through the scheme and then to 2 per cent once the financial package was implemented.
However, the bondholders, advised by Cadwalader’s Andrew Wilkinson and 3-4 South Square barristers Michael Crystal QC, Robin Dicker QC and Stephen Atherton, held out, claiming they had the right to block the restructuring.
At the first hearing, Slaughters, Richard Sheldon QC and Hilary Stonefrost, also of 3-4 South Square, and Erskine Chambers’ Thomas Stockdale QC saw their scheme slapped down by Mann.
However, MyTravel, with scheme of arrangement specialist Stockdale in its corner, scurried off to draft an alternative, which Mann accepted at an afternoon hearing.
Even worse for Cadwalader and the bondholders, in the morning hearing, Mann had chosen to take the point of whether they had sufficient economic interest when strictly speaking he did not have to. Because he ruled that they did not, the second hearing went ahead without the bondholders.
His decision to take the point was a serious blow for the bondholders and Crystal tried to get the issue adjourned, and yet there is no doubt that this issue was at the heart of the case.
Way back in May 2003, Cadwalader wrote to Slaughters strongly challenging MyTravel’s contention that the bondholders could block the restructuring.
“We cannot find any authority to the contrary position you so confidently advise. Further, by continuing to advocate this approach as your fallback, the company is attempting blatant coercion of its creditors,” wrote Cadwalader.
By 1 November, MyTravel was ready to litigate the issue.
“If the convertible bondholders do not accept MyTravel’s proposals it is MyTravel’s intention to seek directions from the court as the formation of classes for approval of the scheme, which would not include a class comprising the convertible bondholders,” countered Slaughters.
Mann has also refused the bondholders’ leave to appeal. Cadwalader now has until this Friday to petition for leave to appeal. If the court says no, there’s no one left to appeal to – the ideal outcome for MyTravel.
Any delay is good for the bondholders, because with MyTravel so close to folding, it gives them more opportunity to leverage their position.
However, if the Court of Appeal agrees to hear the point, the trial will be expedited because the company is so distressed. On the Wimbledon FC administration, the courts took just 12 days from giving leave to hearing the appeal.
If Mann’s ruling stands – and one source close to the bondholders called it “total b*llocks” – the impact of the ruling is restricted to subordinated debt. It could be limited to the small market for subordinated convertible bonds, but could arguably extend to high-yield and possibly mezzanine debt if the company is extremely distressed.
The game that bondholder lawyers play – a game that Cadwalader’s Wilkinson pretty much invented in the UK – is to push companies as far as they can to get the best for their clients. Sometimes they win, sometimes they lose.
For the moment it looks like they have lost on MyTravel, but you can see why they are upset – MyTravel was in trouble again just weeks after they agreed to its last restructuring in 2003.
There are bottom feeders in the bondholder world, but the likes of SocGen and Lehman are not among them, so if they feel that the case needs to be re-assessed to protect debt capital markets then the powers that be will no doubt listen.
But then, there are few small investors in the bond world and the likes of SocGen will have hedged their positions on MyTravel elsewhere. If the court does review the case, the interests of MyTravel’s 22,000 employees, who cannot hedge their positions, must be a priority.