Vol 5 (2008) - Issue 2

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Schefenacker plc: A Successful Debt-for-Equity Swap

Executive summary

This article discusses the way in which the CVA, a highly flexible UK insolvency procedure, was used to implement a complex cross-border restructuring without damaging the operations of a global Tier One automotive supplier.

Background

Schefenacker is the ultimate holding company of a global Tier One automotive products manufacturer. The group supplies some 28% of global production of wing
and rear-view mirrors, and its main customers are five of the largest global auto manufacturers. The mirrors businesses are primarily located in the UK, USA, Korea,
Hungary, Australia and Germany; with operations in a further six countries. At the time of the restructuring it was also the ultimate parent of a smaller lighting business which was operationally based in Germany, the USA and Slovenia.

Prior to the restructuring, the ultimate holding company was Schefenacker AG, a German registered company. The group had originated in Schwaikheim, in South-West Germany, and was still wholly owned by the founding family. However, it had grown from being a German company to a global group, and by the time
of the restructuring its spread of operations was such that the group’s business could not be regarded as only, or even primarily, German.

The principal value of the group's financial debt was as follows:
– Senior secured RCF facility: EUR 50 million
– Second lien term loan: EUR 155 million
– Unsecured guaranteed bond issue: EUR 200 million

In mid-2006 the group became concerned about its operational performance and egan a major restructuring programme, advised by Allen & Overy and assisted by Alix Partners and latterly Alvarez and Marsal. It also embarked on a review of the sustainability of its financial indebtedness. Following these actions, the secured lenders to the group consented to an overall restructuring plan involving four interconnected restructuring elements:

- balance sheet restructuring;
– refinancing;
– corporate restructuring; and
– operational restructuring.

The refinancing, corporate restructuring and operational restructuring proposals were supported by the senior lenders and the key customers and shareholders,
subject to an acceptable balance sheet restructuring to reduce the group's financial debt to a level that it considered sustainable in the long-term.

This article will discuss the balance sheet restructuring.

The method chosen to implement the balance sheet restructuring was a Company Voluntary Arrangement ('CVA') under the UK Insolvency Act 1986 (as amended)
('IA86'). A CVA was used in preference to a S425 Scheme of Arrangement for a number of reasons, including that a CVA is one of the insolvency procedures
recognised under the EC Insolvency Regulation 2000. If the CVA were approved by the creditors, therefore, it would be recognised as a main proceeding throughout
the EU (except Denmark).

The restructuring took the form of a debt-for-equity swap to remove some EUR 300 million from the balance sheet, EUR 200 million of bond debt and approximately
EUR 100 million of shareholder and related loans, together with the release of guarantees of the bond debt from the majority of the operating companies and certain other subsidiaries.