Vol 7 (2010) - Issue 2

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The Courts Speak on Valuation in Restructurings: IMO Car Wash, SAS and Wind Hellas Lessons

1. Introduction

1.1. Pre-packaged sales
The rise of the LBO transaction earlier in the decade has increased the complexity of many companies’ capital structures and increased the number of creditor classes. This has reduced the ability of many companies to enact a consensual deal as more creditors are driven by different objectives. This is particularly true in Europe where consensual deals outside of formal proceedings are more standard practice than in the US where Chapter 11 proceedings are more typically the norm.
One way companies have found to navigate restructurings where the creditors are not all aligned is through a pre-packaged sale ('pre-pack'). This has become common practice in the UK. The advantages of a pre-pack are that dissenting or 'hold out' creditors can be overridden and the sale can be approved immediately after the commencement of proceedings.
In a pre-pack administration, the whole class of debt must consent to the sale of the company. However, in certain cases there may even be dissent within a class. In the UK, there is a further option called a scheme of arrangement which may be used in this type of scenario.
In a scheme of arrangement, the reorganisation and sale of the company is voted on by creditors by class and then usually confirmed by the court. What makes a scheme of arrangement unique is the 'cram-down'.
A cram-down is the overriding of the votes of dissenting claimants who voted against the plan. In schemes of arrangements where a full agreement is not reached, creditors in the majority (over 75%) of a senior class could force the sale of the company. The cram-down requires valuations of the debtor’s business because the eligibility of a vote of any creditor depends upon the future prospects for the debtor. Valuations are undertaken to determine who has a viable economic interest and where the value 'breaks' in the capital structure. The valuation determines which classes of creditors are entitled to compensation.
A scheme of arrangement does not allow junior classes of secured debt to be crammed-down without their consent providing they have an economic interest in the company. However, in cases where the junior creditor does not have an economic interest then their right to vote is waived and they are not included in the scheme of arrangement and are effectively 'crammed-down'.
Historically, junior lenders have not been opposed to this method. Although it typically favours senior lenders, as previously when junior lenders were out of the money, it was at least possible to convert their investment into a controlling stake of the equity and refinance the facilities above them to keep senior lenders whole and out of the equity.
However, the current downturn differs from previous cycles as senior lenders are increasingly 'out of the money' which forces the higher tranche to equitise all or part of their investment and leaves junior lenders in the cold.
If creditors are deemed to have no viable interest in the company then they are not usually informed of the pre-pack until after it has been completed.
This is not uniform across Europe as it still pays for the senior lenders to include the juniors in some less creditor-friendly countries in order to get deals done consensually.