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Cortefiel: The Use of Schemes of Arrangement for 'Amend & Extends'
Christian Pilkington, Partner, and Hayley Mitchinson, Associate, White & Case LLP, London, UKIntroduction
The recent case of Cortefiel SA, a leading Spanish high street clothing retailer ('Cortefiel'), has demonstrated the possibility of amending and extending a company’s obligations under its finance documents by way of an English law scheme of arrangement.
In this article we examine the:
– potential use of schemes as a tool for amend and extend proposals in light of the Cortefiel decision; and
– implications for collateralised loan obligation ('CLO') vehicles and likely grounds for challenge.
Background
As is now widely known, the European leveraged buyout ('LBO') loan market faces a huge refinancing burden over the coming five years. The debt wall is looming, with an estimated EUR 133 billion of unrated European LBO debt maturing by 2015. As traditional bank loan funding is likely to be scarce and many CLO funds are approaching the end of their investment periods, companies will be focussed on their ability to extend the maturity of their existing loans.
For those companies that are performing well, a forward start facility, which allows a borrower to enter into a new committed facility ahead of the maturity of its existing facility, is an attractive solution. If this is not possible, companies may look to use the ‘amend and extend’ technique, whereby the lenders agree (i) to extend the maturity of their loans, and (ii) to amend certain conditions and covenants, in exchange for a higher interest rate and/or additional fees. Based on standard LBO style facility agreements, such a proposal would require the consent of (i) all lenders under that facility, and (ii) a majority of all lenders.
The need for all lender consent under a given facility is a key concern for any company seeking to implement an amend and extend, particularly in complex LBO structures where there are likely to be both a greater number of lenders, often with different economic interests, and more layers of debt than in a standard non-leveraged loan. Further, although historically lenders have been willing to give their consent, there appears to be an increasing reluctance to do so where companies are performing less well, especially if the lenders anticipate that the company will struggle to meet its future interest payments.
Schemes of arrangement
A scheme of arrangement is a court sanctioned 'compromise' or 'arrangement' between a company and its creditors (or any class of them), made under Part 26 of the Companies Act 2006.
A scheme requires approval by at least 75% in value of each class of the members or creditors who vote on the scheme, being also at least a majority in number of each class. The technical test for composing the classes of creditors is that each class ‘must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult together with a view to their common interest’. This is a broad test, but the focus should be on legal rights, not economic interests, and should consider both the rights which creditors have before the scheme and the rights which they would have if the scheme is approved. As such, creditors’ rights do not need to be identical for them to be placed in the same class; they simply need to be sufficiently similar to make it possible for them to consult together with a view to identifying their common interest.
The key feature of a scheme of arrangement is that, upon sanction by the Court, it binds all dissident creditors as matter of statute and, therefore, will override any voting thresholds in a company’s finance documents (in particular, any super-majority or unanimous voting requirements). It is a very flexible tool and, since the start of the economic downturn, in a restructuring scenario has typically been used to effect debt-for-equity swaps, debt reductions/extinguishments and/or the exchange of one debt instrument for another. However, as the recent case of Cortefiel demonstrates, the use of schemes is limited only by the imagination of the company.
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