Vol 10 (2013) - Issue 3

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Secured Creditors Scheme to Get Channel Nine Deal Approved

During October last year, the senior and junior lenders of Nine Entertainment Group Limited ('Nine Entertainment' or the 'Company') reached an agreement allowing the Company to continue as a going concern. The deal was struck at the 'eleventh hour' following a protracted negotiation that dominated business press in Australia at the time. As a result of a concession by the senior lenders, it was announced that the deal would involve a debt for equity swap that was to be effected through a scheme of arrangement ('Scheme'). The approval of the Scheme was, it was thought, a forgone conclusion. While the Scheme was ultimately approved in late January this year, not every creditor was satisfied, and the Court applications required to approve the Scheme provided the dissatisfied creditors with a chance to be heard.

Background
The secured creditors of Nine Entertainment can be broken up into two categories: the senior beneficiaries ('Senior Lenders') and the mezzanine or subordinated beneficiaries ('Junior Lenders').
Apollo Management LP ('Apollo') and Oaktree Capital Management LP ('Oaktree') formed the bulk of the Senior Lenders (together they held approximately 45% of the senior debt through a number of investment funds). In total, however, the Senior Lenders comprised approximately 35 financial institutions; this included 13 financial institutions with whom the Company had entered into interest rate swaps in order to hedge its interest rate exposure ('Hedge Counterparties'). The Hedge Counterparties ranked equally with other Senior Lenders.
The Junior Lenders comprised six institutions associated with Goldman Sachs who held their interests through 10 separate funds.
Amounts owing to the Senior Lenders and Junior Lenders were approximately $2.5 billion and $1.14 billion respectively. The senior debt was due on 7 February 2013; hence the urgency of the negotiations and Court application (as below, the matter was first before the Courts on 17 December 2012). If the Company failed to pay the senior debt by 7 February 2013 it would have led to an inevitable insolvency appointment.

Implementation of a scheme of arrangement
As noted above, the Senior Lenders and Junior Lenders proposed to structure the debt for equity swap through a creditors’ Scheme.
A Scheme is a procedure under the Corporations Act 2001 (Cth) ('Act') allowing a company to reach a binding arrangement with its creditors, members or both in order to implement a restructure of the company. It is a court-driven process requiring court approval at two stages.
Prior to the Nine Entertainment Scheme, the most recent high profile creditors’ Scheme in Australia was the restructure of the Centro Group.
Under a creditors’ Scheme, the company’s obligations to creditors are deferred, rearranged or extinguished pursuant to the terms of the Scheme. A feature is that, if approved, the Scheme is binding on all relevant creditors even if individual creditors vote against the proposal.
There are various steps required in order to implement a Scheme as set out in s 411 of the Act. These can be summarised as follows:
1) A proposal must be developed and an explanatory statement prepared. At this point the applicant must assign creditors into particular classes.
2) An application is made to court for an order convening the meetings of creditors to consider the Scheme.
3) Once the necessary majority of creditors have approved the Scheme (in each relevant class) an application is made to court to approve the Scheme (s 411(6) of the Act).
4) The Scheme becomes binding on all parties to it when the court orders the Scheme be approved (s 411(4) of the Act).

First court hearing
On 17 December 2012, Jacobson J of the Federal Court of Australia (in NSW), first heard the application by Nine Entertainment to approve the Scheme pursuant to s 411 of the Act (item 2 above). The Company sought orders convening meetings of two classes of secured creditors: the Senior Lenders and the Junior Lenders.