Vol 6 (2009) - Issue 6

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Minority Junior Lender Rights: Getting a Seat at the Negotiating Table

1. Introduction

In Europe restructurings are mostly achieved on a consensual basis outside of any formal proceedings, unlike in the US where the Chapter 11 proceedings are typically used to restructure and rescue distressed corporate debtors. One of the features of the distressed corporate debtors in Europe currently being restructured or those that are anticipated to be restructured in the future is their complex capital structure. Distressed corporate debtors in Europe of a certain size are now not only burdened with (syndicated, as opposed to bilateral) senior secured bank debt, but also have layers of second lien bank debt, mezzanine bank debt, notes, PIK (Payment In Kind) instruments and/or hybrid instruments in their capital structure. Therefore, any consensual restructuring process is likely to involve different groups of creditors.

In this article the focus will be on junior lenders, such as for example second lien lenders or mezzanine lenders, and in particular the rights of junior lenders who have a minority position (the ‘Junior Lenders’). An important driver in any consensual restructuring is a determination of ‘where the value breaks’. This is based on a valuation of the distressed corporate debtor that must be restructured. The valuation will highlight which classes of creditors are ‘in the money’ and which classes of creditors are ‘out of the money’. How the valuation should be conducted and to what extent a certain valuation could (or should) be forced upon creditors of a distressed corporate debtor is an important topic, but will not be further addressed in this article.

Where the value breaks in the mezzanine bank debt, the mezzanine lenders should have a say in the restructuring of the distressed corporate debtor as their consent is likely to be required for certain actions. In many cases, majority mezzanine lender consent would be required. If it is assumed that majority mezzanine lender consent represents those mezzanine lenders with more than 662⁄3% of the outstanding principal amount of the mezzanine bank debt, then a minority of mezzanine lenders with at least 331/3% of the outstanding principal amount of the mezzanine bank debt would constitute a ‘blocking position’. If the minority mezzanine lenders do not have a blocking position, they would still be able to block decisions or actions that require the consent of all mezzanine lenders. In addition, there may be other non-contractual remedies available to the minority mezzanine lenders to challenge certain actions or decisions of the majority senior or mezzanine lenders in a restructuring of a distressed corporate debtor.