Vol 12 (2015) - Issue 1

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European High Yield Debt Restructuring: Where Are We Heading?

Introduction
The growth of debt issued by European companies through US law governed high yield continues to soar with a c.34% increase in the last year alone totalling over EUR 110 billion. As a consequence, the various recent high profile debt restructurings involving companies across Europe reflect the nature of such debt both from a legal and contractual basis as well as the nature of those who hold the paper.
Many recent restructurings have attempted (often successfully) to push the boundaries of what tools and methods there are available for the majority of the financial creditors to put forward a plan to refinance and restructure that can stand up to the challenge of the minority, whilst maintaining operational activities . Although each situation is very different there are some common themes that run through them that must be faced by the note holders when looking at a restructuring. In particular, when seeking solutions, creditors must weigh up the balance of flexibility, cost and, above all, certainty in achieving the desired outcome.

High yield situations – key characteristics
In most of these situations the high yield debt is subject to US law but the Centre of Main interest is in Europe. The debt is usually held by multiple parties with differing interests and motives and, when combined with interests of equity, the chances of obtaining agreement from all the stakeholders to achieve a consensual restructuring (be it through new monies, extending maturity dates, debt for equity swaps or whatever restructuring is required) is very low. When looking for options as to how to achieve a restructuring, it becomes apparent that the level of sophistication and range of local insolvency procedures differs greatly across Europe, with most not equipped to allow for the majority of lenders to cram down the minority – even in countries where the legislation is considered to be among the most advanced.
It is paramount for lenders to operate in an environment where, should a restructuring be required, there is flexibility in options, efficiency (in terms of cost and timing) and predictability borne from a track record of consistent professional advice and consistent judgements.
It is on those tenets that many of the more recent restructurings have been based but there is still a degree of uncertainty and limitation around each solution that casts some doubt as whether what has worked today will indeed be fit for purpose tomorrow. What is clear is that whether the right tool for implementing a restructuring is using a UK Companies Act Scheme of Arrangement, or a US Chapter 11 filing, or German Protective Shield proceedings or something else, all proposals will be scrutinised in detail by an ever increasing number of stakeholders and interested parties, all learning lessons from previous restructurings.

Creative solutions
As a result of the search for flexibility and certainty (at least compared to local law solutions), there has been and continues to be a preference to using either a UK Scheme of Arrangement (Scheme) or a UK administration to effect a pre-pack with the intention of cramming down equity and/or out-of-the-money creditors. In this respect at least, the UK is still seen as a good place to do business.
In order to make use of these options, the market has developed ever more inventive and creative ways to create the necessary nexus to the UK jurisdiction.
There have been well documented cases where the Centre of Main Interest (COMI) of a group has been changed in order to take advantage of a UK process, most recently Magyar Telecom BV where a Dutch company moved its COMI to the UK in order to restructure its debt through a Scheme. This Scheme was then recognised in the US courts (and therefore binding on the US law noteholders) under Chapter 15 of the US Bankruptcy code to pre-empt any challenge by noteholders with respect to their US law rights being compromised by the Scheme.
The boundaries have been further pushed in cases such as Apcoa Parking, where no connection to the UK existed and so the governing law of the debt was changed to English law by the requisite majority of lenders and this was then considered sufficient connection to the UK to allow the High Court to approve a Scheme of Arrangement.