Vol 12 (2015) - Issue 6

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DTEK: Changing the Governing Law of Bonds in Order to Restructure by a Scheme of Arrangement – the Importance of Being Effective

Introduction
In Re DTEK Finance BV, the High Court held that a change in the governing law of bonds issued by a Dutch company (DTEK Finance B.V. ('DTEK')), from New York law to English law, established a sufficient connection with England to allow the Court jurisdiction to sanction a connected scheme of arrangement. The fact that the change in governing law was made shortly prior to the sanction hearing and for the sole purpose of establishing a sufficient connection did not render the connection insufficient.

Background to the case
DTEK is part of a privately-owned corporate group which operates an energy business in the Ukraine. DTEK was responsible for raising finance within the
group and achieved this by raising funds on the capital markets before distributing them to the rest of the group.
The high yield bonds restructured in this case were issued in 2010 and comprised USD 200m of unsecured 9.5% senior notes, governed by New York law, due to mature in April 2015 (the '2015 Notes').
Recent destabilisation in the region and currency devaluation had adversely affected the group’s financial position and the group intended to undergo a restructuring in a bid to improve its economic situation. However, DTEK was faced with a more immediate problem in that it was unable to pay the amounts due on maturity of the 2015 Notes, a default under which would trigger cross-defaults under other agreements, and likely cause DTEK and some or all of its guarantors to enter into insolvency proceedings.

Restructuring plan
DTEK wished to extend the maturity of the 2015 Notes and launched an exchange offer and consent solicitation under which DTEK would acquire and cancel these notes, with noteholders receiving new 2018 notes for 80% of the par value of the old notes, plus 20% in cash by way of incentive.
The consent solicitation invited the noteholders to agree a change of governing law from New York to English, with the offer documents making clear that the change was intended to enable a scheme to be sanctioned in the event that the relevant threshold for the exchange offer was not met. The consent solicitation was structured so that noteholders which supported the exchange offer would also be treated as having approved the proposed scheme, which was launched at the same time.
The exchange offer threshold under the terms of the 2015 Notes’ indenture was 98% (by value) and, had this threshold been reached, the exchange offer would have been voluntarily effected without the need for the Court’s involvement. Only 91.1% (by value) of noteholders ultimately agreed to the offer, meaning DTEK had to rely on its contingency plan of implementing a scheme in order to restructure the notes.