Chapter 11: Applications and Advantages in European High Yield Restructurings

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1 Chapter 11: Applications and Advantages in European High Yield Restructurings from PwC's Deals Practice Business Recovery Services April 2015

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3 The European high-yield debt market has seen tremendous growth since the 2008 financial crisis. Prior to 2008, most European issuers with non-investment grade credit ratings obtained financing privately from banks rather than issue debt on public markets. That pattern has changed dramatically, however. More stringent capital requirements under Basel III have prompted European banks to reduce their corporate lending, forcing many lower-rated companies to borrow on public markets for the first time (1). As a result, the European high-yield market has grown from roughly 80 billion in 2008 to an expected 500 billion by the end of One key difference, when it comes to restructuring, between private bank financing and publically traded high-yield notes is in the standard number of holders a company needs to engage with. Publically traded highyield issues typically have hundreds, and in certain cases thousands, of holders. It can be difficult just to identify these holders, let alone organize, negotiate, and execute a transaction with them. This becomes particularly problematic if there is not a heavy concentration of large holders. Obtaining the necessary noteholder consents (100% standard consent thresholds for payment modifications out of court, or 75% consent thresholds in a U.K. scheme of arrangement) from widely held high-yield note issuances especially in situations where there are multiple issuances outstanding can be extremely difficult outside of a formal insolvency proceeding. It is therefore paramount that a company develop a potential backstop option for use in the event it cannot lock up the consents required to execute a consensual restructuring out of court, or through a light- touch process such as a U.K. scheme of arrangement. In an ideal world, there would be an international insolvency court to handle such debt restructurings. Short of that, European companies should consider a restructuring venue that best addresses their complex issues. In restructurings where the fulcrum security consists of high-yield notes, a U.S. process may provide the best outcome, regardless of a company s location. From a management perspective, the U.S. Chapter 11 process possesses four key qualities that, taken in combination, may likely trump any insolvency regime in the world for restructuring high-yield notes: Source: T. Rowe Price: 2015 Global Market Outlook Press Briefing High Yield Bonds European companies needing to restructure such debt face some significant challenges from this explosive growth in European high-yield issuances. Increasingly complex capital structures, combined with globalized operations, have posed new tests for companies and their restructuring professionals as they seek solutions that minimize disruption of the business while maximizing the benefits from the restructuring. Control Predictability Flexibility Effectiveness (1) Moringstar s Market Update: European High Yield Bonds Dated June 26, 2014 Business Recovery Services 2

4 Control One of the key attributes of a U.S. Chapter 11 proceeding is that a company s board of directors and management can maintain absolute control of the day-to-day operations of the business after an insolvency procedure commences. This feature, known as debtor in possession (DIP), constitutes a major difference between the United States and many key European jurisdictions that replace management with what is effectively an interim CEO (known as the administrator ), whose duty of care is primarily to protect the secured creditors. When management has trouble locking up the requisite amount of noteholders out of court, a U.S. Chapter 11 provides a means for negotiating a restructuring without losing control of the business. Predictability Today s U.S. restructuring market began to develop shortly after the introduction of the original issue highyield note in the 1980s, and U.S. companies and courts have now been actively restructuring high-yield note obligations for more than 25 years. These restructurings have generated a mountain of precedent decisions that provide significant guidance to both companies and their noteholders as to how a court may rule on key legal issues; indeed there is not a venue in the world that comes close to the United States for volume of high-yield restructurings and resulting case law. By allowing companies, noteholders, and restructuring advisors to handicap outcomes, these guideline decisions facilitate negotiated settlements, avoiding time-consuming and costly litigation while providing a level of predictability only U.S. courts can provide. Flexibility Unlike insolvency proceedings in many other jurisdictions, a U.S. Chapter 11 will allow companies to treat different types of unsecured creditors differently. The U.S. Bankruptcy Code does not state that similarly situated claims must be classified together and treated in the same manner. On the contrary, there is substantial U.S. case law stipulating that the mere inability to bind creditors to a restructuring plan is reason enough to separately classify their claims and treat them differently. This flexibility stands in stark contrast to many insolvency regimes, which require all similarly situated creditors to be treated in concert. It allows companies to provide local trade creditors with full payment while impairing only their unsecured financial obligations, if that results in the best outcome for the estate. Effectiveness When a European company is searching for a venue to restructure high-yield obligations outside its home country, it needs to make sure the venue affords both the time to negotiate a holistic restructuring and the authority to enforce the plan once it is negotiated. The United States is positioned to deliver on both these requirements through the debtor-friendly Chapter 11 provision that enables companies to raise financing postbankruptcy on a priming basis, combined with the United States unique position as a worldwide financial center. Three particular considerations are relevant here: Debtor-in-possession financing and other liquidity enhancement: Unlike many insolvency regimes, the U.S. Chapter 11 process permits a company to raise additional liquidity through DIP financing that primes unsecured creditors. DIP financing provides companies the liquidity needed to develop and negotiate a holistic restructuring. This financing is particularly effective when the fulcrum securities are unsecured obligations, such as in most high-yield debt restructurings. Furthermore, the U.S. Bankruptcy Code allows debtors to stop paying interest on unsecured obligations, further enhancing a company s liquidity during a restructuring of unsecured high-yield obligations. Worldwide automatic stays: Unlike in most insolvency regimes, the automatic stay, under U.S. law, has worldwide effectiveness. This comes from a provision in the U.S. Bankruptcy Code that defines a bankruptcy estate as comprised of all the debtor s property, Business Recovery Services 3

5 wherever located. However, in order for the court to effectively enforce this provision, a company s creditors must have some nexus with the United States. In the case of financial institutions, the likely holders of high-yield notes, it is probable that they have a U.S. connection given the United States place as a worldwide financial center. A creditor who violates the automatic stay in non-u.s. jurisdictions may be subject to the contempt powers of the U.S. Bankruptcy Court. Furthermore, if a number of creditors do not have a connection to the United States, a company can file for a complementary insolvency proceeding to enforce the stay in other territories. Plan enforcement: Like an automatic stay, a reorganization plan in any country, and the discharge received thereunder, may not bind foreign creditors who do not have a nexus with that jurisdiction. It is therefore important, when a debtor is choosing a venue, that its creditors have some connection with that venue. Again, given its position in worldwide financial markets, the United States is an ideal location to enforce reorganization plans involving high-yield obligations. Given the potential advantages of using a U.S. Chapter 11 as a backstop to a lighter-touch local proceeding, is it a realistic option for European corporates to seek jurisdiction in the United States? Fortunately, the threshold to obtain jurisdiction is very low. have at least two options for an insolvency venue, their home country and the United States. Conclusion European capital structures have become increasingly complex, since the financial crisis, with the explosive growth in the European high-yield debt market. However, the related European insolvency venues may not be the best locations for modifying these obligations should they be in the need of a restructuring that cannot be achieved out of court or in a lighter-touch procedure. In many cases, the United States will likely prove a superior venue due to management s ability to remain in control, the predictability of the courts based upon 25- plus years of case law, the flexibility provided by allowing companies to treat similarly situated creditors differently, and the effectiveness created by being able to obtain liquidity and discharge financial creditors on a worldwide basis. Given these advantages, the United States should be looked at as a potential backstop option in cases involving high-yield bond obligations. Business Recovery Services is part of the PwC s Deals Practice which helps corporate and financial sponsors achieve their growth initiatives from deal strategy through value capture. PwC s Deals professionals support clients on a wide range of transactions including domestic and cross-border acquisitions, divestitures and spin-offs, capital events such as IPOs and debt offerings, as well as bankruptcies and other types of business reorganizations. For more information, visit: A key provision of the U.S. Bankruptcy Code allows a bankruptcy proceeding to be filed by a person that resides or has a domicile, a place of business, or property in the United States. The last criterion, having property in the United States, has been interpreted as having a bank account in the country or even a retainer provided to a U.S. advisor. Thus it is relatively easy to qualify as a U.S. debtor, and numerous foreign filers have used the U.S. courts to restructure their obligations. European issuers of high-yield debt should therefore Business Recovery Services 4

6 Acknowledgements For a deeper discussion about PwC s Business Recovery Services, please contact: Perry Mandarino Principal, US Business Recovery Services Leader PwC s Deals Practice perry.mandarino@us.pwc.com Author: Keith Kaiser Director, Business Recovery Services PwC s Deals Practice keith.kaiser@us.pwc.com 2015 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.