2020 Pandemic Schemes Wipe Out €674M of Unsecured Debt; €4.16B Secured Debt Equitized; €690M New Super Senior Debt Added; Average Return of 33% to Scheme Creditors in Distressed Sale Comparator

So far during the Covid-19 pandemic, Reorg has seen debtors use the English law scheme of arrangement and the Part 26A Restructuring Plan in 11 large, non-consensual debt refinancings to:

• Wipe out about €674 million in senior unsecured debt;


• Equitize about €4.16 billion in secured debt; and


• Add €690 million in new super senior debt.

Two of the 11 debt refinancings were undertaken contemporaneously with company voluntary arrangements, or CVAs.

Debt obligations had their maturities extended by an average of 2.75 years. Where a distressed asset sale was used as a comparator, the average midpoint of expected return to secured creditors was 33% of their debt claim.

Reorg’s primer on how schemes and Part 26A plans can be used to implement refinancings on a non-consensual basis can be found HERE.

Where a tool was used to compromise debt, the debt was either extinguished or compromised as below:

*Swissport December scheme not yet sanctioned.

Each of the schemes or Part 26A plans used this year by debtors are summarized below:

Each of the schemes used during the pandemic, starting from March of this year, is summarized below.

The English High Court allowed Dutch retailer Hema to use the English law scheme of arrangement to deleverage and obtain new liquidity in August. The Dutch group incorporated an English company, Hema UK I Ltd., before commencing the process and the new company acceded as a co-issuer of Hema’s senior secured notes in July. The group also amended the governing law of its notes to English law from New York law with the consent of its noteholders, and was later successful in achieving chapter 15 recognition in the U.S. courts.

The group used a transfer scheme, combined with a Dutch enforcement process, to implement a financial restructuring to cut its gross debt from €830 million to €422 million, excluding its PIK notes. There was also a partial debt-for-equity swap of the SSNs.

The group had €600 million in senior secured notes, €150 million of senior unsecured notes and €54 million of PIK notes before the scheme.

The main terms of the restructuring were as follows:

• The existing Hema Group was transferred to a new holding structure, wholly owned by SSN holders, whose debt was subject to a partial debt-for-equity swap, under which half of the outstanding SSNs was discharged and the remainder stayed in place on amended terms;

• SSN holders received new €120 million of PIK notes and shares issued by the new holding company;

• SSN holders were given the chance to lend new money to the go-forward group by subscribing for new PPNs issued by Hema BV with a face value of €42 million;

• The group’s RCF remains in place with its maturity extended by four years; and

• The group’s senior unsecured notes and PIK notes received nothing.

The PIK notes, issued by Hema’s parent company and deeply subordinated, were left behind in the rump structure. The claims of the PIK noteholders against the parent are worthless following the conclusion of the restructuring as the parent will no longer have any material assets.

The group appointed PwC to provide a financial analysis of the likely returns that creditors would receive in the event of a distressed sale. PwC’s analysis showed that in a distressed sale, the RCF lenders and the creditors in respect of the hedging liabilities would be repaid in full and the SSNs would be repaid in part, with a likely return in the range of 36% to 58%. The senior notes and the PIK notes would receive a nil return.

Backstop fees, up to a total amount of €2.1 million, were payable and a lockup fee of 1% of holdings was payable to SSN holders who signed the lockup agreement.

A group of PIK noteholders attempted to block part of the restructuring in the Dutch court but was unsuccessful.

The Hema group was represented by De Brauw Blackstone Westbroek NV (with respect to Dutch law), Cravath Swaine & Moore (with respect to U.S. law) and Slaughter and May (with respect to English law), with Goldman Sachs acting as its financial advisor. The ad hoc group of SSN holders was represented by Kirkland & Ellis (with respect to English and U.S. law) and Loyens & Loeff (with respect to Dutch law), with Moelis as its financial advisor. The RCF lenders were advised by Latham & Watkins (with respect to English law) and Allen & Overy (with respect to Dutch and Belgian law) and Alvarez & Marsal was their financial advisor.

The Luxembourg packaging group used the scheme process to implement an amendment and extend of its first and second lien credit facilities by two years as well as amending asset sales and liquidity covenants. Flint Group’s revolving credit facility lenders had also, separate to the scheme, agreed to a consensual two-year extension of the facility, contingent on Flint’s scheme becoming effective.

The group was not facing any immediate risks of default or urgent liquidity crises, however, it was explained that the group would not be likely to be able to repay its credit facilities when they matured. In the group’s high-case scenario, as set out in its skeleton argument, a distressed sale would raise just 10% of face value for the first lien creditors and nil for the second lien creditors.

Both of the group’s credit agreements and the intercreditor agreement governing the relationship between the two tranches of lending had previously been governed by New York law, however they were changed to English law on June 2, such amendments requiring just a simple majority. This was sufficient, along with expert reports on foreign recognition, to allow the judge, Justice Snowden, to take jurisdiction. A consent fee of 0.5% or 0.25% of holdings (depending on when the lockup agreement was entered into by the creditor) was payable.

The amendments, which have now been sanctioned, are as follows:

First Lien Agreement

• The existing maturity date of the first lien term facilities was extended to Sept. 21, 2023;

• The margin in respect of the cash interest rate for the first lien term facilities was increased by 0.5% (such that the total cash interest rate is 0.5% greater than the existing interest rate);

• Additional “payment-in-kind” or “PIK” interest on the first lien term facilities were introduced at a rate of 0.75% per annum. Such PIK interest will be capitalized on a quarterly basis;

• A new exit fee of 2% was included, payable upon the occurrence of certain exit events;

• The mandatory prepayment regime with respect to asset disposals was amended, to oblige the group to use certain proceeds of asset disposals to discharge its debts under the credit agreements; and

• Certain of the covenants applicable to the first lien term facilities were amended.

Second Lien Agreement

• The existing maturity date of the second lien term facilities was extended to Sept. 21, 2024;

• The margin in respect of the cash interest rate for the second lien term facilities was reduced by 3% (such that the total cash interest rate is 3% greater than the existing interest rate);

• Additional “payment-in-kind” or “PIK” interest on the second lien term facilities was introduced at a rate of 5.75% per annum. Such PIK interest will be capitalized on a quarterly basis;

• A new exit fee of 2% was included, payable upon the occurrence of certain exit events;

• The mandatory prepayment regime with respect to asset disposals was amended to oblige the group to use certain proceeds of asset disposals to discharge its debts under the credit agreements; and

• Certain of the covenants applicable to the second lien term facilities were amended.

The scheme companies were represented by Daniel Bayfield QC of South Square (assisted by Ryan Perkins) and instructed by Milbank LLP.

Codere’s scheme of arrangement was sanctioned by Justice Falk in September and the group used the process to implement an amendment and extension of its existing $300 million 7.625% and €500 million 6.75% senior secured notes due 2021, as well as the provision of new super senior funding. The group obtained jurisdiction by incorporating an English company, which later acceded as a co-obligor to the group’s notes.

Challenging noteholder, Kyma Capital, which held 0.6% of the group’s notes, was of the view that the ad hoc committee of noteholders should vote in its own class, separate from non-committee noteholders. Kyma’s reasoning was that the committee had the benefit of special rights to provide lucrative interim funding and had received working fees which other noteholders had not. Kyma was unsuccessful in its challenge.

The judge accepted the company’s evidence that, absent the scheme, there would most likely be a formal insolvency. A Deloitte report estimated that, if the key operating companies entered into liquidation or a distressed sale, scheme creditors would achieve a return of between 0% and 4.1% (with the RCF holders recovering between 77.3% and 100%). A second possibility is that the key operating companies are able to continue trading for long enough to allow the completion of a distressed sale process achieving a return of between 30% and 72.2%.

The features of the restructuring implemented by the group’s scheme were as follows:

• The maturity of the existing notes was extended from Nov. 1 2021 to Nov. 1 2023.

• The interest rate on the existing notes was increased as follows:

• Existing euro notes: a mandatory 4.5% cash-pay coupon plus a further 5% cash-pay coupon (or a further 6.25% payment in-kind coupon at the option of Codere Finance).

• Existing dollar notes: a mandatory 4.5% cash-pay coupon plus a further 5.875% cash-pay coupon (or a further 7.125% payment-in-kind coupon at the option of Codere Finance).

• Each scheme creditor was entitled to lend up to €165 million of new money, on a pro rata basis as between the scheme creditors, by subscribing for new notes issued by Codere Finance. The new notes will accrue cash-pay interest at 10.75%.

Backstop fees, working fees, advisor fees and consent fees were all payable as part of the scheme. The backstop fee of 2.5% was payable on the new super senior notes, and the “work fee” was payable to members of an ad hoc committee and totaled 1% of the principal amount of the existing notes (totaling about €7.6 million). Further, there were working fees (anticipated to amount to approximately €6.75 million) and a consent fee, comprising a pro rata share of 0.5% of the principal amount of the existing notes to be paid to noteholders who acceded to the lockup by July 20 (an “early bird” fee) and a further 0.5% of the principal amount of the existing notes to be paid to noteholders who acceded by a later date.

The group, following successful sanction, obtained chapter 15 recognition in the New York Court. David Allison QC, instructed by Clifford Chance LLP, represented the company in the U.K.

The group’s scheme, which involved a debt-for-equity swap of its senior secured notes as well as a recapitalization, formed one part of a larger restructuring plan alongside an ongoing CVA. Before the scheme, the group had outstanding, £440 million senior secured notes due 2024, a £100 million super senior revolving credit facility due 2021 and a £65 million operating facility.

The group’s broad restructuring includes:

• A re-basing of the group’s U.K. leasehold obligations through a CVA of New Look Retailers Ltd. (NLRL), the group’s primary U.K. trading entity;

• A debt-for-equity swap of the SSNs. This reduced total senior debt from £550 million to approximately £100 million, and decreased interest costs;

• The exchange of the SSNs for a £40 million non-interest bearing subordinated shareholder loan maturing in 2029 and a 20% non-voting equity interest in the group on a fully-diluted basis;

• An amendment and extension of: i) the super senior RCF to June 2024, and ii) the super senior operating facilities to June 2023; and

• An injection of £40 million of new junior capital, which is being fully backstopped by certain SSN holders. The junior capital took the form of a PIK loan. The face value of the debt is £42 million, but will be issued at a 95% original issue discount.

In the event that the scheme and financial restructuring were not successful it was explained that:

1. The estimated market value of the group’s business ranged from £117 million to £378 million on a going-concern basis, assuming the group had no issues in regards to its liquidity;


2. On a high-level liquidation or distressed sale valuation based on an orderly wind-down scenario, the estimated market value of the group’s business ranged from £93.4 million to £175.9 million;


3. An illustrative application of estimated values in an orderly liquidation scenario under the security proceeds waterfall set out in the intercreditor agreement (where the RCF and the operating facilities of about £154.5 million rank super senior to, and so would recover ahead of, the SSNs) results in the following prospective estimated recoveries for scheme creditors:

No consent fee was payable under the terms of the scheme. The company was represented by Felicity Toube QC and Adam Al Attar of South Square, instructed by Latham Watkins.

U.K. retailer Matalan used a scheme to amend only its second lien notes. The first lien notes and the group’s RCF were not amended by the scheme.

The scheme process was used to amend the interest payment mechanism of the company’s second lien 2024 notes. The cash interest due under the second lien notes will be payable prior to maturity from time to time in return for: i) a 0.5% deferral fee; and ii) the right to PIK interest.

The second lien notes would in effect have a PIK toggle, under which interest would only be payable in cash where certain hurdles were passed. The scheme was part of a wider restructuring which also involves the waiver of RCF events of default and the provision of £50 million in new money.

The scheme was one to which the relevant comparator was not an imminent default, nor was there any other reason for an imminent insolvency comparator. Instead, it was the case that the scheme would benefit the creditors by providing liquidity to the group and mitigating future default risk and that this commercial benefit was the relevant comparator.

There were no jurisdictional issues which could prevent the scheme from progressing, given a number of creditors are domiciled in the U.K., and the fact that the borrower was also based in the U.K. chapter 15 proceedings were commenced following the scheme and recognition was granted.

Felicity Toube QC and Adam Al Attar of South Square Chambers (instructed by Clifford Chance LLP) represented the company.

Selecta used a scheme process to amend its senior secured notes with an aggregate principal amount of €1.24 billion plus 250 million Swiss francs. The scheme was used to equitize the existing notes and replace them with new debt instruments with a €588 million lower principal. The group had hired BDO as independent financial advisor who estimated that on a discounted-cash-flow basis, if there was an accelerated distressed sales process of the group’s assets and business, the noteholders would receive between 44.9% and 56.3%.

The company considered an accelerated sales process as more likely than a liquidation if the scheme was not passed. It was explained at the group’s court hearings that recovery for noteholders would be approximately 66%, if the scheme passed, plus benefits occurring from the issuance of preference shares.

The 81.1% of noteholders who had signed a lockup agreement would be each entitled to a 0.25% lockup fee payable on completion of the restructuring. The ad hoc group of noteholders would also receive working fees, which were paid by the company. The group’s noteholders had consented to amendments to the notes prior to the scheme, which changed their governing law to English law, to allow for the English scheme process to be used and also incorporated Selecta Finance U.K. as co-issuer of the SSNs.

The existing SSNs are the only part of the group’s finance structure that were affected by the scheme itself. The RCF and the liquidity facility will be dealt with as part of the wider restructuring.

The key terms of the group’s scheme are as follows:

• In exchange for each scheme creditor releasing 100% of its SSNs (including any accrued but unpaid interest), each scheme creditor will receive:
  
  
  
  • new senior secured, first lien notes with a maturity date of April 1 2026;
  
  
  • new senior secured, second lien notes with a maturity date of July 1 2026; and
  
  
  • preference shares issued by Selecta Group FinCo SA.
  
  
  
  


• A newly incorporated limited liability company incorporated in Luxembourg, which will be inserted as a new intermediate holding company of the group. The Class A preference shares will bear a dividend rate of 12% per annum with a redemption date of Oct. 1 2026.

The new first lien notes bore cash interest of 3.5% plus capitalized interest of 4.5% per annum from the issue date until Jan. 2, 2023, and cash interest of 8% thereafter.

The new second lien notes bore capitalized interest of 10% per annum from the issue date until Jan. 2, 2023 and, at the parent’s election, capitalized interest of 10% or cash interest of 9.25% per annum thereafter.

Daniel Bayfield QC and Ryan Perkins, instructed by Kirkland & Ellis, represented the company.

KCA Deutag’s scheme saw $1.4 billion of debt converted to equity and a reinstatement of $500 million senior secured notes. The equitized creditors received 100% of KCA’s new equity, with existing shareholders receiving equity warrants in return for their support of the transaction.

The group used the tool to implement its financial restructuring, which saw the debt burden fall to $510 million and leverage eased to 1.4x from the then 6.3x.

On July 31, the oil and gas service company announced an agreement with 51% of the group’s 7.25% 2021 SSN holders, 82.7% of the 9.875% 2022 SSN holders, 73.6% of the 9.625% 2023 SSN holders and lenders holding 54.3% of the total commitments under the credit agreement originally dated May 16, 2014.

The ad hoc committee included Avenue, Baring, Sculptor, Amundi, D.E. Shaw, Farallon, Goldman Sachs, ELQ Investors, PIMCO and each original participating creditor that was a term loan lender or a noteholder and each original participating creditor that entered into the standstill agreement. The company was advised by Houlihan Lokey and the ad hoc group was advised by Moelis and Weil Gotshal & Manges. RCF advisors are Linklaters and FTI Consulting.

The major existing shareholders of the group had also confirmed their support for the proposed financial restructuring. The scheme company was a group guarantor incorporated in England. Prior to the scheme, the group had amended the governing law of its debt documentation from New York to English law.

Deloitte prepared an estimated enterprise value on a cash-free and debt-free basis in the range of $1.2 billion to $1.5 billion. The estimated return to scheme creditors was between 69.7% (based on day-one equity value) and 100% or higher, based on the potential for an increase in the equity value.

David Allison QC and Adam Al-Attar represented the company and were instructed by Allen & Overy.

June Scheme

The Swiss ground-handling group used a scheme in June to amend the terms of its credit and intercreditor agreements to introduce new super senior debt, as reported.

The credit agreement and intercreditor required unanimity to be amended to allow for the incurrence of the super senior debt. The amendments were implemented using the scheme process which required 75% by value of creditors to vote in favor of it, therefore bypassing the requirement for unanimity.

The group’s senior secured noteholders were not scheme creditors as Swissport has already received the required consent from a majority of them to incur up to €380 million in new super senior debt after its consent solicitation. The SUNs rights are not affected by the scheme of arrangement. The SUNs later contested the effect of the scheme, filing a petition in the New York Court.

The scheme company was not a borrower under either the amended intercreditor agreement or the credit agreements, but was a borrower and was incorporated in England.

Felicity Toube QC appeared on behalf of the ad hoc group of creditors, supporting the scheme and Daniel Bayfield QC appeared on behalf of the company.

December Scheme

The group’s second scheme is ongoing, with the convening hearing being held on Nov. 10. The main purpose of the scheme is to implement a debt-for-equity swap with the scheme creditor. In return for releasing their existing claims, scheme creditors will receive 97.5% of the share capital of the new topco.

The group will convert €1.65 billion of debt to equity and €250 million of senior unsecured debt will be extinguished. A new €500 million long-term debt facility with potential of up to €100 million of senior secured debt to be reinstated. Swissport has also finalized the €300 million additional super senior interim facility introduced in June, which will be replaced by the €500 million long-term debt facility.

One SUN creditor, a debt hedge fund called Credit Opportunity Fund managed by Northlight, has challenged an amendment to the intercreditor agreement under Swissport’s June scheme of arrangement. The June scheme was used to allow the incurrence of a super senior facility.

Grant Thornton considered that the shares to be allocated to the scheme creditors will have a day-one value in the range of €565.5 million to €760.5 million. On the basis, the shares in the topco to be received by the scheme creditors have a value in the range of 54.4% to 40.4% of the scheme liabilities.

As part of the wider restructuring, scheme creditors are entitled to advance new money under a new €500 million term loan facility that will be used to refinance the super senior facility, pay the costs of the restructuring and provide working capital to the group. The new term loan is divided into two tranches, of which tranche A will represent at least 88% of the facility.

The aggregate fee payable to the ad hoc group is 3.9%. This includes those fees associated with the super senior facility, which has already been entered into and incurred.

Daniel Bayfield QC and Ryan Perkins represented the company, instructed by White & Case. David Alexander QC represented the SUN holders, instructed by Skadden. Felicity Toube QC represented the ad hoc group and was instructed by Latham & Watkins.

The group used a Part 26A restructuring plan to cut its total debt to implement an equitization of its existing senior secured noteholders. The group’s £200 million senior unsecured debt was completely wiped out.

The value of the group’s business as a going concern was presented to the court to be between £325 million and £425 million. The plan was dependent on a successful CVA.

Financial advisor Lazard undertook a sale process to see if there was any alternative bidder to provide a better outcome to creditors than the plan. The group’s skeleton argument set out that it received one indicative offer, two indicative valuations and two verbal expressions of interest by the end of the first phase of the sale process on Aug. 27. The range of the indicative valuations received was between £125 million and £400 million.

The transaction saw total debt decline to £319 million from £735 million. The existing SSNs were offered the opportunity to participate pro rata to their holdings in a £130 million facility in exchange for 35% of the equity post-reorganization. The new facility features a £14 million backstop fee and will be split into three tranches, one of which can be used in the event that the £70 million super senior facility requires refinancing.

The SUNs were to be converted into 1% of the post-reorganization equity, subject to the requisite majority of noteholders supporting the transaction. Existing shareholders supported the transaction and received 1% of the post-reorganization equity.

The deal included the sale of the group’s operations in China to a Hony SPV after the signing of a lockup agreement.

David Allison QC of South Square, instructed by Kirkland & Ellis, represented Pizza Express. Felicity Toube QC of South Square, instructed by Latham & Watkins, advised the ad hoc group of creditors, who supported the scheme.

Virgin Atlantic was the first debtor to use a Part 26A restructuring plan to effect its restructuring. The company used the Part 26A restructuring plan to implement certain arrangements that form part of a broader recapitalization plan worth about £1.2 billion over the next 18 months.

About £370 million of new money was being provided by: i) a £200 million loan from the company’s Virgin shareholders, ii) £170 million of new money from Davidson Kempner, a new third-party investor, and iii) a $30 million term loan from a further third party.

The restructuring plan was used to deliver the following amendments and arrangements in respect of the four creditor classes subject to the restructuring plan:

RCF Plan Creditors: Various amendments to the terms of the £237.5 million secured revolving credit facility were implemented. These include: i) the conversion of the RCF into a term loan facility; ii) an extension of the final maturity date to Jan. 17, 2026; iii) a change in the repayment schedule so that the currently drawn loans are repayable in three annual installments, starting on Jan. 17, 2024; iv) an increase in the margin payable on the outstanding balance by 1% p.a.; and v) amendments to the suite of covenants and events of default to enhance the position of the RCF plan creditors.

Operating Lessor Plan Creditors: The operating lessors subject to the plan will be entitled to select one of three options, namely: i) a rent deferral, ii) a rent deferral with a bullet repayment, or iii) a lease termination and a redelivery of the relevant aircraft.

Trade Plan Creditors: The contractual arrangements with trade creditors subject to the plan will be amended to, among other things, reduce and discharge all amounts owed to such creditors prior to July 14, 2020, by 20%, with the remainder to be repaid over the next 24 months.

Connected Party Plan Creditors: Each of the connected party plan creditors’ existing claims against the company, and any amounts becoming due and payable until the end of a particular period, will be capitalized and exchanged for preference shares issued by Virgin Atlantic Ltd.

Virgin Atlantic was advised by Allen & Overy, with Houlihan Lokey as financial advisors.

-- Shan Qureshi