2022 Restructuring Wrap: Activity Returns to Pre-Pandemic Levels, Shifts Toward Consensual Transactions; English Tools Still Feature Heavily; Latest Flurry of Advisor Appointments, Negative Economic Conditions Means Busy 2023 Outlook for LMEs

Those who expected to see a wave of hard financial restructurings in 2022 to rival the 2008/9 financial crisis appear to have got their timing wrong. The combination of cheap debt and fiscal support available since the Covid-19 pandemic took hold has meant that stressed debtors, on the whole, have been able to avoid restructurings or insolvency so far.

In 2022, stressed European companies used a variety of liability management exercises (LMEs) to address financial issues. Reorg has continued to see restructuring transactions being implemented both consensually and non-consensually over the last 12 months.

Data compiled by Reorg in our EMEA Restructuring Database, available on Credit Cloud (subscription required) paints a fascinating picture, hinting at what we might see in the financial restructuring arena in 2023. If you would like access to Credit Cloud please email sales@reorg.com.
   

• Restructuring activity, defined by the occurrence of LMEs, in 2022 has briefly returned to pre-pandemic levels, following a surge in 2020;
• During 2022, a higher proportion of restructuring transactions (63%) were implemented consensually compared with the previous two years;
• Restructuring transactions that introduced new money at a secured, senior secured or super senior secured level in 2022 were more likely (66%) than non new money deals to have been implemented using a restructuring tool, (non consensually);
• In 2022, five schemes of arrangement were commenced, with four of the five being sanctioned. Meanwhile, there were four Part 26A restructuring plans sanctioned so far. The English restructuring tools have been used to implement a variety of LME transactions and also deal with creditors subject to political sanctions. Additionally, there has been a shift in how creditors are paid working fees and backstop fees in schemes over the last two years; and
• There has been a large uptick in restructuring advisor appointments over the last three months. Reorg is currently monitoring 45 debtors who have appointed advisors but not yet completed a restructuring. Consumer discretionary, energy and industrial sectors feature most prevalently in this list and further details on each name can be found on our EMEA Special Situations Tracker, HERE.
   

Examining our observations, and wary of the previously mistimed predictions of increased restructuring activity, we have the following outlook for 2023:
 

• Following a busy Q4’22, we expect to see a continued increase in restructuring activity in Europe throughout 2023. The lull in activity which was present in early 2022 appears to have ended;
• We also expect to see a high percentage of consensual LME exercises over the coming months. We could see the occurrence of LME exercises match the higher levels seen in 2020 and 2021 - marking an increase from 2022;
• English law tools (being the scheme of arrangement and restructuring plan) will continue to feature heavily in non-consensual European restructurings, in spite of the recent proliferation of new domestic restructuring tool in other European countries;
• We expect to continue to see amend and extend, or A&E, activity in the short term, with a lot of borrowers facing maturity issues in the coming years. A&Es offer an opportunity for lenders to reprice and avoid hard restructurings which could cause credit investors to prematurely realize losses; and
• Clearly A&E activity cannot continue indefinitely, and eventually more debt-for-equity swaps or other LMEs will need to be used to address missized capital structures.

 
In 2022, Reorg saw 27 debtors close restructurings - which is less than the 36 in 2021 and less than half of the 61 which closed in 2020.

During 2019, before the Covid-19 pandemic, we also saw 27 restructurings close, meaning that restructuring activity in 2022 appears to be similar to that of 2019.

Included in the definition of restructuring are both consensual and non-consensual transactions which featured at least one of the following: (i) an exchange of existing debt for new debt with different terms, (ii) the provision of new money through a new instrument; (iii) the equitization of existing debt instruments, and (iv) the amendment and extension of the maturity date of existing debt instruments.

Each restructuring may feature one or more of the above transaction types. If we break down the restructuring transactions which closed in each year, some trends begin to appear:
 
We can make the following observations from the data:
 

• Restructuring activity in 2022, evaluated by the number of transactions which closed, appears to have returned to pre-pandemic levels;
• There was a clear rise in restructuring activity during 2020, when the pandemic began;
• Proportionally, the percentage of restructurings which featured new money was highest in 2020. Fifty-seven percent of restructurings featured new money in 2020, compared with 47% in 2021 and 44% in 2022;
• A&E transactions were used fairly consistently between 2020 and 2022. Thirty-three percent of restructurings in 2020 featured this LME, compared with 31% for 2021 and 26% for 2022. Pre-pandemic, in 2019, it was 30%; and
• Debt exchanges were used most extensively in 2021, with 39% of restructurings featuring a debt exchange transaction. This compares with 28% in 2020 and 29% in 2022.

The data-backed trends tally with market conditions during the relevant periods. As mentioned above, loose fiscal policy and low interest rates during 2020 and 2021 meant that new money was readily available. However, the playing field has now changed. Easy borrowing conditions appear to have disappeared due to a multitude of factors, including the Russian war in Ukraine and inflation. Therefore our expectation is to see fewer new money transactions, but more A&E and debt exchange LMEs, in 2023.
 
Of the 12 restructurings which featured new money in 2022, just two saw the money provided as equity, (Pierre et Vacances and Figeac Aero). The remainder of the debtors incurred new money ranking either secured, senior secured or super senior:
 

Company	Restructuring Tool/ Method	Court Involvement	Debt for Equity	Amend & Extend	New Money Ranking
Schur Flexibles Group	Consensual Agreement	Out of Court	Yes	No	Secured
Nordic Aviation Capital	Chapter 11	In Court	Yes	Yes	Super Senior Secured
Folli Follie Group	Consensual Agreement	In Court	Yes	No	Super Senior Secured
Orpea (June)	Conciliation	In Court	No	No	Super Senior Secured
ED&F Man	Part 26A Restructuring Plan	In Court	No	No	Super Senior Secured
WiZink	Consensual Agreement	Out of Court	Yes	Yes	Super Senior Secured
Lowen Play GmbH	Scheme of Arrangement	In Court	Yes	No	Senior Secured
Nostrum Oil & Gas	Scheme of Arrangement	In Court	Yes	No	Senior Secured
Smile Telecoms	Part 26A Restructuring Plan	In Court	No	Yes	Super Senior Secured

  
Of the debtors that incurred senior secured, super senior or secured new money during 2022 as part of a restructuring 67% also included a debt for equity transaction, while 33% included an amendment and extension of existing debt instruments.

Likewise, just a third of these restructurings which included new money were implemented fully consensually. The remainder were implemented using one of a variety of implementation tools. These tools are discussed in further detail below.
 
The method used for the implementation of any restructuring transaction is critical. Essentially, there are two approaches - a consensual process or a non-consensual one.

Consensual implementations involve amending the terms of existing debt instruments in adherence with the amendment (and waiver) provisions of the underlying debt documents. Amendments could require the consent of 90% or more of bondholders, where bonds are being amended, or could be up to 100% consent where the instrument being amended is a loan agreement.

There are some clear advantages for a debtor who is able to use a consensual implementation method for a restructuring. Consensual restructurings are faster, cheaper and have less execution risk as they are less likely to be challenged by dissenting creditors.

Often, however, the requisite consent hurdles for consensual restructurings cannot be met and a debtor must therefore use a non-consensual implementation tool. These tools often have lower requisite voting thresholds than the underlying debt instrument’s amendment thresholds. For example, the two English law tools - the scheme of arrangement and the restructuring plan - require the consent of just 75% of creditors in each voting class (subject to certain numerosity and fairness tests).

Following the EU Preventive Restructuring Framework of 2019, there has been a proliferation of restructuring tools in Europe. The Netherlands, Germany, France and Spain have all introduced their own new restructuring tools, some of which have begun to be used in restructurings (see Orpea and Pierre et Vacances).

Of the 27 restructurings that were completed in 2022, just 10 (about 37%) were implemented using a restructuring tool. The remaining 63% were implemented consensually.

Compared with 2020 and 2021, there has been a clear shift toward restructurings being implemented consensually in 2022. Fifty-one percent of the restructurings that Reorg covered in 2021 were implemented consensually, with 42% implemented in this manner in 2020.

This trend could be due to lenders being more willing to enter into discussions with borrowers and work towards a resolution. Alternatively, the types of lenders now involved in distressed situations may be more used to working with borrowers to reach consensual solutions.
 
English law schemes of arrangement and restructuring plans continue to feature heavily in restructurings. In 2022, five schemes were commenced, of which four were sanctioned. There have been four Part 26A restructuring plans commenced and sanctioned in 2022.

A brief summary of each tool’s use can be found below. Vue’s scheme is also included.

Vue Scheme
Intel	Relevant Documents	Facts	Notable Features	Class Features	Sanction Date
Scheme	Practice Statement Letter; Explanatory Statement; Convening Skeleton Argument	The cinema chain had failed to recover from the effect of the Covid-19 pandemic. The company sought a scheme to amend the SFA to permit the insurance of £75 million in additional super senior debt. The financing would allow the company to pursue a wider restructuring via a debt for equity swap that was not part of the proposed scheme. The scheme was abandoned following a fully consensual deal.	The scheme would be coupled with a debt-for-equity swap undertaken using a Dutch share pledge enforcement, which requires approval from the Dutch court. After this the company intends to make an application to the English courts to appoint administrators over the company and use a pre-pack administration structure to effect a transfer of the group’s assets to a Newco.	A single class of creditors.	N/A

 

Lowen Play Scheme
Intel	Relevant Documents	Facts	Notable Features	Class Features	Sanction Date
Scheme	Lockup Agreement; Convening Skeleton; Sanction Skeleton; Convening Judgment	The group’s €350 million 2022 senior secured notes reinstated in €220 million 2025 New SSNs and €130 million of holdco PIK notes. The New SSNs include a 4% original issue discount from face value. Bondholders provided €30 million of new money in the form of SSNs and will take 95% equity in the group. The group’s €40 million senior secured RCF will be repaid.	Prior to using the English law scheme process, the group used a consent solicitation to amend the governing law of the 2022 notes indenture to English law, which was approved by 99.55% of noteholders.It was the looming maturity of the group’s existing 2022 notes that affected its ability to continue as a going concern. The group was unsuccessful in attempting to refinance the 2022 notes during the summer of 2021.	The company proposed a single class comprising its senior secured noteholders.	N/A

 

Amigo Scheme
Intel	Relevant Documents	Facts	Notable Features	Class Features	Sanction Date
Scheme	Practice Statement Letter; Sanction Skeleton; Convening Bundle (including witness statements) Convening Skeleton	Amigo proposed its second scheme of arrangement to compromise historic liabilities to customers for mis-selling loans. The previous scheme was denied on the basis that (i) creditors were not appropriately informed about why their rights were being compromised, (ii) the relevant alternative was not immediate insolvency, and (iii) shareholders retained their stake.	The second scheme proposed a dual structure. A new business scheme and a wind-down scheme in case the first option was not approved by creditors or the court.	A single class of creditors being the redress creditors was convened.	May 30, 2022

 

Haya Real Estate Scheme
Intel	Relevant Documents	Facts	Notable Features	Class Features	Sanction Date
Scheme	Sanction Skeleton Argument; Convening Skeleton	Facing a refinancing wall for more than €400 million of bonds, Spanish real estate company Haya proposed that existing noteholders would be redeemed in part, and the balance be released. The scheme creditors received  a package comprising newly issued notes equal to the balance of the existing notes that were released; and (ii) shares in a new holding company of the group representing 27.5% of the equity on a fully-diluted basis. The new notes carry an extended maturity.	The judge was satisfied that the last-minute alterations to the scheme documents appended to the explanatory statement were not a “blot” on the scheme despite being “unusually large” in number.	A single class of senior secured noteholders was convened.	May 31, 2022

 

Nostrum Oil & Gas
Intel	Relevant Documents	Facts	Notable Features	Class Features	Sanction Date
Scheme	Convening Skeleton;  Sanction Skeleton	The company proposed a debt for equity swap. The existing debt comprising $1.125 billion of unsecured notes will be swapped for a new $250 million senior secured bond and a $300 million senior unsecured note with the remaining debt equitized, leaving lenders with 88.89% of the share capital of the company.	Use of a “scheme standstill” structure to cater for uncertainty arising from the need to obtain EU and U.S. licenses before engaging with sanctioned entities. The standstill period lasts for six months during which creditors will not be able to enforce against the scheme company.A trust structure was created to allow the company to deal with dividends or other payments due to sanctioned creditors.	Single class of unsecured noteholders	Aug. 26, 2022

 

Hong Kong Airlines RP
Intel	Relevant Documents	Facts	Notable Features	Class Features	Sanction Date
Plan	Company Skeleton	HK Airlines had proposed an inter-conditional U.K. restructuring plan and Hong Kong scheme of arrangement to restructure 30.069 billion Hong Kong dollars ($3.863 billion) of debt and avoid being wound up by its lessor creditors. The company has proposed three classes of affected plan creditors comprising (i) unsecured creditors, (ii) “critical” aircraft lessors and lenders and (iii) perpetual noteholders.	The mix of governing law raised the issue as to whether there was a sufficient connection with England and Wales. Issues pertaining to the Cape Town Convention were not required to be decided due to unanimity of voting.	Three classes of creditor	Dec. 9, 2022

 

ED&F Man RP
Intel	Relevant Documents	Facts	Notable Features	Class Features	Sanction Date
Plan	Company Convening Skeleton; CoCom Convening Skeleton; Company Sanction Skeleton; Co-Com Sanction Skeleton.	The commodity trading group sought to avoid breaking minimum cash covenants under its debt facilities. The group’s proposed restructuring involved raising a new $300 million trade finance credit facility, amending existing debt and introducing a new guarantee and security package.	The plan used the incentive of “elevation rights” to induce existing plan creditors to participate in the provision of new super senior money. Cross-class cramdown applied.	The plan company proposed five classes of creditor and two classes of shareholder	March 23, 2022

 

Smile Telecoms RP
Intel	Relevant Documents	Facts	Notable Features	Class Features	Sanction Date
Plan	Company Convening Skeleton; Senior Lenders Convening Skeleton Company Sanction Skeleton	The African telecoms provider appeared for its second Part 26A Restructuring Plan in two years. The purpose of the plan was to provide further super senior funding allowing the company to complete a controlled sales process and hand the equity in the company to the super senior creditor. Senior creditors were wiped out except for an ex gratia payment of $10 million.	The plan is the first ever to include an application to exclude a creditor class from voting on the proposal under section 901C(4) of the Companies Act 2006. A section 901C(4) application, which is heard at the convening stage of the plan, excludes “out of the money” creditors from voting on the plan at all and removes the need to cramdown creditors. It is clear from Smile that section 901C(4) will only be of use in “non-marginal” cases where the valuation evidence is clear.	Regarding creditor challenges, “Shouting from the sidelines” (in the words of Snowden LJ) is not an adequate way to express dissent. Creditors must participate in court and not rely on the scheme company or court to assert their rights on their behalf.Single class of creditors.	March 30, 2022

 

Houst Limited RP
Intel	Relevant Documents	Facts	Notable Features	Class Features	Sanction Date
Plan	Restructuring Plan	The group proposed a simple compromise to debts owed to its two “in the money” creditors and an injection of new money by shareholders.	Houst’s plan is an example of quasi “cram-up,” where cross-class cramdown is used by junior creditors to impose a proposal on more senior creditors. Here, although the crammed-down party, HMRC, would technically rank behind the senior secured creditor (Clydesdale Bank) in an administration, HMRC would have received a higher financial dividend. The judgment is significant for middle market companies which may have previously considered the financial costs of a restructuring plan to be too high.	The group proposed six  plan groups  of creditors and members.	July 22, 2022

 
Reorg has been monitoring the use of fees associated with schemes of arrangement and restructuring plans. Essentially, these are fees payable to creditor groups which are involved with the restructuring.

Typically, the fees payable in schemes or plans fall into one of three broad categories:
 

• Lockup/Consent Fees: These are traditionally offered to all creditors in a class in consideration for them agreeing to vote in favor of the scheme or plan by an agreed date.

• Working Fees: Distinct from advisor fees which are payable to legal or financial advisors, working fees are generally payable to certain creditors (usually an ad hoc group, or AHG, or other committee) in return for the disbursements made and time spent by the creditor group in negotiating the scheme or plan. They tend to be payable regardless of whether the restructuring is sanctioned.

• Backstop/Underwriting Fees: These are paid to certain lenders in consideration for their commitment to provide a backstopping service for the provision of certain new money. Usually, members of the AHG provide this service.
   

Looking at the data that Reorg has compiled, we conclude that with respect to restructuring plans:
 

• “Consent fees” have only featured in one restructuring plan out of the eight that have been sanctioned since the legislation was enacted.
• There has only been one plan which has featured “backstop fees” and, at 5%, this was priced similarly to those “backstop fees” in recent schemes.
• There have been no “working fees” in any of the sanctioned restructuring plans that Reorg has seen.

With respect to schemes of arrangement, the last two years have seen a dramatic decrease in “working fees”. Further, “backstop” or “underwriting” fees have increased in quantum, during the same period.

A summary of the scheme fees from the last two years is below:

Scheme Company Name	Scheme Sanction Date	Lockup/ Consent Fee	AHG Working Fee	Backstop/ Underwriting Fee	Other Fees
Swissport	June 24, 2020	N/A	AHG fees not disclosed	Underwriting fee not disclosed	N/A
Matalan	July 27, 2020	N/A	N/A	0.5% Underwriting fee for single creditor	0.5% 1L consent solicitation (£1.74M), 0.5% 2L deferral fee
Flint Group	July 30, 2020	0.5% (early bird) or 0.25% consent fee	N/A	N/A	N/A
Hema BV	Aug. 24, 2020	1% lockup fee	N/A	N/A	N/A
Codere Finance	Oct. 6, 2020	1% (early bird) or 0.5% consent fee	1% work fee (€7.6M)	2.5% backstop fee	3% discount on interim notes, 2% enhanced coupon on interim notes, €6.75M advisor fees
KCA Deutag	Nov. 5, 2020	0.15% lockup fee	1.75% AHG work fee, 1.75% RCF work fee	N/A	N/A
Swissport (Second Scheme)	Dec. 10, 2020	0.25% consent fee	N/A	0.25% backstop fee	N/A
Petra Diamonds	Jan. 12, 2021	1% lockup fee (paid in additional entitlements)	N/A	5% backstop fee	1% restricted period fee, reasonable costs of advisors
PGS ASA	Feb. 2, 2021	0.25% (early bird) consent fee	0.39%, $1.2M AHG work fee	N/A	0.4% amendment fee, 1% additional fee, costs of advisors
OHL	Feb. 5, 2021	2% lockup fee	N/A	Additional shares for backstop providers	N/A
Lowen Play	May 5, 2022	0.25% consent fee	N/A	4% backstop fee	All advisors' fees paid
Haya Real Estate	May 31, 2022	0.5% consent fee	0.3%, €1.25M work fee	N/A	0.25% Consent Fee

A summary of the plan fees from the last two years is below:
 

Plan Company Name	Plan Sanction Date	Lockup/ Consent Fee	AHG Working Fee	Backstop Fee	Other Fees
Virgin Atlantic Airways	Sept. 2, 2020	N/A	N/A	N/A	Reasonable costs of advisors
Pizza Express	Oct. 29, 2020	N/A	N/A	5% backstop fee for AHG	Reasonable costs of advisors
DeepOcean	Jan. 28, 2021	N/A	N/A	N/A	N/A
Gategroup	March 26, 2021	N/A	N/A	N/A	Reasonable costs of advisors
Virgin Active Ltd	April 29, 2021	N/A	N/A	N/A	Challenging creditors fees: No final judgment provided.
Smile Telecoms	March 10, 2022	n/a (no lockup)	N/A	N/A	Reasonable costs of advisors
ED&F Man	March 23, 2022	0.25% (early bird) consent fee	N/A	N/A	N/A

 
Reorg’s EMEA Restructuring Database currently lists 45 debtors who are in an ongoing restructuring. This means that either the debtor or a group of creditors has appointed advisors, but there has been no final restructuring transaction completed yet.

Looking at these debtors by Global Industry Classification Standard: consumer discretionary, energy and industrial sectors lead.
 

-Shan Qureshi