Leveraged Finance

Coverage of issuances, leveraged financing and recapitalizations across the US, EMEA and Asia from leveraged finance and legal experts. Our coverage includes news, data and analysis on leveraged loans, the leveraged loan and finance market as a whole, leveraged finance transactions and more.

European Leveraged Loan Primary Market Trends | 9/29/2021
Wed Sep 29, 2021 8:08 pm Financial Restructuring  Leveraged Finance

After the summer hiatus, the European leveraged loan primary market has come back to life with a steady flow of deals. 2021 has been a strong year so far and, with a strong pipeline in place, the record-breaking pace is looking likely to continue through to the year end.

With more and more bank/bond structures, the convergence of bank and bond covenants has continued apace. Strong demand from investors has emboldened borrowers to push for, and in most cases achieve, increasing flexibility under their credit documentation. Although we have seen some successful pushback from investors resulting in terms being flexed and, in some cases, deals being pulled.

Some of the notable trends that we have seen emerging in the market this year have included the ability to use capacity under one covenant to create capacity under other covenants, upward-only adjustments to grower baskets, autocure features for financial covenants, testing flexibility for ratios and baskets and extensive EBITDA adjustments. The combined effect of these innovations is to muddy the waters for investors trying to determine the capacity for debt incurrence and value leakage. Our European leveraged loan primary market analysis, combining input from our legal and financial analysts, enables us to guide our clients through this minefield.

It will be interesting to see how this increased flexibility will be used by borrowers when the economic cycle turns. Will it allow them to be more nimble in sidestepping potential pitfalls and avoid defaults, or will it tie the hands of investors and result in greater value destruction and reduced recoveries?

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Americas Podcast: Johnson & Johnson “Texas Two Step” and Yak Access Creditors Organize
Mon Sep 20, 2021 7:37 pm Distressed Debt  High Yield Bonds  Leveraged Finance

Featuring a discussion on Johnson & Johnson’s response to a group of talc plaintiffs’ motion for an injunction from a New Jersey state court preventing the company from pursuing a “Texas two-step” chapter 11 strategy to shed its talc liabilities, as well as the company Yak Access, whose creditors have began to organize, and Cornerstone Chemical, our Americas Core Credit podcast dives deep into the most prominent distressed debt, performing credit and high-yield news from the week. 

On Johnson & Johnson, the plaintiffs alleged that a Texas divisional merger that allocates all the companies talc liabilities to a spinoff without sufficient assets to meet those liabilities would be avoidable as a fraudulent transfer and therefore should be enjoined before it occurs. Johnson & Johnson argued that if this were true, the plaintiffs would have a sufficient remedy of law, an action to avoid the merger should the defendants ever actually transfer assets citing Judge Lori Silverstein’s August 26 decision denying Imerys talcs request for a similar injunction in its chapter 11 cases. 

Discussing Yak Access, an ad hoc group of first lien lenders organized with Akin Gump amid rising concerns about the company’s liquidity and business outlook after a disappointing second quarter according to sources. The company’s second lien lenders also reportedly organized with Ropes and Gray. Members of the ad hoc first lien lender group includes Seabam, KKR and Soundpoint.

Listen to the full episode below to hear our detailed discussion on Johnson & Johnson, Yak Access, Cornerstone Chemical and more.  


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Spanish Direct Lending Analysis, Opportunity to Expand
Wed Sep 8, 2021 4:25 pm Distressed Debt  Leveraged Finance

Spain is an increasingly attractive market for private debt investors. As the country’s banking sector faces another wave of mergers, direct lenders will have the opportunity to expand on the back of the banks’ reduced capacity to cover the mid-market space. As the economy recovers from Covid, we expect the number of Spanish direct lending deals in 2021 to bounce back to 2019 levels, or even higher. Pemberton opened its Madrid office in 2020 to support all our local clients, and Spain is an important part of our strategy to build pan-European portfolios for investors.

Spain is the fifth-largest economy in Europe and the fourth-largest in the Eurozone. Like most of Western Europe, it has been badly affected by the Covid pandemic, and the growth of Spanish direct lending stalled in 1H 2020 – though only temporarily in our view.

Due to the impact of Covid the Spanish economy contracted -10.8% in 2020. The extent of the pandemic’s impact was partly structural. For example, the tourist sector, a prime victim of anti-Covid measures everywhere, represented about 12% of the pre-pandemic economy. However, the Spanish Government is forecasting 6.8% growth for 2021, which would represent a strong rebound.

However, the political situation over the past few years has not deterred investors from putting their money into investment opportunities in the country, both on the debt and equity side. Part of the reason for this is that Spanish businesses post Global Financial Crisis (GFC) have focused on diversifying their footprint, particularly from a geographical standpoint, thus reducing their reliance on the Spanish economy.

As a result, PE investment in Spain has progressively increased up to its all-time high in 2019 with c. €8.5 billion invested, and international funds representing c. 75-80% of that volume each year. Whilst in 2020, the investment of PE funds in Spain fell by 41.8% to €6.3 billion, in line with the global decline, 1H of 2021 has shown a strong bounce back with €2.1 billion invested, +27% yoy growth. 

According to Deloitte’s Alternative Lender Deal Tracker report, Spain recorded 137 direct lending transactions in the last 33 quarters – since January 2012. Although that figure seems small when compared to the 978 transactions recorded in the UK (the cradle of direct lending in Europe), it puts Spain in fifth position, only surpassed by France, Germany and Benelux. Spanish direct lending is a trend that has just begun and which all experts believe will grow exponentially in the future.

Against this mixed backdrop, the level of Spanish direct lending activity during 2020 was – unsurprisingly – lower than in 2019 with 21 deals closed in 2020 compared with 36 in 2019. This gap is mainly explained by the low activity seen in H1, when just four deals were closed as most of the sale or refinancing processes were put on hold given the uncertainty the lockdown brought. However, from June onwards, once lockdown restrictions were lifted, M&A activity resumed, this time very much focused on resilient sectors that coped well through the lockdown or even benefitted from the uncertain environment.

Despite the short-term Covid-driven problems, we take a positive view of the prospects for Spanish direct lending in 2021 and beyond. There will be fewer bank players in the market, creating opportunities for direct lenders to expand their market share from the current 20%.

Spain has traditionally had a strong dependence on bank financing. The consolidation of the Spanish banking system that followed the GFC of 2007-2010 reduced the number of banks and savings banks from 55 in 2009 to just 12 by 2021. After the wave of mergers between 2009 and 2014, in the last six years there were only two deals of note. However, the Spanish banking sector is clearly entering another period of consolidation that is forecast to reduce the number of banks to around five large institutions, plus a few smaller/regional entities. CaixaBank & Bankia and Unicaja & Liberbank have agreed to join forces in 2021, and analysts expect Sabadell to find eventually a partner.

In stark contrast to the situation during the GFC, Spain’s banks now have good levels of liquidity and solvency, but a sustained period of low interest margins has reduced their profitability. These new mergers should help the sector to make the necessary operational savings, but are likely to bring concentration issues, allowing direct lenders to seize the initiative. Bank mergers typically result in lower credit limits for the merged entity, so a reduction in the number of institutions will – on past experience – also mean a reduced size for individual tickets. Banks are also reported to be more cautious about club deals and concerned about their ability to get out of a deal if something goes wrong.

All this will help those direct lenders who can step in and take up the slack. Given that they already have the advantages of flexibility, bigger single tickets and speed of decision-making, continued medium-term growth for the sector looks secure.

So in terms of overall activity – and given that many of the sale or refinancing processes originally expected to take place in 2020 have been delayed to 2021 – we expect Spanish direct  lending deals in 2021 to return to 2019 levels, with c.30 deals in total. Looking further ahead, we think that the 20% of the lending market currently taken by direct lenders could grow to 30-40% by 2025.

The speed and lower execution risk – combined with our capacity to provide tailor-made financings – have been highly valued by our clients. As we continue to reinforce our presence in Spain, we look forward to playing a part in growing the region’s private debt market, allowing it to become a real financing alternative for expanding local mid-market companies.

Guest post written by Leticia Ruenes, Managing Director, Spain at Pemberton.

To learn more about the Spanish direct lending as well as news, commentary and analysis on issues affecting the high-yield, stressed and distressed markets in EMEA visit our EMEA Core Credit product page.


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Leveraged loan lender protections weakening continues…

Written by Peter Washkowitz, Senior Director and Head of Americas Covenants ||

The dog days of summer did not slow down activity in the bankruptcy and restructuring world.

In the United States, August came to a close with a mix of real estate, healthcare and consumer services companies filing chapter 11, including Tix Corp., Brown Industries, Regional Housing & Community Services Corp., Advanced Tissue and New England Sports Village.

After the reduction of revolving commitments under its asset-backed lending facility in the wake of a pipeline leak at the Inglewood Oil Field, E&B Natural Resources may seek a replacement for the facility, while restructuring negotiations between Glass Mountain Pipline’s major stockholders have recently begun to gain momentum.

Meanwhile, with Ion Geophyiscal’s $7 million of 2021 notes maturing on Dec. 15, market participants continue to speculate on how the company will fund the notes’ repayment. Reorg’s Americas Covenants team has provided an updated tear sheet analysis of the credit, which is linked to below.

As fall is fast approaching, the prevalence of weak lender protections in the leveraged loan market appears to be running full steam ahead. Throughout the summer months, new credit agreements for publicly owned sponsored companies continue to include loose covenants and aggressive terms that provide significant flexibility to incur additional first lien debt, transfer assets to unrestricted subsidiaries and pay dividends. (more…)

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Middle Market Distressed Debt; Americas & EMEA

Providing subscribers with intelligence, analysis and news on middle market distressed debt and high-yield situations, our EMEA and Americas reporters and analysts work tirelessly to stay up to speed on situations involving up to €250 million or $500 million in funded debt. Our workflow tools enable financial and legal professionals to perform in-depth searches on companies of interest, dockets, new filings and proprietary Reorg content. In addition, insightful coverage from our uniquely structured team combines reporting with legal and financial analysis offering a holistic perspective on the information you need to stay competitive in the middle market distressed debt and high-yield space.

Our Americas Middle Market and EMEA Middle Market product offerings include a range of content and capabilities for investment managers, law firms, investment banks, professional services and corporations interested in middle market distressed debt and high-yield situations to use for their critical workflows. Stay current on breaking news and developing situations through full-text email alerts and push notifications, customize your flow of information by company, sector, case and more, and increase you and your team’s efficiency with our extensive databases and powerful search engine. Additionally, with a subscription to our Americas and EMEA Middle Market products you are able to connect with our team of legal and financial, middle market distressed debt and high-yield experts whenever questions arise requiring additional information or clarification about specific credits, companies or situations. 

Below are a few examples of the types of middle market distressed debt and high-yield intelligence you would receive access to as a Reorg subscriber:

Americas Middle Market

EMEA Middle Market

If you are interested in learning more about our middle market distressed debt and high-yield intelligence, analysis and news, feel free to request a trial here: 


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Loan Market Legislation and Regulation; All is Quiet(ish)

More than a half-year into the Biden administration and the new Congress, it is a good time to reflect on what’s been going on in Congress and among loan market legislation and regulation in the area of financial services. In a nutshell, not much has happened so far, something bad did not happen, and we can ruminate about what might happen over the coming months.

Unlike in the aftermath of the great financial crisis, banks and other financial services companies did very well through the pandemic (after a brief, but significant downturn).  Accordingly, Congress has not spent much of its scarce time focusing on financial services.  The hearings that were held mostly focused on Robinhood and the so-called “gamification” of the stock market, as well as on diversity, equity and inclusion and ESG.  On the regulatory side, the Biden team has been staffing up across the financial services agencies, most importantly for loan market legislation and regulation with the choice of Gary Gensler, who has a well-deserved reputation as an activist regulator, as Chair of the SEC. Importantly, the administration has not yet picked anyone to lead the OCC, the agency that regulates national banks; the choice will likely come from the progressive wing of the party.

The most significant development to impact the loan and CLO markets is something that didn’t happen.  Last year, federal regulatory agencies published a final rule that significantly revised the Dodd-Frank era Volcker Rule.  Under the previous rule, CLOs could only hold loans and cash equivalents.  Under the revised rule, they could also hold non-loan securities such as bonds.  The importance of this change is not just that it gives CLOs more optionality and diversification in their portfolios, but that it makes it easier for them to participate in restructurings in which non-loan securities are part of the package.  However, this revision was subject to voidance by a simple majority of Congress under the Congressional Review Act.  The good news is that this did not happen and the time for such voidance has passed.

The other major development in Congress was the recent introduction of a bill that would significantly limit the ability of bankruptcy courts to permit non-debtor third party releases in bankruptcy.  This bill was introduced at a House Judiciary Committee hearing focusing on alleged abuses of the bankruptcy process relating to Purdue Pharma, Boy Scouts of America and USA Gymnastics mass tort cases but, if passed, would have a profound impact on corporate bankruptcies, particularly those associated with private equity sponsors.  The LSTA will continue to watch this bill carefully given its importance.

So, what else do we expect in the coming months?  We do not anticipate that Congress to be super focused on the loan and CLO markets but do anticipate that Senator Warren will introduce a bill that seeks to reimpose risk retention requirements on CLO managers.  We also expect to see at least one Chapter 11 bankruptcy reform bill introduced that would favor other classes of creditors over senior secured lenders.  With very tight majorities in both the House and Senate, it will likely be difficult for these bills to get traction in the near term.  Nevertheless, given the downside, it is imprudent to be complacent.  On the regulatory side, we expect to see movement from the SEC on climate change disclosure for registered advisers and, potentially, proposed rules on disclosure for governance, diversity and political giving.  To stay tapped in to current political and advocacy issues affecting loan market legislation and regulation, sign up (for free) to the LSTA’s grassroots advocacy affiliate, the Business Loans Coalition.

Guest post written by Elliot Ganz, General Counsel and Co-head of Public Policy, LSTA

To learn more about loan market legislation and regulation as well as news, commentary and analysis on issues affecting the high-yield, stressed and distressed markets in North and South America visit our Americas Core Credit page.


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CCRC, Hospitals, Transportation and More – Americas Municipals

In terms of new coverage, our Americas Municipals coverage team initiated on a number of names, including three CCRC-related situations as well as a pair of related assisted living facilities, a Staten Island-based hospital, a Maryland transportation situation, a Kansas convention center and a Maryland-based student housing project. 

Lifespace Communities (Edgemere) (CCRC): Dallas-based continuing care retirement facility Edgemere is in default on its $107 million-plus bond debt and is in the process of negotiating a forbearance agreement with its bondholders, after retaining FTI Consulting and Sidley Austin as advisors. We’ve previously reported on Edgemere’s parent company, Lifespace Communities, which owns and operates 14 communities in seven states and is in the process of issuing Series 2021 bonds, which are expected to close on or about Aug. 25. Edgemere is separately financed, however, and is not a part of the obligated group on that new issuance or on Lifespace’s other issuances.

Asbury (CCRC): The owner of two CCRCs in Tennessee – Asbury Place Maryville and Asbury Place Kingsport – is operating well below its required debt service coverage ratio, and if it does not raise the ratio by Dec. 31, it will be in default on its $41 million of bond debt. Although Asbury managed to meet its debt service ratio covenant last year after operating below required levels for the first, second and third quarters of the year, it remains to be seen whether the two CCRCs will be able to recover from the fallout of the Covid-19 pandemic, which continues to “affect occupancy” resulting in a census for both facilities that is “lower than anticipated,” according to Asbury’s quarterly financials.

Santa Fe (CCRC): Two out of three continuing care retirement communities owned by Florida-based SantaFe Senior Living Inc. – The Terraces at Bonita Springs and East Ridge at Cutler Bay – continue to miss bond covenants and are in active negotiations with bondholders. Bonita Springs is operating under a forbearance agreement with its bondholders that expires in October and has continued to miss its bond covenants. East Ridge has no such forbearance agreement in place and is also missing its bond covenants, but management says it will begin negotiations on an agreement with its bondholders.

Wingate Healthcare (Assisted Living):  Wingate Residences at Melbourne in Pittsfield, Mass., a 125-bed assisted living facility with 32 memory care units, and Wingate Residences at Blackstone in Providence, R.I., a 96-bed assisted living facility with 23 memory care units, recently disclosed that they are not in compliance with their bond certificates for the fiscal year ended June 30. The two facilities are related through common ownership and are members of the obligated group on $42.5 million of senior housing revenue bonds.

Richmond University Medical Center (Hospital): The Staten Island-based healthcare facility and teaching institution disclosed this month that it is in jeopardy of missing its required debt service coverage ratio. The hospital currently reports a negative 9.8x DSCR for the quarter ended June 30, while the bond indenture for its $111 million outstanding Series 2018 revenue bonds requires a DSCR of at least 1.15x as of the end of the calendar year. The Medical Center did not generate sufficient income to meet the minimum debt service coverage ratio requirement in 2020 and was granted a waiver by the bond trustee, according to Richmond’s 2020 annual financials. 

Purple Line (Transportation): We also initiated coverage on Maryland’s troubled Purple Line light rail project, a 16.2-mile, 21-station, east-west, light rail transitway with a western terminus in Bethesda and an eastern terminus in New Carrollton, with $313 million in green bonds outstanding. We reported that the Maryland Department of Transportation and the Maryland Transit Administration have agreed with Purple Line Transit Partners LLC to further extend the due date for negotiating a replacement design-build contractor agreement by one month. The borrower is currently under forbearance with its bond trustee while a new contractor is chosen to replace Purple Line Transit Constructors LLC, the current contractor, which notified the MDOT and MTA that it was terminating its contract after alleging that they caused various construction delays.

Sheraton Overland (Convention Center): On March 1, the bond trustee for $90 million of revenue bond debt tied to the Sheraton Overland Park Convention Center Hotel made a $2.2 million unscheduled draw on the debt service reserve and it is unclear whether hotel revenue and transient guest tax revenue from the city of Overland Park, Kan., will be sufficient to avoid another unscheduled draw when next interest payment is due Sept. 1. The bonds are special limited obligations secured by the revenue of the 412-room full-service hotel adjacent to Overland Park’s convention center and a portion of the city’s transient guest tax revenue.

Towson University (Student Housing): The Maryland Economic Development Corp., or MEDCO – the issuer on $42 million of outstanding bonds tied to the Millennium Hall student housing facility at Towson University – does not expect to be in compliance with its revenue covenant at the end of its June 30 fiscal year. 

Existing Coverage

We have written several stories on Provident Oklahoma’s Cross Village Student Housing Project at the University of Oklahoma and the litigation over the project, which was ultimately settled. As part of the settlement, the University of Oklahoma agreed to purchase the student housing project for $180 million. This week, Seth wrote a piece talking about a related new general revenue bond deal, which would finally close the book on the $253 million debacle. Although ratings agencies have given favorable ratings to the university’s general revenue bonds, former investors of the Cross Village Student Housing Project are skeptical of the university’s willingness to back student housing projects given that it chose to renew only a portion of the project’s lease in July 2019, triggering its restructuring.  

CalPlant, our favorite manufacturer of MDF from post-harvest rice straw experienced another setback this week, as CalPlant does not expect to achieve “plant acceptance” with German machinery company Siempelkamp until the end of September, a month later than last reported.

In terms of other existing coverage, Midtown Campus Properties (comments made during a recent hearing revealed that the student housing project still needed $1.4M for completion) Canterbury-on-the-Lake (continues to miss several covenants), Illinois/Exelon (the push by Illinois to advance legislation providing $700M in subsidies related to two Exelon nuclear power plants), Vista Grande Villa (ongoing failure to meet certain minimum covenant requirements), Estates at Crystal Bay Apartments (a proceeding in connection with the borrower’s efforts to pay off the bonds in full) and Nevada State College (disclosures focus on expense reduction efforts and the bondholder group’s retention of Arent Fox).

Primary Coverage

On the primary side, we published on pricing in connection with the $303 million of Series 2021 bonds being issued by the California Statewide Communities Development Authority on behalf of Front Porch Communities and Services. The financing will consolidate the operations of Front Porch and Covia Communities, which provide senior housing and life plan communities, primarily in California. 

The team also covered the pricing of $61.5 million of tax-exempt bonds being issued by Baytown Municipal Development District to finance the Baytown Convention Center Hotel Project, a 208-room hotel and convention center in Baytown, Texas. 

We also previewed the upcoming pricing for $130 million in tax-exempt sales tax revenue bonds that the state of Illinois is issuing as part one of two offerings that will total approximately $500 million of Build Illinois bonds.

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Municipal Bonds Debt Analysis – August 2021
Thu Aug 19, 2021 7:50 pm Distressed Debt  High Yield Bonds  Leveraged Finance

Below is a recap of our municipal bonds debt analysis from the week ending Aug. 13, 2021. Primary market opportunities exclusive to Reorg’s municipal offering took the top spots this week while core, distressed coverage continued to expand the overall universe.

KIPP NYC Public Charter Schools tapped the bond market for $243m in funding to construct two new charter schools in the Bronx and purchase a third. Aggressive demand drove spreads tighter than price talk and the deal priced a week early.

Sanctuary LTC LLC waded into the primary market for a new $554m revenue bond that it tried to issue last year, but pulled because of market volatility. It’s back again with a new underwriter, replacing Truist with Hilltop Securities as lead left. Despite the frothy market, Reorg pointed out that the buyside might snub the deal again because of high leverage and weak occupancy.

Woodloch Towers is a good example for why the buyside is weary of senior care. Bondholders led by Preston Hollow won a $52.6 million judgment against obligor Senior Care Living VI LLC and its guarantor, Mark Bouldin, in a state court action. It’s a positive outcome for bondholders, but another anecdote depicting an increasingly ugly sector. 

Speaking of ugly, Chicago released an updated budget in which it reported a slightly smaller deficit of 17% of revenue, instead of 28%. That this qualifies as good news for the Windy City during a time of unprecedented federal support shows how long it will take for Chicago to get its finances in order. Reminder: Chicago, the third largest city in the US, is still junk-rated.

Rounding out the top five municipal bonds debt analysis for the week ending Aug. 13 was Moody’s downgrade of Rhode Island Convention Center Authority, or RICCA, to A1 from Aa3. This is a great example of how municipal high yield is different from corporate high yield: for Muniland, it’s all about the sector. 

Moody’s reason for the downgrade was succinct: a convention center is a single purpose, non-essential facility. The revenue stream backing over $200M in debt are lease payments from the state. If the state ever decides to end payments for non-essential services, RICCA would be at the top of the list. This is where a municipal credit analyst has to assess “willingness” versus “ability” to pay debt service.


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Tahoe Group Bond Default: Bondholders Should Look Beyond Traditional Restructuring

On July 8, after seeking three extensions, Tahoe Group published its response to an inquiry issued by the Shenzhen Stock Exchange in relation to the group’s 2020 annual report. The response provides some answers to the Tahoe Group liquidity and debt situation, but it is unknown whether the public’s concern over the unanswered progress of the group’s prospective restructuring can be relieved.

Tahoe Group, a Fujian-based PRC property developer, is deeply mired in financial crisis contributed by the PRC policy change. The group’s plan to introduce China Vanke as a white knight has not yet materialized as a result of a delay in the group’s debt restructuring process.

In the meantime, enforcement proceedings against the group have ramped up. Creditors have frozen equities controlled by Tahoe Group and its controller, and the group and its chairman Wang Qishan are also both listed on the List of Dishonest Persons Subject to Enforcement in the PRC. As the guarantor of its subsidiary Tahoe Group Global Co., Ltd, the group is facing a large-scale bond redemption and cross default at a size of over US $800 million for its dollar-denominated bonds alone.

As a standard clause in many US dollar-denominated indentures, individual bondholders are bound by a “no-action” clause prohibiting them from initiating proceedings against the issuers to enforce the note. Its purpose is to guard against superfluous suits taken without the bond trustee’s blessing. The indenture of the Tahoe Group’s bonds provides an exception, however, which lifts the no-action clause when the bond reached maturity. Individual bondholders are therefore entitled to commence enforcement actions after the maturity dates, allowing greater room for activist investors’ strategies.

In order for activist investors to maximize their return on investment, an opportunistic activist approach using offensive investigative tools may help uncover assets owned or controlled by the group and its decision makers. The starting point is to look at the corporate structure of Tahoe Group outside of the PRC. While the group has only a few offshore subsidiaries, including its main Hong Kong subsidiary Thaihot Group (Hong Kong) Co., Ltd and two subsidiaries in the BVI (including the issuer of the distressed bonds), aggrieved offshore bondholders often see themselves in a disadvantaged position as compared with onshore creditors. Indeed, the absence of leverage is often the cause of the loss of momentum in traditional restructuring, which results in a prolonged recovery.

Focusing on decision makers’ business and personal relationships may also provide value to investors, which is often overlooked. For example, looking at the recent activity of the group, attempts were made to create liquidity although its intention to acquire Tahoe Life Insurance, the insurance business in Hong Kong and Macau operated by its majority shareholder Tahoe Investment Group Co., Ltd, which is controlled by the group’s Chairman Wang was aborted. Tahoe Investment is also rumored to be looking to sell its healthcare service in the United States. 

If strategies are devised to block a prospective sale, or even to unwind a completed sale, the distressed company may face unresolvable liquidity issues and its decision maker may also feel enormous pressure to negotiate with better terms. There may also be opportunities for investors to seize assets “in transit”, if a transaction was not properly conducted, hence allowing investors to obtain a quasi-security over the distressed company.

Devising a strategy with information on these relationship and personal ties could provide a new perspective for activist investors in two meaningful ways: First, it facilitates negotiation for a more favorable restructuring plan, which may in turn help bring capital injections from white knights and other potential co-investors; second, it builds on foundational enforcement procedures, which encourages favorable settlement or even provides security to unsecured creditors.

It is therefore vital for investors to keep a lookout for creative strategies in situations where traditional restructuring has proven to be ineffective. 

Guest post written by John Han and Henry Cheung at Kobre & Kim



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Refusal to Sanction Restructuring Processes – Hurricane Energy, Amigo Loans

Since our webinar earlier in the year, two key judgements have provided helpful guidance on circumstances where the courts will use their unfettered discretion in the refusal to sanction restructuring processes.

Hurricane Energy provided a landmark judgment, being the first time since its introduction, that the court has pushed the refusal to sanction a restructuring plan.  The court rejected the company’s submission as to the “relevant alternative” to the restructuring plan and was unconvinced that the creditors subject to the cross class cram down would have been no worse off under the plan than the relevant alternative.  Even had such conditions been satisfied, the court was not willing to exercise its discretion to sanction the plan. 

It remains to be seen if this is a set-back for the plan which until now had always been sanctioned.  The key takeaway is that the court will carefully assess the relevant alternative and companies with a longer runway, as opposed to a “burning platform” (i.e. an imminent liquidity need or upcoming maturity), may face a heavier burden in demonstrating that a plan should be sanctioned, and certainly, where that plan contemplates the permanent compromise of dissenters’ rights.  Timing will need to finely balanced, as the court has previously shown it does not favour companies waiting until the last minute to start a process and thereby putting “a gun to the court’s head”.

Amigo Loans – the refusal to sanction the proposed scheme of arrangement, again highlighted the court’s unfettered discretion.  The court did not believe that imminent insolvency was the only alternative and other proposals should have been assessed.  

The case also highlighted the importance of disclosure when compromising creditors’ rights.  The explanatory statement was deemed to be insufficient and lacked information on the scheme and alternatives.  The level of disclosure and form of information needs to be carefully considered against the financial sophistication, or lack thereof, of the particular scheme’s creditors.  The court also criticised the lack of disclosure relating to the rationale for the terms proposed with particular focus on why the company was unable to engage with shareholders on the restructuring.

Guest post written by Mark Fine, partner at McDermott Will & Emery

Learn more about Reorg’s news, commentary and analysis on issues affecting the leveraged finance and distressed debt markets in Europe, the Middle East and Africa here: https://reorg.com/products/emea/

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