Legal Analysis: Consent Solicitation Trends Over Last 6 Months See Bond Covenants Amended to Generate Liquidity, Restructuring Options; Failure to Consult all Creditor Groups Can Lead to Noteholder Litigation

The strain on liquidity faced by issuers across all sectors in the last six months has meant an increase in the number of consent solicitations, through which borrowers seek an amendment or waiver of the covenants in their notes’ indentures to allow them to take previously restricted actions.

Consent solicitations have been used to create or increase the size of debt incurrence baskets to allow cash-strapped borrowers to avail themselves of liquidity on a super senior or senior secured basis. Borrowers approaching restructurings have reached out to noteholders requesting temporary interest payment default waivers and permission to take actions (such as the appointment of court officers to aid restructurings) that would ordinarily be considered events of default. Continue reading for the Debt Explained team's analysis of recent consent solicitation trends, and request a trial to access our coverage of thousands of other legal analyses.

Consent solicitations have been used to amend the governing law provisions of notes to English law to allow debtors to use English schemes of arrangement. Stressed issuers seeking consents in some cases did not pay a consent fee but had to forgo some of their covenant flexibility and/or provide enhanced reporting in return for the consent.

Where issuers have reached out to amend their debt covenants to allow for the incurrence of new super senior debt, pari secured debt, or sale-and-leaseback transactions, it has not always been straightforward. Car manufacturer McLaren first applied to the English High Court in June, seeking permission to undertake certain sale-and-leaseback transactions under the terms of its existing intercreditor agreement and notes indenture.

McLaren’s noteholders resisted the company’s position. However, after initial court hearings and negotiations, the noteholders and McLaren reached an agreement which provided additional protection to existing noteholders as well as granting the group flexibility to incur further debt.

Ground-handling group Swissport reached out to its senior secured noteholders (SSNs) for permission to incur further super senior debt with a consent solicitation requesting amendments to the notes indenture’s debt and lien covenants. The SSNs agreed and the terms of the group’s intercreditor agreement were later amended using an English law scheme of arrangement in June to allow the debt incurrence.

However, the group’s senior unsecured noteholders (SUNs) were not consulted as part of the process. They later organized and filed a complaint in the New York Court, claiming that the amendments to the group’s intercreditor agreement were not effective without SUN consent. The dispute is ongoing and could create additional hurdles for the group when it comes to implement its full-scale restructuring in the next six months.

Consent solicitations have also been used by car rental company Hertz and steel tube manufacturer Vallourec to help the issuers facilitate and encourage reaching a restructuring deal with creditors. In May, Hertz’s noteholders were asked to grant a waiver of the event of default that would have been caused by a chapter 11 petition made by certain of the group’s subsidiaries in return for the issuer restricting movement of value between its international operations and U.S.-Canadian operations. The waiver was extended for three months in September and, in return, the issuer had to provide additional reporting to an ad hoc committee and was incentivised to reach an agreement in principle with its creditors by a certain date. Failure to comply with those requirements would lead to an uptick in payable interest, therefore encouraging the company to negotiate with its creditors.

Vallourec in September requested a waiver of the event of default and immediate acceleration that would occur by its appointment of a mandataire ad hoc. A mandataire is usually appointed by companies approaching financial distress to help negotiate a restructuring agreement with creditors. The noteholders’ waiver could allow the group and its creditors time to negotiate a restructuring that ensures the survival of the business and preserves value. French car rental company Europcar has also reached out to its noteholders for permission to appoint a mandataire ad hoc and/or a conciliateur for its upcoming debt restructuring negotiations.

Finally, Dutch retailer Hema, reached out to the holders of its SUNs and SSNs requesting permission to amend the governing law of the notes to allow for an English law scheme of arrangement to be used. The scheme was to be used to implement a restructuring which would effectively partially equitize the SSNs and leave the SUNs with little to no value. Only the SSNs provided the majority consent required for the amendments and so only a scheme for the SSN issuer could be undertaken. Hema had to use a Dutch enforcement process to bind the SUN holders to the restructuring.

Schemes of arrangement have also been used by Spanish gaming company Codere and U.K. retailer Matalan to permit incurrence of further debt.

Each of the issuers mentioned and their respective consent solicitations is discussed in detail below.

On June 4, Swissport received the required consent from a simple majority of its 2024 senior secured noteholders and used a scheme to bypass the 100% consent required from its credit lenders to incur up to €380 million in new super senior debt. The group did not have any capacity baked into its senior secured debt instruments for incurring super senior debt and therefore had to reach out to creditors for consent to create a new class of super senior debt.

The senior secured noteholders consented to the amendments that would allow the incurrence of the new super senior debt by way of consent solicitation, requiring just a simple majority. A detailed analysis of Swissport’s consent solicitation can be found HERE.

The SSN holders and credit lenders were both able to participate in the new funding. The group’s credit agreements and parts of the intercreditor agreement (ICA) required unanimous approval to be amended, so a scheme of arrangement was used and successfully passed on June 24.

The group’s senior unsecured creditors were not consulted with respect to the amendments, and have contended that their rights under the group’s ICA remain unchanged.

Shortly after the consent solicitation, senior unsecured noteholder Northlight Capital made a petition in the New York Supreme Court resisting the purported amendment of the ICA. Subsequently, on Aug. 11, Northlight sought a declaration from the court that the purported amendments to the Swissport ICA required the consent of the SUN trustee or, if the proposed amended ICA had already been executed, a declaration that the ICA was void and that the SUN holders’ rights had been violated. In its complaint, Northlight alleged that the actions taken by the group have “threatened the bargained-for rights of the [SUN holders].”

Swissport’s position, as per an expert witness report cited in its scheme skeleton argument, is that under Section 28.1(a) of the ICA, the proposed amendments did not “adversely affect” the SUNs as the SUN indenture permits the incurrence of “Permitted Debt”, which ranks in priority to the SUNs, and therefore SUN consent isn’t required for the amendments.

Northlight’s position is that the ICA does not allow for the borrowing of super senior debt which ranks ahead of the senior secured liabilities (i.e. the credit facilities and the SSNs) without an amendment to the ICA, and furthermore that Section 28.1(c) of the ICA (which Section 28.1(a) of the ICA is expressly subject to) provides that any amendment that changes or relates to Sections 15, 16, 18 or 28 of the ICA requires SUN holder consent.

Reorg’s full analysis of the parties’ positions can be found HERE. The matter is ongoing and the court docket can be found HERE. The company is yet to file its defense.

Swissport is attempting to implement a large-scale restructuring, including €1.9 billion of debt to be partially converted into equity and partially extinguished and a new €500 million long-term debt facility with potential of up to €100 million of senior secured debt to be reinstated. The Northlight challenge to the amendment of the ICA may cause the group issues as it attempts to implement the larger restructuring, as the implementation method will have to consider whether the original ICA or amended ICA is effective.

The Swissport example can be compared to that of Serta Simmons, where minority lenders who were not consulted regarding amendments required to create a new layer of debt ranking above them have sued, claiming that their consent was required for the new super senior debt. The minority lenders in Serta Simmons did not succeed in their legal challenge, and the maneuver used by Serta Simmons has been copied in the U.S. by Boardriders and Trimark.

Dutch retailer Hema successfully used an English law scheme of arrangement, coupled with a Dutch enforcement process, to implement its restructuring. The group had two tranches of notes issued by its restricted group outstanding before the restructuring. These were the SUNs and the SSNs, each issued by a different group entity. The scheme of arrangement was used to implement the deal for the SSN holders and the enforcement mechanism for the SUN holders.

Among other things, the group’s proposed restructuring sought to implement a debt-for-equity swap for the SSNs, whereby the existing business would be transferred to a new SPV wholly owned by the SSNs. The group’s SUNs received an exit fee consisting of €1.5 million cash and 5% of any excess value. The exit fee was contingent on their consenting to the transaction.

Consent levels received from the SSN holders and SUN holders was key in determining the implementation method used by the group.

SSNs - 98% of SSN holders eventually voted in favor of the scheme of arrangement that was used to implement the restructuring.

Prior to commencing the scheme process, the group sent a consent solicitation to SSN holders asking for the governing law of the SSNs in the SSN indenture and all relevant guarantees to be changed to English law. Further, the SSN consent solicitation proposed to introduce an English-incorporated co-obligor under the SSNs. These amendments, (“Pre-Scheme Amendments”) were made to allow the Dutch group to pass the jurisdictional tests under an English scheme. The relevant consent threshold needed under the consent solicitation, was a simple majority.

The group had no difficulty in obtaining the simple majority required for the SSN consent solicitation. Further, by the time the group came to the English court for its SSN scheme, more than 91% of SSN holders had acceded to a lockup agreement in which they agreed to vote in favor of the scheme.

SUNs - Garnering high levels of support from the SUNs was more difficult, given that their economic interests were effectively being wiped out by the deal. The level of support received from the SUN holders would determine the manner in which they could be bound to the restructuring, as shown:

Hema launched a consent solicitation for its SUN holders at the same time as its SSN consent solicitation. However the group was unable to reach the required consent levels for either a consensual deal or to use a scheme of arrangement and therefore withdrew its SUNs consent solicitation. It instead had to use an enforcement method in the Netherlands to bind the SUN holders to the deal.

Full details of the group’s restructuring, including the SSN scheme and SUN enforcement can be found HERE.

In June, U.K. supercar group McLaren applied to the High Court in England for guidance and declaratory relief as to the interpretation of the covenants in its senior secured notes. The company sought the court’s blessing to incur new indebtedness secured on its heritage assets (including the group’s collection of F1 racing cars) and its Woking plant, potentially using a sale-and-leaseback transaction.

Certain of the group's noteholders later applied to be party to the application, resisting the group’s proposed borrowing and transactions.

Reorg’s analysis on the group’s then ability to incur priming indebtedness, including a version of the J.Crew maneuver, is HERE.

Eventually, following discussions between the group, its shareholders and noteholders, an out-of-court agreement was reached which allowed the company to incur further debt. As part of the deal, the group has received £150 million equity injection from the National Bank of Bahrain.

As part of the agreement, the group launched a consent solicitation to amend the terms of the indenture for its notes. The group amended the notes’ covenants to facilitate potential liquidity support transactions through a sale and leaseback of the Woking headquarters and/or a sale of the racing and/or applied divisions. In exchange, noteholders got additional protections to preserve value within the obligor group, regulate the application of asset sales proceeds, and restrict further debt incurrence.

The covenants amended included:

In addition to the above covenants, amendments were made to a number of the material covenants in the indenture, in particular in relation to value leakage to equity holders and incurrence of further debt. Reorg’s full analysis of the possible effects of the amendments included in the consent solicitation can be found HERE.

Vallourec sought its noteholders' consent to appoint a mandataire ad hoc without this constituting an event of default under the terms of the notes, all of which are unsecured obligations. The role of the mandataire is to facilitate negotiations with all stakeholders of the group.

The noteholders held the right to choose whether or not to waive the event of default under their indentures that would be triggered by the appointment, however they chose to waive that right following the consent solicitation. The bankruptcy event of default would cause the notes to be immediately accelerated, without the need for noteholder instruction, however a simple majority of noteholders could waive the event of default.

In September, the group received the required consent. If the mandat ad hoc is successful it will be converted into a conciliation, which in turn will be converted into a sauvegarde financière accélérée, (SFA). Notably, two new further consent solicitations will be required with noteholders to waive the events of default that would be caused by progression into conciliation and then the SFA. Currently, no lockup agreement exists between the parties.

A successful deal could entail at least a partial equitization and deleveraging of the group.

Full details of the French restructuring processes as well as the options available to the group can be found HERE.

Europcar has also reached out to its noteholders for permission to appoint a mandataire ad hoc and/or a conciliateur for its upcoming debt restructuring negotiations.

Certain of Hertz’s Canadian and U.S. subsidiaries had filed petitions under chapter 11 in the U.S. Bankruptcy Courts. Such actions would have been an event of default under the notes resulting in automatic acceleration, absent a waiver. The group therefore reached out to its noteholders in May and received an event of default waiver from its secured noteholders, which expired on Sept. 30.

Hertz more recently reached out to its noteholders in late September with a consent solicitation, which was approved, and will extend the waiver of default to Dec. 31. The September consent solicitation attracted a 0.5% consent fee.

The most recent consent solicitation, once effective, creates further information reporting obligations for the company to the ad hoc group, and imposes ticking fees if principal agreement with the group’s creditors is not reached by Oct. 30 and/or the company fails to provide adequate information to the ad hoc group.

The new reporting requirements mean the issuer must provide enhanced reporting information to the ad hoc committee every 14 days, among other things.

The original May consent solicitation included amendments to some covenants and events of default sections in addition to providing a waiver. Such amendments included restrictions on leakage from Hertz’s international operations in Europe, Australia and New Zealand to Hertz group members in the U.S. and Canada when subject to chapter 11 proceedings; restrictions on incurring additional secured debt on the assets of the international operations; and restrictions on the receipt of loans into the international operations from Hertz group members in the U.S. and Canada up to a cap, unless such loans are subordinated and a covenant to maintain at least €185 million of “Italian Financeable Assets” to be be reported on a monthly basis, starting June 30, 2020.

During the second and third quarters, while lockdown measures were in place and many companies were facing liquidity issues, several groups resorted to the issuance of new priming debt, typically super senior debt, to create a breathing space, as discussed in our Navigating Uncertainty series.

In incurring such new debt, issuers were obliged to either comply with the existing debt incurrence provisions of their debt documentation or amend them, consensually or by using a restructuring process.

The introduction of new super senior debt was, on occasion, part of a larger restructuring process, with certain issuer groups taking the opportunity to amend and extend their existing borrowing obligations. Where issuer groups had remaining super senior debt capacity baked into their debt documentation, debt incurrence required no amendments or existing creditor consent. However, where there was no such capacity, the use of a consent solicitation or a restructuring tool to garner creditor support for appropriate amendments was required.

Where issuers have been unable to consensually achieve the documentary threshold to allow new super senior debt incurrence, some have turned to the English law scheme of arrangement process. The tool allows a debtor to amend the terms of its debt documentation with the consent of just 75% by value (and 50% by number) of affected scheme creditors, as noted above.

Swissport (as discussed), Codere and Matalan all explored the option of incurring further super senior debt to solve liquidity issues.

Swissport received the required consent from a simple majority of its 2024 senior secured noteholders and used a scheme of arrangement to bypass the 100% consent levels required to amend its credit agreement and intercreditor agreement to incur up to €380 million in new super senior debt.

For Codere, the deal included €165 million of new super senior notes. The group is currently using a scheme to implement the restructuring. The group, prior to launching the scheme, used a consent solicitation to amend the terms of its notes and add an English co-obligor to allow it to use the English scheme tool.

In May, U.K. retailer Matalan launched a consent solicitation in order to permit the incurrence of further super senior debt by increasing the size of its existing super senior debt basket. The group has both first lien and second lien notes, due 2023 and 2024. The group’s consent solicitation was sent only to its first lien lenders and contained a 0.5% consent fee, and was successful. The solicitation required majority consent to effect amendments to the first lien notes and to certain waivers under the group’s intercreditor agreement.

The consent solicitation also made amendments to the group’s debt, restricted payments and asset disposal covenants and restricted EBITDA addbacks, including tightening language to prevent Covid-19 add backs. The full overview of the terms of Matalan’s consent solicitation is HERE.

Separately, the group used a scheme of arrangement to amend the interest payment mechanism of its second lien notes. The scheme will require at least 75% consent of second lien noteholders.

Naviera Armas, Travelodge, Selecta and Pizza Express also incurred additional super senior borrowing, however they did not require the consent of their noteholders as they used baked in indebtedness capacity.

Reorg’s full analysis of super senior debt issuance can be found HERE.