Orpea
Orpea Proposed Restructuring Implementation via Accelerated Safeguard Likely to Face Legal Challenges Over Class Composition, Use of Cramdown; Stakeholders Outside Conciliation Mount Additional Counter Offers
Wed 02/15/2023 09:20 AM
French care home operator Orpea, which is the largest company to date to test France’s newest restructuring tool, is facing opposition and possible legal challenges to the implementation of its draft restructuring agreement. The group is attempting to use the new accelerated safeguard regime sauvegarde accélérée, or SA, to enforce a restructuring plan that is expected to equitize €3.8 billion of unsecured debt.
Orpea, whose first and second conciliation procedures faced unsuccessful court challenges, may face further legal disputes around a proposed composition of classes and use of the cramdown power, both of which are largely untested under French law.
Orpea has reached an agreement in principle on its financial restructuring plan with a group of French long-term investors led by the Caisse des Dépôts et Consignations, or CDC, and a steering committee of unsecured creditors. On Tuesday, Feb. 14 Orpea said it signed a lockup agreement on the draft restructuring proposal with CDC and the SteerCo, which is discussed in detail below.
The deal explicitly envisages using the new accelerated safeguard by March 31, rather than the traditional safeguard procedure. Orpea will therefore be the first significant test of the new restructuring regime since Pierre Et Vacances in 2022.
A scenario where five classes of stakeholders are asked to vote on the plan is a likely option, sources said. These would comprise: (i) the most senior secured creditors, i.e. lenders who elevated their claims in the first conciliation (ii) other secured creditors, (iii) unsecured creditors, (iv) convertible bondholders, and (v) shareholders.
The French regime uses a different test for class composition than that familiar to English law practitioners. The French test appears to be focused on the “interests” of the creditors and their outcome in the plan, rather than the legal rights that creditors have, when deciding class composition.
Orpea’s convertible bondholders may wish to argue that they should form a separate class to shareholders on the grounds that their interests are not aligned. Some legal sources described this as a loophole in the law.
The care home operator has already faced litigation by Schuldschein lenders, a convertible noteholder and the minority shareholders against the opening of the second conciliation procedure. This followed a challenge by unsecured noteholders against the suspension of unsecured debt payments from Dec. 1 and a separate challenge to the first conciliation procedure by a Schuldschein holder. Given the contested nature of the restructuring and the size of Orpea’s capital structure, dissenting groups will likely mount challenges to the accelerated safeguard.
As reported, a group of unsecured creditors representing about €500 million of unsecured debt of Orpea, including over 33% of the OCEANE convertible bonds, and minority shareholder group Concert’O have put forward an alternative proposal to the company’s draft restructuring plan (discussed in detail below). The group hosted a call with investors yesterday, Tuesday, Feb. 14.
A breakdown of the competing proposals supplied by Concert’O is below:
Sauvegarde Accélérée
Process
An SA cannot be commenced under the French regime until a group has concluded a conciliation. In short, the weakness of the conciliation is that a plan accepted by some creditors cannot be imposed on others that do not consent. It is the SA that can be used to bind dissenting creditors.
Orpea’s second conciliation period is due to expire on Feb. 24, however, this is likely to be extended by one month if the court is convinced that a viable plan is being worked on. At the end of the period, the court will decide to open the SA procedure following a report from the conciliator on the progress of the conciliation and the prospects of the draft plan being adopted. An accelerated safeguard lasts for two months but may be extended at the company’s request to a maximum of four months.
This opening judgment for the SA will also place the affected parties into classes on the recommendation of the judicial administrator. Each class will be asked to vote on the proposal, with a majority of two-thirds (66.7%) required in each class by value for the plan to be approved. This is lower, for example, than the 75% approval threshold required in an English restructuring plan or the German StaRUG.
Class Composition
The use of creditor classes is new in French law and marks an end to using court-appointed creditor committees. Previously creditors would be grouped into one of three committees based on their identity: credit institutions, main suppliers and bondholders.
Under the new regime, the judicial administrator will place creditors into the same class where there is a sufficient “community of economic interests” and they are treated equally with others in the same class. Furthermore, the treatment of each class under the plan must be proportionate to their existing claims or rights. The approach differs from that under English law.
Under the English tools, English judges have decades of jurisprudence on class composition, but the basic test is that creditors who have the same rights against the debtor should be placed in the same class. Notably, creditors’ interests are not of concern when the English court determines class composition. This seems to be a slightly different position to that under the SA, which considers “a community of interests” and could create significantly different outcomes on a case by case basis (emphasis added).
Article L. 626-30 of the French Commercial Code has three further conditions governing the approach to class composition:
In Pierre Et Vacances, the court approved five classes including separate classes for secured creditors, shareholders and convertible bondholders. In particular the court separated the convertible noteholders from the shareholder class on the basis that they “do not share a community of economic interest sufficient to justify the constitution of a single class of capital holders.”
An English machine translation of the Pierre Et Vacances judgment approving the SA plan is HERE. An English translation of the company’s draft SA plan, with suggested class composition is HERE.
Cramdown
Unlike the traditional safeguard procedure, the SA includes provisions for cross-class cramdown. This means that if a restructuring is not approved by all creditor classes meeting the two-thirds threshold, the plan can still go ahead and bind all creditors. Crucially, cramdown must have the consent of the debtor and should abide by the absolute priority rule, or APR.
The APR, which is borrowed from chapter 11 of the U.S. Bankruptcy Code, provides that senior classes must be repaid in full before junior classes or equity. The court can depart from the rule in some circumstances, such as it being necessary for the plan’s objectives and if the plan does not excessively affect the rights of interests of impaired parties. In most cases, however, the APR rules out the remote possibility of a “cram-up” where junior creditors impose a compromise on more senior creditors.
The two criteria for cross-class cramdown that must be fulfilled are:
To exercise a cramdown the proposal must be in the best interest of the affected creditors test. In other words, the affected party must not be in a less favorable position under the plan than it would be in (i) a compulsory liquidation (ii) a sale of the company or (iii) under a better alternative solution.
In Pierre Et Vacances only one class, the shareholders, did not vote in favor of the plan. However, the court approved a cramdown on the basis that the plan was more favorable to them than the alternative of a liquidation or sale as they would be out of the money on the basis of the valuation evidence.
Concert’O and other unsecured lenders say that a cramdown is all but inevitable under the company’s draft agreement with the CDC. On a lender call held Tuesday, Feb. 14, they explained that their alternative proposal is designed to avoid a cramdown. “We want to be able to achieve an amicable deal which 67% of the unsecured creditors can vote for, so we can avoid the first cross-class cramdown, which in French law is now authorized but, as you are aware, has never been fully tested,” said Jean-Francois Cizain, Partner Messier & Associes.
Applying the cramdown criteria to Orpea, Reorg calculates that the unsecured creditors are largely underwater, giving the group evidence to request a cramdown on any classes of dissenting unsecured lenders. For illustrative purposes, Reorg estimates that Orpea’s enterprise value, or EV, could range between €4.6 billion and €5.8 billion if using a 9x-11x EV/EBITDA multiple and by incorporating management’s business plan into a discounted cash flow, or DCF, model. Reorg’s waterfall analysis on the current (pre-restructuring) capital structure as of Dec. 31, 2022, results in a recovery of the consolidated unsecured debt at about 3% when using a 9x EV/EBITDA multiple, a recovery at about 17% when using a 10x multiple, and a recovery of 31.5% if using 11x, with secured debt being fully covered. However, the value could break inside the secured debt if using a multiple below 9x. Across all three cases, shareholders are entirely out of the money.
The EV is calculated using as terminal EBITDA the management €745 million EBITDA (pre-IFRS 16) expected in financial year 2025 and the present value of management’s unlevered free cash flow forecast (to which Reorg added finance lease payments in line with the historical payments and some non-recurring expenses). Reorg also incorporated in the free cash flow forecasts capex and other expenses deferrals from 2022 to 2023, as reported by Orpea. We use a 6.8% WACC that corresponds to the weighted average of the discount rates assumed by Orpea to estimate the value of its cash generative units in its regular impairment test carried out on the FY’21 audited accounts.
New Money Privilege
The new tool also permanently establishes super priority ranking for the provision of new money. When considering whether to approve the plan, the court must consider whether the provision of new money causes “excessive harm” to any of the affected parties. In this regard, the Pierre Et Vacances judgment is instructive. The court considered the new funding to be necessary for the survival of the business and noted that all classes, except the shareholders, had voted in favor and had expressed their support via a lockup agreement. The interests of the shareholders, however, were not excessively harmed because they were also given the opportunity to participate in the new money, the court concluded.
The two competing proposals for Orpea both involve new money. Orpea and CDC’s proposal envisages three successive capital raises, however, in contrast to the Concert’O proposal, not all of them are open to unsecured lenders (see below).
If the plan is not approved by the requisite classes, including via cross-class cramdown, under the new regime the French court no longer has the power to impose a term-out on creditors i.e. a forced extension of debt maturities to a maximum of 10 years, as last seen in Comexposium in August 2021.
Creditor and Shareholder Challenges
On the Feb. 14 call a lawyer from Lantourne et Associés advising the Concert’O-led group described any use of cross-class cramdown as “really risky” as they believe the company’s proposal does not meet their required legal criteria. “They will need to demonstrate that creditors are not in the money, and that there is no other better alternative solution available,” they added.
Dissenting creditors have a right of appeal within 10 days of the class vote on the grounds that it fails a “best interest of creditors test.” In other words, the affected party will be in a less favorable position under the plan than it would be in (i) a compulsory liquidation (ii) a sale of the company or (iii) under a better alternative solution.
In addition, the debtor, administrator, legal representative or public prosecutor may appeal the judgment approving the plan within 10 days.
The opposing group sees an opportunity in the third limb of the “best interest of creditors test.” On the call, a lawyer from Lantourne said one of the main criteria for cramdown is to demonstrate that there is no other alternative solution, “but we know today that there is one.”
Deal Terms With CDC and SteerCo
Orpea’s restructuring proposal gives the CDC-led group of investors, or Groupement, 50.2% of the company’s capital, while the unsecured financial creditors would hold about 49.4%.
The existing shareholders, if they decide not to participate in the capital increases open to them, would hold only about 0.4% maximum of the capital of company
The SteerCo/CDC group agreement in principle was backed by a group of unsecured creditors representing 50% of the €3.8 billion of unsecured debt at Orpea SA holding as of Feb. 1.
The lockup agreement aims to implement the terms of the Feb. 1 draft agreement in principle that envisages:
Alternative Restructuring Proposal
On Monday, Feb. 13, an alternative proposal to the company’s draft restructuring plan was submitted by a group comprising “Concert’O” shareholders (Matt Beaune and NextStone) and the “Support Club” creditors including Fortress, Kyma, LMR Partners and Whitebox Advisors. The group said their proposal, which also envisages CDC as the largest shareholder post restructuring, is “more balanced” than Orpea’s proposal and will result in higher recoveries for unsecured creditors.
The main terms of the proposal submitted are below:
The opposing group said their plan secures higher recoveries for unsecured creditors, with a higher day-one equity value for the equitized unsecured debt equal to 36% of the unsecured nominal claim, which is 4 percentage points higher (or 17% higher) than the current CDC/SteerCo proposal, the group said.
Additionally, the new money provision is open to other unsecured creditors to join the €400 million capital raise, resulting in an initial 46% equity allocation, which could increase to 60%, the group said, reducing the Groupement stake to 40% Under the CDC/SteerCo proposal other unsecured creditors can only take part in the third €195 million capital raise.
A backstop, to the extent necessary, would also be open to other unsecured creditors at a lower percentage than the backstop fee in the CDC/SteerCo proposal.
– Connor Lovell, Andrew Ross
Orpea, whose first and second conciliation procedures faced unsuccessful court challenges, may face further legal disputes around a proposed composition of classes and use of the cramdown power, both of which are largely untested under French law.
Orpea has reached an agreement in principle on its financial restructuring plan with a group of French long-term investors led by the Caisse des Dépôts et Consignations, or CDC, and a steering committee of unsecured creditors. On Tuesday, Feb. 14 Orpea said it signed a lockup agreement on the draft restructuring proposal with CDC and the SteerCo, which is discussed in detail below.
The deal explicitly envisages using the new accelerated safeguard by March 31, rather than the traditional safeguard procedure. Orpea will therefore be the first significant test of the new restructuring regime since Pierre Et Vacances in 2022.
A scenario where five classes of stakeholders are asked to vote on the plan is a likely option, sources said. These would comprise: (i) the most senior secured creditors, i.e. lenders who elevated their claims in the first conciliation (ii) other secured creditors, (iii) unsecured creditors, (iv) convertible bondholders, and (v) shareholders.
The French regime uses a different test for class composition than that familiar to English law practitioners. The French test appears to be focused on the “interests” of the creditors and their outcome in the plan, rather than the legal rights that creditors have, when deciding class composition.
Orpea’s convertible bondholders may wish to argue that they should form a separate class to shareholders on the grounds that their interests are not aligned. Some legal sources described this as a loophole in the law.
The care home operator has already faced litigation by Schuldschein lenders, a convertible noteholder and the minority shareholders against the opening of the second conciliation procedure. This followed a challenge by unsecured noteholders against the suspension of unsecured debt payments from Dec. 1 and a separate challenge to the first conciliation procedure by a Schuldschein holder. Given the contested nature of the restructuring and the size of Orpea’s capital structure, dissenting groups will likely mount challenges to the accelerated safeguard.
As reported, a group of unsecured creditors representing about €500 million of unsecured debt of Orpea, including over 33% of the OCEANE convertible bonds, and minority shareholder group Concert’O have put forward an alternative proposal to the company’s draft restructuring plan (discussed in detail below). The group hosted a call with investors yesterday, Tuesday, Feb. 14.
A breakdown of the competing proposals supplied by Concert’O is below:
Sauvegarde Accélérée
Process
An SA cannot be commenced under the French regime until a group has concluded a conciliation. In short, the weakness of the conciliation is that a plan accepted by some creditors cannot be imposed on others that do not consent. It is the SA that can be used to bind dissenting creditors.
Orpea’s second conciliation period is due to expire on Feb. 24, however, this is likely to be extended by one month if the court is convinced that a viable plan is being worked on. At the end of the period, the court will decide to open the SA procedure following a report from the conciliator on the progress of the conciliation and the prospects of the draft plan being adopted. An accelerated safeguard lasts for two months but may be extended at the company’s request to a maximum of four months.
This opening judgment for the SA will also place the affected parties into classes on the recommendation of the judicial administrator. Each class will be asked to vote on the proposal, with a majority of two-thirds (66.7%) required in each class by value for the plan to be approved. This is lower, for example, than the 75% approval threshold required in an English restructuring plan or the German StaRUG.
Class Composition
The use of creditor classes is new in French law and marks an end to using court-appointed creditor committees. Previously creditors would be grouped into one of three committees based on their identity: credit institutions, main suppliers and bondholders.
Under the new regime, the judicial administrator will place creditors into the same class where there is a sufficient “community of economic interests” and they are treated equally with others in the same class. Furthermore, the treatment of each class under the plan must be proportionate to their existing claims or rights. The approach differs from that under English law.
Under the English tools, English judges have decades of jurisprudence on class composition, but the basic test is that creditors who have the same rights against the debtor should be placed in the same class. Notably, creditors’ interests are not of concern when the English court determines class composition. This seems to be a slightly different position to that under the SA, which considers “a community of interests” and could create significantly different outcomes on a case by case basis (emphasis added).
Article L. 626-30 of the French Commercial Code has three further conditions governing the approach to class composition:
- That secured creditors are separate from other classes;
- That division into classes respects the subordination agreements entered into before the opening of the procedure; and
- That shareholders be placed in a separate class.
In Pierre Et Vacances, the court approved five classes including separate classes for secured creditors, shareholders and convertible bondholders. In particular the court separated the convertible noteholders from the shareholder class on the basis that they “do not share a community of economic interest sufficient to justify the constitution of a single class of capital holders.”
An English machine translation of the Pierre Et Vacances judgment approving the SA plan is HERE. An English translation of the company’s draft SA plan, with suggested class composition is HERE.
Cramdown
Unlike the traditional safeguard procedure, the SA includes provisions for cross-class cramdown. This means that if a restructuring is not approved by all creditor classes meeting the two-thirds threshold, the plan can still go ahead and bind all creditors. Crucially, cramdown must have the consent of the debtor and should abide by the absolute priority rule, or APR.
The APR, which is borrowed from chapter 11 of the U.S. Bankruptcy Code, provides that senior classes must be repaid in full before junior classes or equity. The court can depart from the rule in some circumstances, such as it being necessary for the plan’s objectives and if the plan does not excessively affect the rights of interests of impaired parties. In most cases, however, the APR rules out the remote possibility of a “cram-up” where junior creditors impose a compromise on more senior creditors.
The two criteria for cross-class cramdown that must be fulfilled are:
- A majority of the classes of impaired parties voted in favor of the plan, provided that at least one of those classes is a secured creditors’ class or is senior to the ordinary unsecured creditors’ class; and
- At least one of the affected classes (other than shareholders or out-of-the-money creditors) has voted for the plan.
To exercise a cramdown the proposal must be in the best interest of the affected creditors test. In other words, the affected party must not be in a less favorable position under the plan than it would be in (i) a compulsory liquidation (ii) a sale of the company or (iii) under a better alternative solution.
In Pierre Et Vacances only one class, the shareholders, did not vote in favor of the plan. However, the court approved a cramdown on the basis that the plan was more favorable to them than the alternative of a liquidation or sale as they would be out of the money on the basis of the valuation evidence.
Concert’O and other unsecured lenders say that a cramdown is all but inevitable under the company’s draft agreement with the CDC. On a lender call held Tuesday, Feb. 14, they explained that their alternative proposal is designed to avoid a cramdown. “We want to be able to achieve an amicable deal which 67% of the unsecured creditors can vote for, so we can avoid the first cross-class cramdown, which in French law is now authorized but, as you are aware, has never been fully tested,” said Jean-Francois Cizain, Partner Messier & Associes.
Applying the cramdown criteria to Orpea, Reorg calculates that the unsecured creditors are largely underwater, giving the group evidence to request a cramdown on any classes of dissenting unsecured lenders. For illustrative purposes, Reorg estimates that Orpea’s enterprise value, or EV, could range between €4.6 billion and €5.8 billion if using a 9x-11x EV/EBITDA multiple and by incorporating management’s business plan into a discounted cash flow, or DCF, model. Reorg’s waterfall analysis on the current (pre-restructuring) capital structure as of Dec. 31, 2022, results in a recovery of the consolidated unsecured debt at about 3% when using a 9x EV/EBITDA multiple, a recovery at about 17% when using a 10x multiple, and a recovery of 31.5% if using 11x, with secured debt being fully covered. However, the value could break inside the secured debt if using a multiple below 9x. Across all three cases, shareholders are entirely out of the money.
The EV is calculated using as terminal EBITDA the management €745 million EBITDA (pre-IFRS 16) expected in financial year 2025 and the present value of management’s unlevered free cash flow forecast (to which Reorg added finance lease payments in line with the historical payments and some non-recurring expenses). Reorg also incorporated in the free cash flow forecasts capex and other expenses deferrals from 2022 to 2023, as reported by Orpea. We use a 6.8% WACC that corresponds to the weighted average of the discount rates assumed by Orpea to estimate the value of its cash generative units in its regular impairment test carried out on the FY’21 audited accounts.
New Money Privilege
The new tool also permanently establishes super priority ranking for the provision of new money. When considering whether to approve the plan, the court must consider whether the provision of new money causes “excessive harm” to any of the affected parties. In this regard, the Pierre Et Vacances judgment is instructive. The court considered the new funding to be necessary for the survival of the business and noted that all classes, except the shareholders, had voted in favor and had expressed their support via a lockup agreement. The interests of the shareholders, however, were not excessively harmed because they were also given the opportunity to participate in the new money, the court concluded.
The two competing proposals for Orpea both involve new money. Orpea and CDC’s proposal envisages three successive capital raises, however, in contrast to the Concert’O proposal, not all of them are open to unsecured lenders (see below).
If the plan is not approved by the requisite classes, including via cross-class cramdown, under the new regime the French court no longer has the power to impose a term-out on creditors i.e. a forced extension of debt maturities to a maximum of 10 years, as last seen in Comexposium in August 2021.
Creditor and Shareholder Challenges
On the Feb. 14 call a lawyer from Lantourne et Associés advising the Concert’O-led group described any use of cross-class cramdown as “really risky” as they believe the company’s proposal does not meet their required legal criteria. “They will need to demonstrate that creditors are not in the money, and that there is no other better alternative solution available,” they added.
Dissenting creditors have a right of appeal within 10 days of the class vote on the grounds that it fails a “best interest of creditors test.” In other words, the affected party will be in a less favorable position under the plan than it would be in (i) a compulsory liquidation (ii) a sale of the company or (iii) under a better alternative solution.
In addition, the debtor, administrator, legal representative or public prosecutor may appeal the judgment approving the plan within 10 days.
The opposing group sees an opportunity in the third limb of the “best interest of creditors test.” On the call, a lawyer from Lantourne said one of the main criteria for cramdown is to demonstrate that there is no other alternative solution, “but we know today that there is one.”
Deal Terms With CDC and SteerCo
Orpea’s restructuring proposal gives the CDC-led group of investors, or Groupement, 50.2% of the company’s capital, while the unsecured financial creditors would hold about 49.4%.
The existing shareholders, if they decide not to participate in the capital increases open to them, would hold only about 0.4% maximum of the capital of company
The SteerCo/CDC group agreement in principle was backed by a group of unsecured creditors representing 50% of the €3.8 billion of unsecured debt at Orpea SA holding as of Feb. 1.
The lockup agreement aims to implement the terms of the Feb. 1 draft agreement in principle that envisages:
- A conversion of the unsecured financial indebtedness of Orpea SA into equity through a first capital increase with maintenance of the preferential subscription rights of existing shareholders, of approximately €3.8 billion, by way of setoff with their existing claims; and
- An equity injection in cash (new money equity) of €1.55 billion, via two capital increases that would be subscribed by the Groupement for about €1.355 billion in total, and a backstop for the balance up to €195 million, provided by the SteerCo. In particular:
- The second capital increase in cash would allow the Groupement to subscribe by up to €1.16 billion;
- The third capital increase in cash, to which Groupement members can exercise their preferential subscription rights is €200 million and the SteerCo members would backstop €195 million.
Alternative Restructuring Proposal
On Monday, Feb. 13, an alternative proposal to the company’s draft restructuring plan was submitted by a group comprising “Concert’O” shareholders (Matt Beaune and NextStone) and the “Support Club” creditors including Fortress, Kyma, LMR Partners and Whitebox Advisors. The group said their proposal, which also envisages CDC as the largest shareholder post restructuring, is “more balanced” than Orpea’s proposal and will result in higher recoveries for unsecured creditors.
The main terms of the proposal submitted are below:
- A full equitization of the senior unsecured debt for a total amount of €3.8 billion.
- New money cash equity of €1.55 billion (based on pre-money valuation of €1.35 billion) to be subscribed as follows:
- A share capital increase reserved to CDC for an amount of up to €650 million, which will be backstopped by Concert’O, the Support Club and potentially unsecured creditors in case of absence or refusal of CDC;
- A share capital increase reserved to Concert’O for up to €500 million; and
- A share capital increase reserved to the Support Club (and potentially other unsecured creditors) for up to €400 million.
- A new €400 million bank debt to be provided by existing bank creditors, the G6 lenders, or other financial institutions.
The opposing group said their plan secures higher recoveries for unsecured creditors, with a higher day-one equity value for the equitized unsecured debt equal to 36% of the unsecured nominal claim, which is 4 percentage points higher (or 17% higher) than the current CDC/SteerCo proposal, the group said.
Additionally, the new money provision is open to other unsecured creditors to join the €400 million capital raise, resulting in an initial 46% equity allocation, which could increase to 60%, the group said, reducing the Groupement stake to 40% Under the CDC/SteerCo proposal other unsecured creditors can only take part in the third €195 million capital raise.
A backstop, to the extent necessary, would also be open to other unsecured creditors at a lower percentage than the backstop fee in the CDC/SteerCo proposal.
– Connor Lovell, Andrew Ross
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