Tue 03/26/2024 04:54 AM
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Legal Directors: Shan Qureshi, Chetna Mistry

Altice France could use the relatively new French restructuring tools to implement a debt impairment to its capital structure if a consensual deal cannot be reached, however, features of the Accelerated Safeguard (AS) process mean that majority shareholder Patrick Drahi could risk losing his equity stake.

This Reorg analysis examines the restructuring tools available in France and considers how Altice could use them to delever.
Key Takeaways
  • If Altice is unable to reach a consensual deal with its creditors to facilitate intended deleveraging, it is more likely to use a French restructuring tool rather than an English tool to implement a transaction.
  • France – previously considered a “debtor friendly” jurisdiction – has aligned its financial restructuring regime with its European neighbors complying with the implementation of EU Directive 2019/1023 on preventive restructuring frameworks, which came into force on Oct. 1, 2021.
  • Altice France may consider using the French conciliation process to facilitate the implementation of a consensual deal with its creditors, however, disparity between the commercial interests of creditor groups may mean that a nonconsensual tool such as AS is more likely to be used instead.
  • AS is a court-led process, which can be used to implement a nonconsensual deal and requires the consent of 66 ⅔ of each class of creditor. Creditor classes are formulated on the basis of the creditors’ “community of interests” and recent precedents in Orpea and Casino show that class formation can be used strategically.
  • Cross-class cramdown (CCCD) is available in AS, however, it is subject to the absolute priority rule, meaning that junior creditors cannot be impaired where shareholders retain all the equity. This may cause a problem for shareholder Drahi if he seeks to use CCCD to impair creditors but retains his own equity stake.
  • CCCD can be used if a majority of the creditor classes of impaired parties vote in favor of the plan subject to the following:
    • Provided that at least one of those classes voting in favor is a judicial administrators’ class or is senior to the ordinary unsecured creditors’ class;
    • At least one of the affected classes (other than shareholders or out-of-the-money creditors) has voted for the plan; and
    • Subject to the “best interests” of the debtor test.
  • AS sanction judgments can be recognized under chapter 15 of the U.S. Bankruptcy Act where they purport to amend New York law governed debt.
  • A conciliation process can last for up to five months (four months with a one month extension) and must be commenced before an AS is used, however, a debtor can enter and exit conciliation proceedings multiple times.
  • Recent AS that used cross-class cramdown attracted challenges from dissenting creditors in court and we would anticipate that an Altice AS that compromises debt may also be susceptible to challenge.

Altice France, a French telecoms and media company said on a call last week that it is pursuing a new net leverage target of well below 4x and needs creditors' participation in discounted transactions to facilitate this.

The group’s management has not excluded debt impairments to achieve its new leverage target. Absent a fully consensual deal, Altice France would need to use a French restructuring tool, likely a conciliation process followed by accelerated safeguard to implement a financial restructuring compromising part of its capital structure. Altice France SA, is the borrower under the debt for the majority of the group’s capital structure, and is located in France, along with most of the group’s assets.

France – previously considered a “debtor friendly” jurisdiction – has aligned its financial restructuring regime with its European neighbors. France has complied with the implementation of EU Directive 2019/1023 on preventive restructuring frameworks, which came into force on Oct. 1, 2021, and a wide range of French processes have been tested recently amid a busy period in the French market, with Orpea and Casino among prominent ongoing cases.

The flexibility of the English restructuring tools, the “Scheme” and the “Part 26A” means there are a series of precedents whereby foreign headquartered debtors have effectively restructured their debts in English courts. However, given the national importance of Altice in France, the fact that the majority of the group’s assets are located in the jurisdiction as well as the possible recognition hurdles to be encountered if an English restructuring tool is used means that the French tools appear to be the more likely implementation route.

Two ad hoc groups of Altice’s creditors have formed in the past few days, a $12 billion secured creditor group represented by Gibson Dunn and another group - a mix of alternative and long-only credit funds holding about €1.5 billion of Altice France’s debt represented by Millbank. Altice has significant investment capacity to designate unrestricted subsidiaries and move sale proceeds into those subsidiaries to escape bond covenants.
Financial Restructuring Tools in France

The French restructuring regime (Ordinance 2021-1193) contains two routes for financial restructuring - a consensual route and a nonconsensual route. Further, there is a hybrid approach whereby parties negotiate consensually but then pursue a nonconsensual route to implement a transaction.

We consider each of the above, and examine how they could be used by Altice, in more detail in the paragraphs below. Further detail on European Restructuring Tools can be found here.

Consensual Processes

The mandat ad hoc and conciliation proceedings are voluntary and consensual processes.

What are the conditions for entry?

The French debtor must be in a state of “cessation of payment” but not insolvent to use the tools. A cash-flow test is used by a French judge to determine whether the debtor is in this state and, while under the mandat ad hoc proceedings may be initiated at any time, under conciliation, a debtor may only initiate conciliation proceedings if the cessation has been for fewer than 45 days.

How are negotiations between parties facilitated?

The role of the court-appointed conciliator is to facilitate the private discussions and negotiations between the company and its stakeholders to reach a voluntary, consensual agreement to resolve the difficulties the company is facing. The consensual nature of the process means that all the relevant stakeholders that are party to the conciliation must agree in order for it to be binding. There is no cramdown mechanic under this process.

With two ad hoc creditor groups already formed and relations between Altice France and its creditors already strained - it appears unlikely that a full consensual deal will be reached by parties at this stage.

A debtor is able to enter and close numerous conciliation processes - there is no limit in theory, however, each separate process has an initial term of four months (which can be extended once, for up to one month). A process can also be initiated with all relevant stakeholders or with only certain groups being invited to participate, for example, certain creditors.

How does a debtor exit conciliation?

To the extent it is possible to reach an agreement under this process, the plan can be sanctioned (homologated) with the effect that the judgment becomes public or it can be acknowledged by an order of the commercial court. The former judgment route is preferable as it protects new money providers from clawback among other things and enshrines any new money privilege in the transaction.

By homologating the agreement, creditors (especially those providing new money) may derive comfort in the event that an insolvency process is engaged later down the line as the process of homologation mitigates against the risk of claw back. If creditors under a mandat ad hoc want their agreement to be homologated, the mandat ad hoc must first be converted into a conciliation.

Where no consensual agreement can be reached, insolvency proceedings may be considered.

Hybrid Route

Financial restructuring plans for distressed French debtors can be negotiated within a consensual context and implemented within a nonconsensual process. Through this “evolution” of the process being used, parties can benefit from the confidential and private nature of the mandat ad hoc and conciliation proceedings while using sauvegarde (discussed below) as either a threat to straggling creditors or as a tool for cramming them down (if required).

This concept of a prepackaged plan has itself been enshrined in law, creating a statutory ability to prepare the terms of a sale during a consensual proceeding, but implementing it in a nonconsensual one. In this way, such plans benefit from the confidentiality derived from the amicable, albeit court-assisted, proceedings in the preparation stage while benefiting from a reduction of duration of process and homologation in the court phase.

Nonconsensual Process

Accelerated Safeguard (AS) is a nonconsensual implementation tool. The process has been used by several high profile debtors in the past two years; French retail group Casino made use of the procedure following holiday park operator Pierre et Vacances in 2022 and care home group Orpea (renamed Emeis) in 2023. Orpea saw the first use of the cross-class cramdown mechanism by a French court and was bitterly contested by dissenting creditors and shareholders for which some litigation is still pending.

When can AS be commenced?

AS is an insolvency procedure that cannot be commenced under the French regime until a company has started and concluded a conciliation procedure. To this end, conciliation is a prerequisite to AS.

At the end of the conciliation period, the French court will decide to open the procedure following a report from the conciliator on the progress of the conciliation and the prospects of the draft plan being approved, and provided the debtor has not been insolvent for more than 45 days. AS lasts for two months but may be extended at the company’s request to a maximum of four months. One of the advantages of the new regime is that it can be used to bind dissenting creditors with use of the cross-class cramdown.

As previously mentioned, the opening judgment for AS will place 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.

How will creditor classes be formed for the purpose of voting on an AS?

Creditors will be put into classes where there is a sufficient “community of interests” and they will be treated equally with others in the same class. Additionally, the treatment of each class under the plan must be proportionate to their existing claims or rights. We note that the community of interests test is different from the test under English law for Schemes and Part 26A, which provides that creditors with the same legal rights against the debtor will vote together, as opposed to considering their interests.

Article L. 626-30 of the French Commercial Code cites three further conditions governing the approach to class composition: (i) that secured creditors are separate from other classes; (ii) the division of classes respects any subordination agreements entered into prior to the opening of proceedings; and (iii) that shareholders are placed in a separate class.

By way of background under the previous French insolvency regime, (prior to the existence of AS), if the class threshold was not reached, the court had the power to impose a 10-year term-out of the debt, that is, a forced extension of debt maturities on creditors with a statutory defined repayment schedule in certain circumstances. This was last seen in French conference producer Comexposium in 2021.

What lessons have we learned from previous AS about class composition?

Recent cases that have used and adopted the new French restructuring regime can inform us on class composition: tourism company Pierre Et Vacances, Orpea and Casino.

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.”

In Orpea, the court approved 10 classes and the restructuring plan was approved by six classes with the required majority of two-thirds. See Orpea’s capital structure as of Dec. 31, 2022, HERE. In particular, the bank lenders who had elevated their claims in the first conciliation were placed in a separate, higher ranking class.

The four classes that voted against Orpea’s plan comprised unsecured creditors and shareholders. The court then had to decide if conditions for cross-class cramdown were met. It decided that the conditions were satisfied, hence the plan was approved and the unsecured debt was equitized.

For Casino, the court approved seven classes at Casino-Guichard Perrachon, or CGP, the TopCo, with classes 1 and 2 representing the secured creditors under the term loan B and the RCF:
  1. Term Loan and RCF lenders who have not committed to participate in the new operational financings;
  2. RCF Lenders who have committed to participate in the new operational financings;
  3. Unsecured creditors: EMTN, high-yield bonds, commercial paper;
  4. Quatrim bondholders, in respect of the guarantee given by Casino. These notes are secured at the Opco level;
  5. Casino’s Brazilian subsidiary GPA, in respect of the guarantee given by CGP;
  6. Subordinated debt holders: the perpetual hybrid bonds and the perpetual bonds; and
  7. The shareholders.
A takeaway of this composition is the clear distinction that emerged between investment funds and banks, a dynamic that may have implications for Altice. The “community of interests” concept does leave room for interpretation and uncertainty when considering classes.

Is it possible for class composition to be “gerry-mandered” creatively by a debtor? Can new money be provided for the group as part of the AS?

It is possible for some creditor classes to be elevated into more senior classes, therefore “gerry-mandering” the group. In Orpea, explained above, we saw certain bank debt elevated during negotiations giving them the right to sit in a separate class for the purposes of voting.

AS permanently establishes super priority ranking for the provision of new money. Court-approved injections of new money are protected from future clawback risk and benefit from privileged status if the debtor subsequently files for insolvency.

Although the capacity under an AS exists, for Altice, new money is not something that the group currently needs.

Does the AS permit cross-class cramdown?

AS also includes provisions for cross-class cramdown. This means that a plan can still go ahead even if it is not approved by all creditor classes meeting the two-thirds threshold. Cramdown must have the consent of the company and abide by the absolute priority rule (APR) that is, that senior classes must be repaid ahead of junior creditors and equity holders. (APR is considered in more detail below).

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 judicial administrators’ 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.

What does the APR mean for Altice, should it pursue an AS?

Sources have told Reorg that holders of telco Altice France’s senior secured debt that formed a second ad hoc group advised by Gibson Dunn are aiming to work together with the company to part-equitize their claims in exchange for a minority stake in the business and wipe out the group’s roughly €4.2 billion unsecured debt.

In the scenario above - existing equity holders continue to hold their interests, but unsecured debt (which ranks ahead of equity on liquidation priority) is wiped out. This is contrary to the APR - and as explained above, if cross-class cramdown is used under an AS process, the APR must be respected.

Majority shareholder Patrick Drahi therefore could risk losing his equity stake in Altice France if an AS featuring cross-class cram down is pursued.

Will the New York courts recognise the amendments purported by an AS?

There is precedent for the purported amendments sanctioned by an AS being recognised by the court of New York. French retail group Casino Guichard-Perrachon SA filed a chapter 15 petition in the U.S. Bankruptcy Court for the Southern District of New York in February of this year.

It would therefore be possible for Altice France, following an AS, to use a Chapter 15 application to effect amendments to New York law governed debt.

What execution risk (challenge) is there under the AS?

AS can be challenged at several different stages. Class composition can be challenged, as can cross-class cramdown.

The formation of classes can be challenged by the dissenting affected parties with appeals needing to be filed immediately after the notification of formation of the classes.

For example, Orpea’s case, a tenth additional creditor class was created and added to the nine classes proposed by the group’s judicial administrators as a result of an appeal challenging the composition of creditor classes led by a group of dissenting creditors representing about 13% of Orpea’s unsecured creditors, the so called “Support Club.” The additional class comprised lenders with cross-holdings in both the secured classes and unsecured class.

During an AS process, which uses cross-class cramdown, the valuation evidence during AS is crucial because a condition of cross-class cramdown is that creditors are better off under the plan than in a liquidation or immediate sale of the group.

Basically, if some creditors are not covered, it gives the borrower evidence to request a cramdown on the classes of dissenting creditors. These “out-of-the-money” creditors might not have much bargaining power in a restructuring unless they put up new money or they can present an differing relevant alternative to the court.
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