Authored by Barry Russell and Richard Hornshaw of Akin Gump
Introduction
The English court’s recent decision in Re AGPS BondCo PLC raises a number of important issues for fixed income investors in the debt of companies where those companies may be able to take advantage of the new restructuring plan in the UK. In particular, the judgment calls into question the extent to which liabilities which are initially pari passu are at risk of being subordinated through this in-court restructuring process.
The Background to the Restructuring Plan
For many years, both English and – in certain circumstances – foreign companies have been able to restructure their balance sheets through the English court “scheme of arrangement” process. In 2020, the “restructuring plan” (“RP”) was introduced as an alternative in-court restructuring mechanism. While there are a number of similarities between an RP and a scheme, one crucial distinction is that, for the first time, the RP introduced the possibility of a Chapter 11 style cross-class cramdown.
As with a scheme, an RP is a three stage process involving:
(i) an initial court hearing (the convening hearing) at which the Court will consider whether it has jurisdiction over the RP and, if so, whether to convene the proposed plan meeting(s) of the company’s creditors to vote on the RP;
(ii) the plan meeting(s) of creditors at which 75% by value in each class must approve the RP; and
(iii) a final court hearing (the sanction hearing) at which the Court will consider whether to sanction the RP, at which point it will become effective.
At the sanction hearing, the Court will consider the “relevant alternative” (i.e. what would most likely happen if the RP is not sanctioned) and, where there is a dissenting class, will only sanction the RP if it is satisfied that the dissenting creditors will be no worse off under the RP than they would be under the relevant alternative, and that the RP is otherwise fair taking into account, among other things, the distribution of benefits in the restructuring.
The Adler Group, and its Restructuring Plan
The Adler Group is a German real estate business, which owns some 26,000 residential units, as well as a small number of development projects. It has a fairly sizeable capital structure, which included some €6.1bn of German law-governed public notes maturing roughly annually from 2024 to 2029. Adler had been suffering some well-publicised challenges, including macro-economic headwinds and an adverse short-seller report. In 2022, in anticipation of an April 2023 maturity of debt at its subsidiary level, Adler launched a consent solicitation in order to effect a liability management exercise. That solicitation failed because one group of noteholders (holding the longest-dated, 2029 notes) voted it down. Accordingly, in February 2023, Adler pivoted and issued an application before the English Court for an RP. In order to do so, it utilised a provision in the (German law-governed) note documentation which allowed for the substitution of AGPS BondoCo PLC (an English newco) for the existing (Luxembourg) issuer, so long as the substitution did not leave the noteholders in a less favourable economic position.
The key commercial elements of the RP were:
(i) €940m of new money, given super-senior first ranking security;
(ii) the 2024 Notes were extended to 2025, and (together with certain of Adler’s other liabilities) given second ranking security;
(iii) the original maturity profile of the remaining notes (2026-2029) was maintained, and those notes were given third-ranking security;
(iv) the new money providers were paid substantial fees, and also given 22% of the equity in the group;
(v) the relevant alternative to the RP was an immediate insolvency (due to an imminent subsidiary debt maturity); and
(vi) the RP anticipated a realisation of the Group’s assets and distribution of proceeds to creditors.
The Court convened creditors meetings in which each series of notes formed a separate class. At least 75% of creditors in each class voted in favour of the RP, except in the 2029 noteholders class, so the vote did not pass in that class. Accordingly, Adler asked the Court to use the new RP powers to cramdown that class of creditors, and to sanction the RP. The dissenting creditors opposed sanction.
The Grounds of Challenge
The 2029 Noteholders had a number of different grounds of challenge including:
(i) Jurisdiction – as noted above, in order to bring itself within the jurisdiction of the English court, Adler had utilised a provision in the notes to substitute the existing Luxembourg issuer for an English newco. The 2029 noteholders argued that was, as a matter of German law, an impermissible use of the contractual substitution provision.
(ii) No Worse Off – the Company’s evidence was that all noteholders would be repaid in full under the RP, but would only receive 63c/€ under the relevant alternative. However, the 2029 noteholders’ evidence was that they may receive as little as a 10c/€ recovery under the RP, and would in any event be worse-off under the RP.
(iii) Pari Passu – perhaps most fundamentally, the 2029 noteholders argued that, under the relevant alternative, all the notes ranked pari passu but, under the terms of the RP, the 2029 notes would be temporally subordinated to all other notes, would be subordinated to the second-ranking security being given to just one series of notes (the 2024s), and would be put in a position where they ranked behind approx. €1.65bn of new and existing elevated debt. This was particularly unjustifiable given that the RP effectively constituted a liquidation plan.
(iv) Distribution of benefits – it was unfair for the existing shareholders to retain the majority of the equity in circumstances in which they were providing no additional support for the Company.
The Court’s Judgment
After an extremely compressed procedural timetable and hearing, the Court handed down its 164-page judgment on 21 April finding, amongst other things, that:
(i) the issuer substitution was valid as a matter of German law;
(ii) the No Worse Off test was satisfied because, on the balance of probabilities, the 2029 Notes would be repaid in full under the RP (or at least would recover more under the RP than they would under the relevant alternative);
(iii) there was no departure from the pari passu principle because the RP maintained the existing differential maturity dates, and because the Court found that all noteholders would be repaid in full under the RP such that any differential treatment was justified;
(iv) the RP does not need to be the best plan and the Court does not need to test if there could have been an alternative plan;
(v) the additional credit risk faced by the 2029 noteholders was not unfair in the circumstances, including because they had initially subscribed for longer-dated notes which would have been reflected in the prices paid for the notes; and
(vi) the retention by the existing shareholders of the majority of the equity was a concern, but did not ultimately provide a reason for the Court to refuse to sanction the RP in circumstances in which that arrangement had been agreed to by those most affected by the retention of equity (i.e. the new money providers).
Comment
This case was one of the most hotly contested, and closely-watched, English restructuring cases for a number of years.
From a practical perspective, it was a striking example of the difficulties which can arise where a company is seeking an expedited timetable for an RP. In this case, the Company requested a judgment sanctioning the RP within 9 weeks of its application. Where companies are able to command the timing of the RP proceedings, opposing creditors can be placed under huge time pressure to consider the company’s evidence and prepare their own evidence in response, in particular valuation evidence. Creditors are therefore well-advised to organise, and begin engagement with the company, as early as possible where an RP is likely to be proposed.
From a legal perspective, the judgment has identified a number of areas of uncertainty in relation to the appropriate approach to be taken by the English court in deciding whether to sanction RPs, in particular where a cross-class cramdown is envisaged, including:
(i) whether the Court was right to conclude that, just because it had found the 2029 Noteholders were likely to be repaid in full, that meant there was no departure from the pari passu principle (or that any departure was justified);
(ii) whether – when considering whether the distribution of benefits under an RP is fair – the Court should consider what alternative plan might have been put forward with a different allocation of benefits;
(iii) whether it is appropriate for the Court to apply the “rationality test” (i.e. whether a reasonable and honest person would approve the scheme) in the context of cross-class cramdown (i.e. where different classes have different views on fairness); and
(iv) what weight the Court should place on the fact that the majority of the creditors (including a bare majority of the 2029 Noteholders) voted in favour of the RP.
From a commercial perspective, the Court’s treatment of previously pari passu notes (including in an RP to liquidate Group assets) potentially raises significant issues for fixed income investors (and therefore issuers) in how they price pari passu notes issued in different series with different maturity dates.
In the couple of months since the Adler judgment, we have seen a number of further RP decisions which indicate that there is an inconsistency of approach at the High Court level on some of these issues.
The Court of Appeal has recently granted the 2029 noteholders permission to appeal. That appeal hearing will provide a critical opportunity for the Court of Appeal to provide guidance on the correct application of the RP legislation.
