Distressed debt & claims trading - Market alert - July 2015

This alert summarises some of the significant issues and developments in the distressed debt & claims trading space. The information contained in the alert is based exclusively on publicly available sources.

Lehman Brothers Holdings Inc - motion to estimate LBHI guarantee claims at zero

On 10 June 2015, Lehman Brothers Holdings Inc (LBHI) filed a motion seeking to estimate certain LBHI guarantee claims relating to the primary obligations of Lehman Brothers International (Europe) (in administration) (LBIE) at zero dollars for reserve and distribution purposes (the Motion).

Any objections to the Motion must be filed by no later than 10 July 2014 at 4:00 pm (Eastern Time). The hearing has been scheduled for 22 July 2015 at 10:00 am (Eastern Time).

According to the Motion there are approximately 1,150 disputed claims that assert guarantee claims against LBHI based on primary obligations of LBIE.

LBHI asserts in the Motion that it should not be required to pay or hold reserves for any of the disputed claims because, amongst other things, unsecured creditors of LBIE have either already received 100% of their admitted claims or LBIE has reserved in full for the remaining disputed claims. In relation to LBHI’s primary argument that unsecured creditors with allowed LBIE claims have already been paid 100%, we would just note that that precise point is currently before the courts to determine and it may well be that the court decides that no unsecured creditor of LBIE has in fact received 100% of its allowed claim.

Although LBHI appears to acknowledge that certain holders of LBIE-based LBHI guarantee claims may be entitled to receive additional amounts due to the difference in the foreign exchange rates used in the LBIE administration and the LBHI Plan (the Plan Exchange Rate Loss), it appears to suggest that LBIE will pay additional amounts in respect of such Plan Exchange Rate Loss. If that is indeed LBHI’s argument, then that is not correct - at no point will LBIE pay any additional amounts for Plan Exchange Rate Loss. It is true that unsecured creditors of LBIE may (or may not) get additional payments from LBIE for any currency conversion loss they have suffered as result of having their foreign currency debts converted by LBIE to GBP (as required under the Insolvency Rules) (the Currency Conversion Claim), however, that is not the same thing as Plan Exchange Rate Loss. In any event, entitlement to Currency Conversion Claim is by no means certain at this point - not until the Supreme Court has ruled on whether such an entitlement in fact exists as a matter of law. Assuming Currency Conversion Claim exists as a matter of law and LBIE pays additional amounts in respect of it, it is not clear that such amounts will go towards filling-up part or all of any Plan Exchange Rate Loss and, in any event, payments in respect of Currency Conversion Claims will not, in all cases, fill-up the Exchange Rate Loss claim in whole.

Given, in particular:

  • that the question of the existence of Currency Conversion Claim remains to be determined by the Supreme Court
  • the uncertainty as to whether payments in respect of Currency Conversion Claim (and/or interest) go to fill-up any Plan Exchange Rate Loss, and 
  • that LBHI is proceeding with the Motion on the basis that any unsecured creditor who does not object will be deemed to have accepted the Motion,

we would advise unsecured creditors of LBIE with LBHI guarantee claims (particularly LBHI guarantee claims based on specific guarantees issued in respect of derivative contracts with LBIE, as opposed to guarantee claims based on the more generic LBHI guarantees issued to S&P and/or the LBHI Board resolution guarantee) to consider lodging an objection to the Motion.

Greece: capital controls

On 28 June 2015 a decree was issued by the Greek Government imposing capital controls. A copy of the decree is available here and an English translation is available here. In summary: 

  • all credit institutions operating in Greece will remain closed until Tuesday, 07 July 2015 (history shows that not only is the scope of the controls extended over time but the time period during which restrictions apply are also invariably extended)
  • cash withdrawals form ATM machines are capped at €60 a day per bank card (save in respect of cards issued outside of Greece)
  • subject to some limited exceptions, transfer of money to accounts held outside of Greece is not permitted. The decree does not currently restrict the transfer of physical cash out the country
  • although it is currently unclear, the decree would appear on its face to also restrict credit institutions in Greece from making payments of amounts owing to their own counterparties (save for any transactions which have been registered in the central payment systems prior to 28 June)
  • a five member committee for Approval of Bank Transactions has been established to approve, on a case-by-case basis, any transactions deemed necessary for the protection of public or social interests, including, for example, transactions for the payment of medical expenses or import of pharmaceuticals
  • credit institutions breaching the rules face a fine of 10% of the value of the transaction concerned and the employment contracts of any employees involved in any such transfer is required to be terminated, and
  • The Bank of Greece and the Hellenic Republic are excluded from the scope of the measures and, therefore, are not directly affected by the controls imposed.

As a consequence of the capital controls, the Hellenic Republic Capital Market Commission has announced that the ATHEX regulated market and the EN.A (the alternative market of the Athens Exchange) shall remain closed from 28 June until 06 July inclusive. The Electronic Secondary Market “HDAT”, for government bonds (operated by the Bank of Greece) shall also remain closed for this period. The announcement also suspends: (i) redemption of mutual funds’ units; (ii) the operation of ATHEXClear for securities traded on ATHEX and EN.A; and (iii) the settlement of securities traded on the Greek market by the Hellenic Central Securities Depository.

The capital controls not only raise questions of the legality and enforceability of the controls themselves but also of the legal and commercial implications on contracts that are either governed by Greek law, are denominated in Euro or are otherwise required to be performed in Greece. There is now, of course, also the heightened spectre of some form of Grexit which will further aggravate the legal and commercial consequences of certain contractual obligations. A brief overview of the legal and contractual implications of Grexit can be found here

General Healthcare Group - debt restructuring

Simmons & Simmons acted for the PropCo (Theatre Group) arm of the General Healthcare Group (and their BVI parents) in the successful restructuring of their debts worth circa. £2bn. The Theatre Group is the landlord of the majority of hospitals being operated by BMI Healthcare, the largest private healthcare provider in the UK.

Simmons & Simmons acted for over three years on the complex restructuring of the group’s debts. The complexity of the deal is a result of the documentation and negotiations required to address the intricate corporate and multi-tranched debt structure of the group. A significant portion of the group’s debt is also securitised and listed on the Irish stock exchange. This resulted in the involvement of a large number of parties with varying interests and rights in the restructuring and a range of novel and multi-faceted legal issues. The restructuring has been described as the most complex European securitisation restructuring ever, according to Debtwire.

Given the length of time it took to complete the restructuring, not only did Simmons & Simmons advise the Theatre Group on the restructuring itself; but importantly, assisted in ensuring the stability of the Theatre Group’s business throughout this period. This included a successful defence of a Competition Commission investigation into the private health care sector, whose recommendation to break up BMI’s business could have potentially further aggravated the already distressed business of the Theatre Group. In addition to this, Simmons and Simmons advised the Theatre Group on all aspects of its business during this distressed period which included:

  • advising on landlord-tenant issues in relation to the properties
  • advising on corporate governance issues
  • advising on directors’ duties in continuing to trade the business during the "twilight zone"
  • compliance with Companies Act obligations
  • ongoing compliance with obligations under the various finance and contractual documents
  • compliance with obligations under the new EMIR regime
  • environmental compliance
  • advising on potential claims against third parties
  • advising on and obtaining appropriate buildings and D&O insurance cover
  • advising on capital reduction, audit and accounting issues, and
  • advising on and negotiating the various contractual agreements entered into by the Theatre Group during the "twilight zone".

The Simmons & Simmons team was led by partners Peter Manning and Richard Cook.

Restructuring high yield bonds - the DTEK scheme of arrangement

There have been some recent positive developments in connection with the use by foreign companies of English law schemes of arrangements to restructure debt obligations. We, therefore, summarise below the key points and takeaways from the recent DTEK case (a more detailed commentary can be found here):

  • Following the Apcoa case (which concerned bank debt originally governed by German law), the English court sanctioned a scheme of arrangement in respect of the obligations of a Dutch entity under high yield bonds originally governed by New York law where the governing law clause was amended to English law with the specific intent of creating sufficient connection to England for an English court to sanction a scheme of arrangement.
  • Whilst there are examples of other companies with New York law governed bond debt using an English law scheme to implement a restructuring, this has principally been achieved by virtue of a centre of main interest (COMI) shift (see Re Magyar Telecom and Re Zlomrex International Finance). DTEK is the first reported case where New York law governed bonds have had their governing law amended as a “gateway” to English scheme jurisdiction.
  • Notwithstanding this, a COMI shift of the debtor to England (to ensure that the debtor has a foreign main proceeding in England) will remain important as a means to ensure Chapter 15 recognition (and associated relief) in the United States. Whilst the court in DTEK found that the change of governing law was, of itself, sufficient for the purposes of scheme jurisdiction, the restructuring did also involve a COMI shift of the debtor from the Netherlands to England.
  • As there is now clear and consistent English law authority for schemes to be used to implement successful restructurings of New York law governed debt obligations, the cost and time advantages of a scheme over Chapter 11 is likely to mean that schemes of arrangement are increasingly considered as a viable and, in some cases, preferable alternative to Chapter 11 for restructuring New York law governed debt instruments. As and when the high yield default rate increases from today’s historic lows, the scheme of arrangement’s position as the pre-eminent international restructuring tool is likely to be confirmed.
  • Creditors of non-English law governed debt obligations who are worried about being schemed against their wishes should always check the amendment provisions of the relevant debt documentation. Prima facie any document which requires less than 75% of creditors to amend the governing law / jurisdiction provisions potentially provides an option for the debtor to invoke an English court’s scheme jurisdiction via an amendment to these provisions.

Vanderlande Industries BV acquisition of Dinamic Group using amended Spanish insolvency law

Simmons & Simmons has advised Dutch company, Vanderlande Industries BV, on its acquisition of the Spanish-based Dinamic Group. This was the first use of amended Spanish insolvency law to acquire the business of an insolvent company.

Vanderlande is primarily engaged with the manufacture of automated lifting and handling equipment. Vanderlande acquired ten companies in the Dinamic group (together with a US subsidiary), by way of simultaneously (a) seeking their bankruptcy proceedings, (b) opening the liquidation phase of those proceedings and (c) launching an offer for the acquisition of the companies.

The deal was particularly distinctive as it allowed for a debt-free sale pursuant to the Spanish Insolvency Act, as modified by Royal Decree law 11/2014 of 05 September 2014. For the first time since the amendment to Spanish insolvency legislation, the target was sold free from security following an application to the Spanish courts. The Simmons & Simmons team successfully obtained the court’s sanction for the release of all mortgages granted in favour of “privileged creditors” (without the consent of those creditors).

The transaction demonstrates how the modified Insolvency Act has opened the doors to a more simplified, secure and speedy process to acquire the business of insolvent companies within the framework of an insolvency process ("concurso de acreedores"). Key benefits to purchasers include:

  • buying the business for a fixed price
  • acquiring only selected assets
  • acquiring the business free from liabilities, debts, liens and encumbrances (with the exception of any employee or social security liabilities)
  • ability to acquire only selected employees (with the possibility of establishing new conditions of employment), and
  • automatic subrogation of the purchaser in specified contracts, licenses and authorisations, without the need for third-party consent.

The multidisciplinary Simmons & Simmons team was led by Andres Mochales in the Madrid office.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.