#16691 - Chapter 11 Usc - Debt Restructuring

Overview:

• Title 11 of the United States Code (the “US Bankruptcy Code”)

  • Chapter 7 (Winding Up)

  • Chapter 11 (Reorganisation)

  • Chapter 15 (Foreign Main and Non-Main Proceedings)

Truvo:

• Capital structure:
  

• Restructuring:
  

  • The companies in red filed under Chapter 11.

  • Sale of shares in T USA Inc to NewCo.

  • Senior lenders assign their claims to NewCo in exchange for equity in NewCo or equity + PIK notes.

  • High-yield bondholders get 2% warrants + cash payment of 20 million + participation in anticipated cash refund.

Almatis:

• Value broke in the senior debt class.

• Pre-pack:

  • Debt reduction from $1.044 billion to $410 million.

  • Senior lenders get equity and debt in the new group.

  • Second lien lenders get warrants.

  • Mezzanine lenders get nothing.

  • This attracted overwhelming support from senior lenders, but was rejected by the second-lien and mezzanine lenders.

• Amended plan:

  • DIC to inject $100 million in new equity.

  • Senior lenders to be paid in full.

  • Second lien lenders get a pro rata share in PIK notes.

  • Mezzanine lenders get a pro rata equity share.

  • DIC remains the majority shareholder.

Chapter 11 of Title 11 USC:

• Reorganisation as the main purpose.

• Balance sheet reorganisation through:

  • Debt write-downs;

  • Debt-for-equity swaps; or

  • Deferral of payment.

• Business reorganisation:

  • Reorganisation of business operations.

  • Resulting in smaller, leaner companies.

• Initiating reorganisation under Chapter 11:

  • Voluntary filing under S301:

    • By the “debtor” under S190(a).

    • Through a petition.

    • Insolvency is not a precondition to a voluntary filing..

    • S1112(b): The voluntary filing may be dismissed on a motion brought by an interested party if it is not filed in good faith.

  • Involuntary filing under S303:

    • By three or more creditors with unsecured claims (which, in the case of secured creditors, refers to the difference between their claims and the value of the collateral) totalling $10,000.

    • The debtor may controvert the filing. If so, it will only go ahead if the debtor is cash flow insolvent.

    • See Re Rais Investment Grade.

• The automatic stay:

  • S362(a): An “automatic stay” comes into effect upon the filing of the petition.

    • Pre-petition creditors are prevented from enforcing their claims.

    • Secured creditors are prevented from exercising the remedies that are available to them under non-bankruptcy law on default by the debtor. This means that the debtor’s assets cannot be physically seized.

    • Nationwide and possibly also worldwide (Truvo).
      In Truvo, the stay was extended to both the Delaware-incorporated holding companies and European operating subsidiaries that had guaranteed parts of the debt. The court held that a failure to grant such stay would cause immediate and irreparable injury to the injury to the debtor’s estate, thereby jeapordising the debtor’s ability to consummate a reorganisation plan. Actions against the European companies would potentially force them into insolvency proceedings and irreparably destroy creditor value.

    • The stay comes into effect automatically and without notice.

    • The stay cannot be waived.

    • Protecting third parties as well? See Re Grace & Co.
      In exceptional circumstances, the stay may be extended so to protect non-debtors where “there is such an identity between the debtor and the third-party defendant that the debtor may be said to be the real defendant and that a judgment against the third-party defendant will in effect be a judgment or finding against the debtor.” This is the case where a judgment against the third-party defendant would trigger the debtor’s indemnification obligation. The indemnity obligation impairs a successful reorganisation by depleting assets currently available.

  • S362(b): Exceptions.

    • Set-off and netting of financial contracts.

    • Public policy exceptions (such as fines for pollution).

  • S362(d): Stay-lifting litigation.

    • The stay is lifted automatically after 30 days unless the court orders a continuation.

    • The stay may be lifted if there is “cause” for removal.

    • The stay can also be lifted if the debtor lacks equity in the collateral, and the collateral is not necessary for an effective reorganisation of the debtor. The burden of proof actually lies on the debtor, who must prove that there is a reasonable prospect of reorganisation in order to be granted a continuation of the stay.

  • What constitutes “cause”?

    • If the debtor damages the collateral;

    • If the debtor no longer insures the collateral; or

    • If there is a “lack of adequate protection”.

  • Under S361, an absence of adequate protection constitutes a “cause”. What then is “adequate protection”?

    • Adequate protection means making periodic cash payment to secured creditors if, and to the extent that, the stay decreases the value of the collateral.

    • Or giving secured creditors some additional or replacement lien.

    • Or giving secured creditors some other kind of protection that is the “indubitable equivalent” of the rights that they are asserting.

    • Secured creditors are entitled claim administrative expenses to the extent that the protection given to them turns out to be inadequate.

• Control:

  • The Debtor In Possession (“DIP”) controls the “estate” as a new legal entity.

  • Or, in the alternative, a Trustee In Bankruptcy (“TIB”) will be appointed. The rights and duties of the TIB are set out in S1107.

  • Creditors may ask for a TIB to be appointed for reasons of fraud or gross mismanagement by exiting management, although this is rare (see Enron).

  • An examiner can also be appointed to investigate the affairs of the debtor (see Lehman).

  • The DIP can continue to use cash in the ordinary course of business.

  • Court approval is however required for:

    • Disposals of the debtor’s assets outside the ordinary course of the debtor’s business;

    • To pay wages;

    • To use cash collateral; and

    • Approval of post-petition financing.

  • The DIP also has the exclusive right to propose a plan for the first 120 days (and this is extendable).

• Proposing a plan:

  • The debtor has the exclusive right to propose a plan in the first 120 days.

  • Other parties (and, in particular, the creditors) have a right to propose a plan if:

    • The debtor fails to propose a plan within 18 months of the filing; or

    • The debtor’s plan has been rejected.

• Plan procedure:

  • Consider the creditors’ claims and the shareholders’ interests.

  • Creditors and shareholders are grouped into different classes and are treated based on their class.

  • Only substantially similar claims or interests are grouped together in the same class.

    • Claims with different legal rights are grouped into different classes.

    • Each secured claim is a class of its own (if the underlying collateral or the priority of the claims are different).

  • Substantially similar claims are necessarily grouped in the same class.

    • In principle, all unsecured creditors belong in the same class.

    • Unless there are good reasons (as might be the case if an unsecured creditor’s contribution is vital to the debtor’s business).

  • Creditors of the same class have the same legal status.

  • The more classes, the more likely that at least one class will dissent. See the absolute priority rule (considered later).

  • Disclosure statements and solicitation rules:

    • The debtor can begin soliciting acceptance only after court approval.

    • There must be disclosure of “information of a kind, and in sufficient detail, as far as is reasonably practical, [for creditors and shareholders] to make an informed judgment about the plan”.

    • Solicitations can only be made for the plan on the table.

    • Creditors can urge other creditors to vote against.

• Votings on the plan:

  • Creditors vote in classes.

  • Approval by the class requires a simple majority (i.e. half) in number of the creditors representing at least two-thirds in value.

  • Votes may be disqualified if they are not procured and exercised in good faith (as is the case in opportunistic obstructions of feasible reorganisations).

    • This is especially important in relation to vulture funds.

  • Classes the receive nothing are deemed to have rejected the plan.

  • And there is constructive approval by the unimpaired classes.

• Court approval of the plan:

  • What if there are dissenting classes? The court can approve a plan despite the presence of dissenting classes if certain conditions are met.

  • At least one impaired class must approve the plan.

    • The more classes there are, the likelier that at least one impaired class will approve the plan.

  • The “best interest of the creditor” test: The amount that the creditors would get under the plan must be compared to the amount that they would get if the debtor were liquidated immediately.

    • Each dissenting creditor must receive an amount that is equivalent to at least the liquidation value of his claim.

  • The “fair and equitable” principle: The plan must be fair and equitable to the dissenting classes.

    • For secured creditors, “fair and equitable” treatment means retaining their lien over their collateral and...