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Orrick, Herrington & Sutcliffe LLP | November 2015

Current Trends in the RestructuringMarket

The use of UK Restructuring Procedures inEuropean Restructurings and an Update on ItalianInsolvency legislation

Milan Lunchtime Briefing 17 November 2015


Madeleine Horrocks

Structured Finance Partner, Milan

[email protected]

+39 02 4541 3841

Stephen Phillips

Restructuring Partner, London

[email protected]

+44 20 7862 4704

Daniela Andreatta

M&A and Private Equity Special Counsel, Milan

[email protected]

+39 02 4541 3885

Speakers

2

mailto:[email protected]




This presentation considers:

• The current Restructuring Market

• Certain English Insolvency and Restructuring Procedures

– Administrations and Pre-Packs

– English Scheme of Arrangement

• EU Regulations on Insolvency Proceedings and "COMI shifts"

• Case Studies

• Italian Insolvency Update

Introduction

3


Restructuring Market

4

• Low default rate in Europe

• Emerging market stress

• Focus on commodities

• High yield bonds – the next wave?



5

Defaults in Europe at a near all time low

0

2

4

6

8

10

12

Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 Dec 13 Dec 14 LTM Aug 15 AdjustedYTD Aug 15ª

By number of deals By value

European Leveraged Loan Default Rates

(%)

a Adjusted YTD is pro forma for C*/CC* rated issuersSource: Fitch Leveraged Credit Database

0

5

10

15

20

25

30

35

2Q

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4Q

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2Q

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4Q

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2Q

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4Q

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2Q

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4Q

13

2Q

14

4Q

14

2Q

15

(%)

*end of quarter values, by volume of bonds defaultedSource: Fitch, Bloomberg

European High-Yield Default RatesTrailing 12-months



6

Emerging Markets Debt


Sector Focus - Overview

European HY Price Indices by Industry (Rebased, 4-Week Moving Avg.)• Key industrieshave deterioratedin the last year

Source: Bloomberg on 9-Nov-15. Each sector index is composed of the high yield bonds with(i) Western Europe country of risk, (ii) maturity date beyond 01-Jan-17, and (iii) issue date priorto 09-Nov-14. Where there was multiple bonds outstanding per issuer, the average was used 7

90%

96%98%

68%

86%85%

92%

60%

70%

80%

90%

100%

110%

120%

Nov-14 Feb-15 May-15 Aug-15 Nov-15

Communications Consumer, Cyclical Consumer, Non-cyclicalEnergy Industrial Basic MaterialsEuropean HY (ex. Financial)


15

7

1

9

6

3

7

1716

26

6 6

17

6

3 3 34

2

52

--

20

40

60

80

100

120

--

5

10

15

20

25

30

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

$/bbl oilIssuance($bn)

EMEA Energy HY Issuance Brent Crude Oil - ICE

Sector Focus – Natural Resources

• Oil prices expected to remain below $65 /barrel for the foreseeable future (bearcase as low as $20)

• Increase in defaults in the US nottransferred to Europe – yet

• Larger companies either have sufficientflexibility or have implemented short-termsolutions (asset sales, A&Es, covenantresets, etc.)

• Expect changes in 2016 due to (RBL-resets, hedges coming off, additional CFdeterioration)

• Substantial uncertainty driving environment– challenges to business model, Chineseimpact

• Large cap dis-/stressed opportunities,though unclear whether any will restructure(rights issues keeping them afloat for now)

EMEA Energy HY Issuance1IssuesOil & Gas

Metal Prices1IssuesMetals & Mining

50%

60%

70%

80%

90%

100%

110%

Oct-14 Jan-15 Apr-15 Jul-15 Oct-15

Aluminium - LME Copper - LME

Steel (Hot Rolled, US) Zinc - LME

1. Source: Bloomberg, Quarterly average oil price

74%

76%

54%

73%

8

2011 2012 2013 2014 2015


Purpose of UK administration

a) Rescuing the Company as a going concern

b) Achieving a better result for creditors as a whole than a winding up

c) Realising property for benefit of secured or preferential creditors

Can only be (b) or (c) if (a) is not reasonably practicable to achieve or (b) would bebetter for creditors as a whole. If (c), it must not unnecessarily harm the interestsof creditors as a whole.

Administration

9


• An administrator may be appointed:

– out of court by

• a holder of a qualifying floating charge ("QFC") appointing an administrator

• a company or directors appointing an administrator

– by an application to court by the company or a creditor

• A QFC is a holder of a floating charge which expressly gives the power to appointan administrator and which creates security (or the holder holds additionalsecurity) over the whole or substantially the whole of the company’s property

• Role of Administrator

– Officer of the court

– Duties to all creditors

– Agent of the company

Administration

10


• Powers

– Directors’ powers subordinated to administrator

– Has the power to sell and purchase property, raise and borrow money, grantsecurity, bring or defend any action, execute any contract, deed, receipt orother document, can appoint or dismiss directors, call a meeting ofshareholders, investigate the conduct of the company and its directors anddistribute money to secured and preferential creditors and, with the court’spermission, unsecured creditors

• Effect of administration

– Moratorium - stay on certain creditor actions against company or its property

• No winding up petitions

• No appointment of administrative receiver

• No enforcement of security

• No litigation

• No repossession of goods in company’s possession

• No forfeiture by re-entry

– Court or administrator can consent to some of these actions

Power of administrators and effect of administration

11


• Not part of the administration legislation but a practice has developed whereby adeal is negotiated with a purchaser prior to the appointment of the administratorsand is effected by the administrators immediately following their appointment

• Pre-packs have been recognised as a legitimate restructuring tool – Re KayleyVending Limited [2009] EWHC 904 (ch)

– The court reviewed academic and other commentary on pre-packs andconcluded that the administrators must consider the following factors: -

• whether a pre-pack achieved the best deal for the assets sold

• whether the trading of the insolvent company whilst negotiations took placecost the creditors more (in terms of debt incurred by the company) than theamount by which they benefited from the sale price achieved

• whether the inability of creditors to influence the transaction before itcompleted was outweighed by the benefit to them of the deal achieved

Administration – ‘Pre-packs’

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Pros

• Enhances intrinsic value of the business

• Less disruption to the business

• Cheaper than a trading administration while a deal is negotiated

• More likely to result in the sale rescue of the business

Cons

• Creditors have no control over the process

• No transparency with respect to sales process or potential buyers

• Reputation of ‘Phoenix’ companies

Administration – ‘Pre-packs’

13


"The inherent flexibility of a scheme of arrangement has proved particularlyvaluable in such cases where the existing financing agreements do not contain

provisions permitting voluntary modification of their terms by an achievable majorityof creditors, or in cases of pan-European groups of companies where co-

ordination of rescue procedures or formal insolvency proceedings across morethan one country would prove impossible or very difficult to achieve without

substantial difficulty, delay and expense".

Mr Justice Snowden in the Van Gansewinkel Groep Scheme

22 July 2015

English Scheme of Arrangement

14


What is it a Scheme of Arrangement?

• A procedure under Companies Act 2006 (not an insolvency procedure)

• Compromise or arrangement proposed by the company with its creditors and/ormembers or any class of them

• Company must have a "sufficient connection" to the UK – market trends haveresulted in a number of European companies using schemes, sometimes movingtheir COMI or changing the governing law of debt documents to achieve a"sufficient connection" - Apcoa Parking (German), Magyar Telecom (Dutch /Hungarian), SEAT (Italian), Zlomrex (French), La Seda (Spain), Yüksel (Turkey),TORM (Denmark), Russian Standard Bank (Russia).

• Note English law governed documents plus a few English creditors likely toachieve "sufficient connection."

English Scheme of Arrangement

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• Will be binding on ALL relevant scheme creditors and or members if the scheme is

approved at a creditors/members meeting by 75% by value and a majority in

number present and voting

• Each class of creditors/members must approve the terms of the Scheme

• No constraint as to what can be agreed between the company and its creditors /

members (i.e. debt for equity swaps, amending documents, issuance of new debt

instruments)

• Can release third party guarantees

• Recognised under Chapter 15 of the US Bankruptcy Code

• Recognised in Europe pursuant to Brussel’s convention but some doubt.

Process

• Application to court

• First hearing to consider jurisdiction

• Meeting of creditors/members

• Second hearing to consider fairness

English Scheme of Arrangement (contd)

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• Enacted 31 May 2002

• Establishes common rules on cross-border insolvencies

– Uniform conflict of laws rules

– Does not harmonise substantive law or policy

• Provides a uniform set of rules to identify where insolvency proceedings shouldbe commenced and determine which country’s law is to be applied

• EU Member State with "centre of main interests" ("COMI") to have primaryjurisdiction

– In general, once proceedings are opened in a Member State, they are to beautomatically recognised in all other Member States "without further effectand without further formalities"

• Applies only when COMI is in EU

• Exclusions: insurers, banks and investment undertakings

• Applies on a company-by-company, not group, basis

EU regulation on insolvency proceedings

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• Company’s COMI (Article 3(1) of EC Regulation)

– "The place where the debtor conducts the administration of his interests ona regular basis and is therefore ascertainable by third parties"

– Rebuttable presumption that COMI is located in the jurisdiction of thecompany’s registered office (Article 3(1) of EC Regulation)

– Re Eurofood IFSC Ltd. This presumption, however, can be rebutted only iffactors which are both objective and ascertainable by third parties (i.e., bycreditors of the company) establish that the COMI should not be in thelocation of the debtor’s registered office, e.g. where a company does not carryout any business in the territory of the jurisdiction in which its registered officeis situated

– COMI is determined as at the date of opening of the insolvency proceedings

– COMI is a crucial concept and will affect applicable law

• AIM: universal scope EU-wide, to avoid forum shopping (ironic!)

• Automatic recognition EU-wide

• Recast Regulation comes into effect in 2017

EU regulation on insolvency proceedings

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A.T.U. Auto-Teile-Unger – UK pre-pack

administration sale for a German

Company

The restructuring of A.T.U. Auto-Teile-

Under (ATU), the German auto car parts

reseller, was completed following a pre-

packed sale of ATU through a UK

administration.

Prior to the restructuring the group had a

€130m of Junior Notes. The junior notes

were released using the release

mechanics under the (ICA) which

provided that the Senior Notes and Junior

Notes and their corresponding guarantees

and security could be released in the

event of an enforcement.

There was no need for a COMI shift but a

UK pre pack was achieved by

incorporating a UK holding company.

Case studies for European Companies using UKprocedures

19

STEP 1Company is

incorporated as anEnglish company and

wholly ownedsubsidiary of ATU

STEP 2Company purchasesthe shares of HoldCopursuant to a share

purchase agreementwith LuxCo

STEP 3Company is put into

an English lawadministration and its

assets areimmediately sold toBidCo, free from all

previousindebtedness

TopCo(Cayman Islands)

BidCo(Luxembourg)

HoldCo(Germany)

InvestCo(Germany)

ATU(Germany)

Company (inadministration

(England)

Company(England)

HoldCo(Germany)

InvestCo(Germany)

ATU(Germany)

HoldCo(Germany)

InvestCo(Germany)

ATU(Germany)

Company(England)

German Company is restructuring using a UK pre pack administration


Apcoa Parking AG

• Apcoa Parking AG’s scheme at the beginning of 2014 involved a three monthextension to the maturities of Apcoa’s loans.

• The scheme was sanctioned by the UK High Court in London on 14 April 2014.

• In Germany insolvency laws require companies experiencing payment defaults tofile for an insolvency process within 21 days of the occurrence of the default andso the scheme allowed the discussion to continue outside the possible shadow ofan insolvency filing.

• The governing law of the debt subject to the scheme was originally German law.

• In order to pass the sufficient connection test to allow the High Court to takejurisdiction the lenders agreed to change the law of the documents to Englishlaw, a process which could be achieved by a majority lender vote (in contrast to ahigher threshold necessary for an extension of the maturities).


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Germany Company with German law debts changes law to English law touse a UK scheme


Magyar Telecom BV

• Magyar Telecom BV is a Dutch business whose operations were focused on Hungary.

• Following low economic growth in Hungary and adverse tax changes, Magyar Telecom needed torestructure its €425m high yield bonds governed by New York law.

• The key problem was that, consistent with many New York governed high yield bonds, thepercentage required to agree to a compromise of a debt to effect a debt equity swap was 90%.

• To achieve the statutory threshold for a UK scheme Magyar Telecom BV needed the support of75% by value and a majority in number of the noteholders present and voting at the meeting – alevel of support far lower than the 90% required under the terms of the bonds.

• To obtain a "UK nexus" so that a UK judge would take jurisdiction, Magyar Telecom BV shifted itsCOMI from Holland to the UK.

• One key advantage of a COMI shift is that if the English courts were to find that the COMI ofMagyar Telecom BV was in England, the New York courts would likely follow suit.

• The New York bankruptcy courts granted an order under Chapter 15 of the Bankruptcy Coderecognising the scheme.

• Chapter 15 provides that where the main proceeding of an insolvency or debt compromise is in aforeign jurisdiction the US bankruptcy court may recognise the "main proceeding" and hence nobondholder could take action in a New York court to seek recovery under the bonds.


21

Dutch issuer "Comi" shifts to England to use an English scheme

Orrick, Herrington & Sutcliffe LLP | November 2015 22

Case Study: Seat Pagine Gialle

Corporate and Capital

Structure

Sponsors (through 2 levels of Lux HoldCos)

CVC Capital 29.4%

Permira 13.1%

Various investors 7%market

SEAT PAGINE GIALLE S.p.A.

(“SPG”)

Senior debt € 630 mln

SSB €750 mln

+ security package

LIGHTHOUSE INTERNATIONAL S.A.(Lux – «LH»)

Subordinated bond € 1.3 bln

4 Italiansubsidiaries

guarantee

49.6% 50.4%

1 UK subsidiary 1 Germansubsidiary

Italian debtor restructures its indebtedness using an English schemeSeat Pagine Gialle s.p.a.

Orrick, Herrington & Sutcliffe LLP | November 2015 23

Case Study: Seat Pagine Gialle

• The overall debt of approx. € 2.7 bln was reduced to € 1.396 bln via an Italian out-of-courtrestructuring (under Art. 67 of the Italian Bankruptcy Law) which incorporated the following actions:

1. Exchange of subordinated bonds with new bonds, some convertible in LH shares andsome in SPG new bonds;

2. Conversion of new convertible LH bonds in LH shares;

3. Merger LH/SPG;

4. Issue of new SPG bonds and conversion of LH remaining bonds;

5. Rescheduling of SPG debt;

6. Spin-off of SPG business.

• To complete the restructuring, SPG filed for a scheme of arrangement in the UK that allowed to«drag» a dissenting minority of senior lenders.

• The scheme of arrangement was commenced in July 2014 and was sanctioned by the UK courtmid August 2014.


Step 1: New holdcos owned by senior lenders are incorporated

Step 2: Senior Lenders accelerate senior debt and appoint administrators over holding companies in theexisting group

Step 3: The administrators sell the shares of the operating companies to the new group at the best pricereasonably obtainable (consideration for the sale is the release of a proportion of the senior debt). Junior debt isleft behind in the existing group and Intercreditor release mechanics are used by the Agent to releaseguarantees and security in favour of mezzanine lenders granted by the Opcos

Step 4: Scheme of arrangement becomes effective to ‘roll over’ a proportion of the senior debt to the new group(the scheme only includes senior lenders to bind dissenting senior lenders to transfer their debt to the newgroup)

Pitfalls

• Not a true cram-down of out of the money creditors as their debt is left behind

• Need for an intercreditor agreement to release junior debt

Case Studies – Scheme and ‘Pre-pack’

24

Holdco 1

Topco

Opcos

Administrator sale ofbusinesses/Opco shares

Newco

Midco

Opcos

SeniorLenders

Administratorsappointed

+


• On 27 June 2015 the Italian government enacted the law decree n. 83(converted into law on 6 August 2015, the «2015 Reform») that includesmaterial changes to the Italian bankruptcy law («IBL»)

• The changes cover bankruptcy proceedings (fallimento) and in particular in-court proceedings (concordati preventivi) and semi in-court proceedings underarticle 182bis of the IBL («182bis Proceedings»)

• The rationale behind the changes is to (a) accelerate bankruptcies (b) grantmore powers to creditors in in-court restructuring proceedings and (c) eliminatehold-out creditors

• The changes (especially to pre-packs) may lead Italian debtors to makerecourse to UK restructuring proceedings

Update on Italian Insolvency legislation

25


• The 2015 Reform aimed at increasing transparency in the appointment oftrustees (curatori) and improving the efficiency and speed of sale proceedings.

• New rules:

(i) trustees are requested to have adequate resources and structures to carryout the job and are permitted to retain specialised servicers

(ii) payment of any fee to trustee is subject to (partial) distributions to creditors

(iii) an on-line national register is created at the Ministry of Justice covering dataof trustees, commissioners and liquidators appointed nationwide inbankruptcy or concordato preventivo proceedings; the register will includeinformation on the performance of the trustees, commissioners andliquidators and will be open to the public;

(iv) trustees will be requested to prepare a liquidation plan within 180 days ofcommencement of the bankruptcy proceeding and to complete theliquidation process within 2 years from such date (failure is cause fordismissal of the trustee)

(v) bankruptcy proceeding can be closed regardless of pending litigation –priority to bankruptcy-related disputes

Update on Italian Insolvency legislation: bankruptcyproceedings (fallimento)

26


The 2015 Reform revolutionised the concordato preventivo proceedings byintroducing three «creditor-friendly» options:

1. the creditors’ vote to be expressed (no silenzio assenso)

2. the alternative plans (proposte concorrenti); and

3. the competitive bids (offerte concorrenti)

1. Vote on the restructuring plan (article 178 of the IBL)

Creditors must vote in writing on the plan. Non-voting creditors are no longerdeemed to have approved the plan.

Update on Italian Insolvency legislation: Concordatopreventivo

27


2. Alternative plans (article 163 of the IBL)

• Creditors holding more than 10% of the overall indebtedness are entitled to putforward an alternative restructuring plan, provided the plan filed by the debtoroffers to unsecured creditors less than 40% of their claims (if the debtor filed aliquidation plan) or 30% thereof (if the debtor filed a plan on a going concernbasis; concordato in continuità)

• Alternative plans must be filed at least 30 days prior to voting – no expertopinion is required under certain circumstances

• Alternative plans can (possibly) be of any kind and can even provide for capitalincreases diluting in whole or in part existing shareholders (!)

• Information on the debtor and its estate are to be delivered by the court-appointed commissioner subject to appropriate confidentiality arrangements


28


Alternative plans (article 163 of the IBL) - continued

• Investors that collected information from the commissioner are not entitled tobuy-out the estate from bankruptcy (i.e. file a concordato fallimentare) in theevent they do not file any alternative plan in the concordato preventivoproceedings

• All plans are put out for approval by creditors: in the event of parity, thedebtor’s plan prevails; in the event of parity among alternative plans,preference goes to the plan filed first (creditors filing the alternative plan voteas a class); in the absence of the required majorities, the most voted plan isagain submitted to creditors for approval.


29


3. Competitive bids (article 163bis of the IBL)

Pre-packs filed by the debtor in a concordato preventivo scenario that are basedon the transfer/rent of the business or single assets to a pre-selected purchaserare opened to the market as follows:

• upon filing of the plan the court orders a competitive auction to be run inrespect of the assets to be transferrred

• information on the terms of the auction (including starting price and minimumbid increase) will be made available on the court website and information onthe assets will be made available by the commissioner subject to confidentialityarrangements

• investors that collected information from the commissioner are not entitled tobuy-out the estate from bankruptcy (i.e. file a concordato fallimentare) in theevent they do not file any competitive bid in the concordato preventivoproceedings


30


Competitive bids (article 163bis of the IBL) - continued

• bids must be comparable with the initial plan filed by the debtor and cannot besubject to conditions whatsoever

• in the event of multiple bids the court orders an auction among bidders

• the highest bid becomes part of the plan and is submitted to creditors forapproval

• the initial bidder (if different from the winning bidder) is reimbursed of costs andexpenses not to exceed 3% of the price set out in the initial bid.


31


The 2015 Reform introduced the following features in 182bis Proceedings:

a) the debtor’s right to «drag along» dissenting financial creditors

b) the debtor’s right to extend a standstill arrangement to dissentingfinancial creditors

c) the extension of the criminal liability regime applicable in a concordatopreventivo scenario to 182bis Proceedings with dissenting financialcreditors

1. «Drag along» of dissenting creditors (article 182 septies of the IBL)

• The debtor can request the bankruptcy court to extend the effects of anexecuted debt restructuring agreement also to the minority dissenting/non-adhering financial creditors, provided that:

(a) at least 50% of the overall indebtedness is owed by the debtor to banksand financial intermediaries (collectively the «Financial Creditors»)

(b) the Financial Creditors that executed the debt restructuring agreementhold at least 75% of the debts owed by the debtor to Financial Creditors(the calculation to be made in respect of the single classes of FinancialCreditors, if any)

Update on Italian Insolvency legislation: 182bisProceedings

32


(c) the dissenting/non-adhering Financial Creditors:

(i) have been informed and invited by the debtor to participate in thedebt restructuring negotiations

(ii) have legal positions and economic interests homogenous to those ofthe adhering Financial Creditors (judicial mortgages registered in the90 days prior to publication of the debt restructuring agreement arenot to be considered)

(iii) have been served (notificati) with a copy of the debt restructuringagreement and the petition (ricorso) filed with the court

(iv) have been provided with (a) complete and updated information onthe economic situation and financial position of the debtor and thecontents and implications of the debt restructuring agreement, (b) areoffered a treatment that is not worse than the one they would receivein any practicable alternative scenario.


33


• Dissenting/non-adhering Financial Creditors can oppose the request forextension whenever the conditions are not met by filing a formal objection withthe bankruptcy court within 30 days from the service upon them of the debtrestructuring agreement.

2. Standstill extension to dissenting financial creditors

Whenever a debtor executed an out-of-court standstill agreement with FinancialCreditors holding at least 75% of the debts owed by the debtor to FinancialCreditors (the calculation to be made in respect of the single classes of FinancialCreditors, if any) such standstill applies automatically to the dissenting/non-adhering Financial Creditors, provided that:

(a) the dissenting/non-adhering Financial Creditors have been informed of,and invited to participate to the relevant negotiations

(b) an independent expert confirms that the dissenting/non-adheringFinancial Creditors have legal positions and economic interesthomogeneous with those of the adhering Financial Creditors.


34


The dissenting/non-adhering Financial Creditors can oppose the standstillextension whenever the conditions above are not met by filing a formal objectionwith the bankruptcy court within 30 days of the service upon them of theexecuted standstill agreement.

3. Criminal liability regime

• The criminal liability regime applicable in a concordato preventivo scenario(report to the public prosecutor of past wrongdoings of the debtor) is applicableto 182bis Proceedings incorporating a «drag along» of dissenting financialcreditors or the extension to them of standstill arrangements.


35

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