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Restructuring High Yield Bonds

Examining market techniques, methods and tools used to restructure high yield bonds

Drafting & Negotiation Real Estate Finance Term Sheets Training Course

A one-day course

  • The trainer has deep experience of restructuring having been involved in restructurings for over 30 years
  • The trainer has had exposure to restructuring from a global perspective having been involved in restructurings in the UK, Europe and Africa
  • The trainer has been involved in restructurings from both debtor and creditor side and his career also includes stints in commercial and investment banking, accountancy, tax and law thus providing insight from a wide range of perspectives
  • The trainer has provided restructuring training to a wide range of blue-chip clients including the EIB, the EBRD, Deloitte, Robeco
  • Through the trainers role as a Senior Consultant to Grant Thornton and as a Senior Advisor to KPMG Finland, he retains exposure to restructurings

  • Global nature – High Yield Bonds have migrated from the US market and are now increasingly used as a major financing option by issuers across the globe. However, since they are mainly issued subject to New York law the methods used to restructure them are heavily influenced and driven by US Regulations such as Tender & Exchange Offers and Consent Solicitations. The programme thus provides participants with insight into these tools and techniques and the regulatory challenges firms need to navigate in these complex restructurings
  • Review of key Covenants – understanding the key covenants found in High Yield Bonds and how they are structured is essential to anyone seeking to restructure High Yield Bonds. Participants will learn which covenants matter in a restructuring scenario
  • Co-ordinating Bondholders – restructuring listed securities (i.e. High Yield Bonds) requires a completely different approach to restructuring loans. Being on the Ad Hoc steering committee increases potential liability for insider trading. Getting it wrong can entail both civil and criminal liability for market abuse. The programme provides guidance on the various strategies investors and their advisors can adopt to navigate this tricky area
  • The Liquidity challenge – access to additional cash resources represents one of the more challenging aspects of restructurings. The programme analyses the various options available to raise cash and the pros and cons of each (hint; this requires a sound understanding of the covenants re debt incurrence, disposals and liens)
  • Liability management – restructuring bonds makes use of a wide range of techniques unique to that market, many of them driven by US regulatory requirements. Tender/Exchange Offers are widely used, often in conjunction with, Consent Solicitations. Market Purchases and Redemptions are other, less frequently used, options but all of these options require a sound knowledge of the regularity requirements in order to avoid potential criminal and civil liability
  • Coercive Exchange offers – these are widely used to deal with recalcitrant issuers or investor holdouts. Advisors have employed sophisticated game theory techniques to minimise Holdouts and improve the chances of implementing the Exchange offer. The programme reviews some of the key cases which have made use of these techniques
  • Multiple Pathways – English Schemes of Arrangement are accessible to issuers outside the UK and have been widely used to restructure bonds (e.g. Syncreon, Agrokor & Nyrstar). Similar considerations apply to Chapter 11, which can also be accessed by non-US firms (e.g. Truvo). The programme reviews how both these techniques have been used in some of the landmark cases and also considers the pros and cons of each approach
  • Forum Shopping – has become topical with the use of English Schemes of Arrangement used to restructure bonds of non-UK based issuers. The programme looks at two landmark cases (Nobel and Codere) to consider the current state of play

Typical High Yield structures & Restructuring routemap

  • Bond Restructuring routemap: overview of the stages in the process
  • Overview of current Loan/ Bond structures (what’s market)
    • SSRCF/Senior Secured Notes
    • pari Loan/ Bond structures
    • Junior Notes
  • Double Luxco – back on the agenda
  • Review of the various potential stakeholders who can affect the restructuring
    • Euroclear & Tracing agents
    • Credit Insurance
    • Works councils
    • CDS providers
    • Hedge counterparties
    • Landlords 

Who controls Security Enforcement (each deal is different)

  • Review the debt structure (wiring diagram)
  • Do local laws influence or affect security rights
  • How many Restricted Groups are they and how do they interact
  • Is there an Intercreditor and who is bound?
  • Obtain the (current) Intercreditor (original plus any amendments)
    • Is local Intercreditor recognition a problem
    • Who is the Instructing group
    • Does this change?
    • Review the ranking and the proceeds waterfull
    • Is there a Turnover
    • Is there a payment stop notice 

Review of the Covenants in the Indenture

  • Summary of the key covenants in the Indenture
  • Typical three-part covenant structure
    • The Prohibition
    • The Proviso
    • The Carve-out baskets
  • What are the key covenants in a restructuring scenario
    • Debt incurrence
      • Ratio debt basket
      • Other debt baskets
      • Debt reclassification – how and why it matters
    • Liens vs Permitted Collateral Liens – what’s the difference?
    • Asset Dispositions – what to look out for

Restructuring triggers

  • Review the key EoDs in Notes
    • Payment breach
    • Bankruptcy
    • Guarantee invalidity
    • Impairment of Security – what does this mean?
  • Key voting thresholds in Notes
    • Trust Indenture Act terms & relevance for EU issuers
    • Key money terms
    • Release of security & guarantees
    • General other amendments, waivers, tender / exchange offers
    • Right to instruct the Trustee re acceleration / enforcement
    • Minor amendments by the Trustee
    • Change of Jurisdiction
  • Review other types of debt in the group to ascertain if there are earlier triggers
    • EoDs in RCF
    • Cross defaults?
  • Dealing with the problem of information asymmetry between Loans & Notes
  • Other aspects which may give lenders a head start over the Notes 

Co-ordinating the Bondholders (Ad Hoc Committees)

  • Who is the “Creditor”? – why this matters
    • US vs UK approach
    • Problems in identifying them (Custody chains)
  • Why and how jurisdiction matters (SEC!)
  • INSOL principles
    • What are they and are they used
  • How to find them – use of tracing agents, other strategies
  • Ad-hoc Committees – key issues
    • How many Committees?
    • Valuation – where does the value break
    • When to form the Committee
    • Composition of the Committee
    • Dealing with differing Investors’ agendas
    • Potential challenges – blocking stakes
    • Lockups – how long?
    • Market abuse & inside dealing & Fraud and other issues
      • US anti-fraud
      • UK & EU rules and regulations
      • Cleansing notices
    • Strategies for managing confidentiality re members on the Committee
  • Impact of CDS on restructuring
  • Case: The Truvo problem 

Liquidity & Standstills

  • Relevance of filing periods in distress
  • Liquidity – what are the funding options and requirements
    • New shareholder funding
    • Payment extension and deferment techniques
    • Incremental debt incurrence
    • Refinancing / Take-outs
  • Case Study: Algeco Scotsman
  • Case Study: Rallye refinancing of derivatives & funding of current liquidity needs via the new facility
  • Case Study: Mallinckrodt’s Opioid Settlement and Refinancings
    • Review of Towergate solution for liquidity
    • Sale of Assets – carveouts
    • Ability to retain sales proceeds
  • Case Study: review Kantar, D&G, Panther
  • Standstills
    • Is a standstill necessary or achievable?
    • Are contractual standstills possible in the jurisdiction
    • Legal Standstills – are they available (e.g. Spain, Italy)
    • Negative vs positive standstills
  • Case: Review Metinvest Standstill Scheme 

Liability management

Market purchases

  • Pros and cons
  • Methods of implementing
  • Application – when can (should) these be used?
  • Funding the purchase
    • Potential problems and restrictions
  • Key tripwires
    • Is it a “Tender Offer” (this matters!)
    • The Willams Act
  • Review the criteria in the Wellman case
  • Potential Fraud, Market Abuse issues
    • Market Abuse Directive [2003/6]
    • Criminal Justice Act 1993
    • Transparency Directive [2004/109]
    • Safe harbours
  • US anti-fraud provisions
    • 10b-5 & Rule 10b-5 Exchange Act 

Cash redemptions

  • Methods
  • Procedures
  • Method– Fixed vs FRNS
  • Call protection
    • Nature of call protection
    • Can the issuer redeem Notes and if so how much
  • Is it potentially a Tender?
  • Other impediments
  • Influence of US Regulations

Tender Offers

  • The main advantages
    • Flexibility
    • Quick and cost effective
    • Can invert the waterfall!
  • Compliance with the Exchange Act
  • Tender periods
  • US Regulationory requirements
    • Regulation 14E
    • Rule 14e-1
    • Rule 1§4e-1(b) - if holders are offered a consent premium or early tender premium
    • Rule 13e-4 Exchange Act
  • Structuring the Tender to Exclude US specific jurisdictions (e.g. US)
  • The problem of ‘Holdouts’
  • Pricing the Tender
    • Dutch auctions
    • Modified Dutch auction
    • Fixed
    • Pros & cons
  • What about ‘Lock-ins’ 

 (Consent) Solicitations

  • What are they
  • Where and howa are they applied in restructuring scenarios
  • Interaction with Tenders / Exchange Offers
  • Application of US Security regulations
  • Dis-application of the Trust Indenture Act (Rule 144A securities)
  • Timing 

Exchange Offers generally

  • Registered Exchange offers
    • Pros & cons
    • Formalities
    • Application of Tender Offer rules
    • 11 Securities Act
    • Rule 10b-5 Exchange Act
  • 3(a)(9) Exchange offers
    • The five main requirements
    • Main advantages
    • Key disadvantages
  • Section 4(a)2 Private Exchange Offers
    • Pros & cons 

Coersive exchanges - key features and requirements

  • Issuer considerations
  • Noteholder considerations
  • Dealing with holdouts – carrots & sticks
    • Consent solicitations
    • Layering of more senior debt
    • Chapter 11 (if all else fails)
    • Early tender premia
    • Consent fees
    • Better terms, security
    • Using game theory to ‘entice’ noteholders
    • Changing the terms of the tender
  • Case Study: analysis of the DTEK triple-track Exchange offer & Consent solicitation (EDCON use of game theory to squeeze the hold-outs)
  • Exchange offers & the Assenagon “exit consent” problem 

Schemes of Arrangement in Bond restructurings

  • Application to other, non-UK issuers
  • General application in Restructuring bonds
    • Maturity extension (A&E)
    • Reduction of principal
    • Debt to Equity
    • Debt to Debt (PIK)
  • Procedure & Requirements
    • Voting thresholds
    • Meaning & relevance of “Class”
  • Case Study: review Noble Scheme
    • What is the “comparator”
  • Standstills?
  • Review Vinashin and Metinvest
  • Twin Track Schemes
  • DTEK
  • Zlomrex
  • Edcon Scheme – key takeaways
  • Enquest Scheme – key takeaways
  • Codere Scheme
  • What About Brexit
    • Article 25 of the EU Judgments Regulation (EU JR)
    • Article 8 of the EU Judgments Regulation 

Pathways - Chapters 11 & 15 and Administration

  • General application and founding jurisdiction
  • Why these will become more popular this time!
  • Procedure & voting thresholds
  • timeline
  • Key benefits
    • Automatic stay - Worldwide impact (practical application)
    • Management retain control
    • Cherry-picking contracts
    • Assets sales
    • DIP funding
    • Use of Cash collateral
    • Cram-downs and Cram–ins
  • What are the disadvantages
  • Case study: Discuss and analyse ATU Flip & and Pre-pack
  • Chapter 15 - overview

The trainer is a consultant, public speaker and author with expertise in private equity, debt advisory, restructuring and infrastructure. He is a Senior Advisor to KPMG Finland, a Senior Advisor to Reorg EMEA Covenants, the leading provider of information to the European High Yield community, and a Senior Consultant to Grant Thornton UK.

Training programmes are provided to a wide range of blue-chip clients in Europe, Africa, the Middle and Far East, North America and Australasia. In-house clients include banks (BNP Paribas, Société Générale, ING, Barclays Capital, Bank of China, RBS, SEB); lawyers (Baker & McKenzie, Skadden Arps, Sullivan & Cromwell, Cadwalader, Latham & Watkins, Weil, White & Case); advisory firms (Lazard, PWC, M&A International, KPMG, EY, Deloitte); PE firms (Cinven, Advent, Barings Asia, Waterland); corporates (Siemens, Airbus, Turkcell, Candy Crush, Gunvor, Statkraft) and governmental bodies (the UKLA, the EBRD, the ECGD, Omani Oil Corp.)

He qualified in South Africa both as a Chartered Accountant, with Deloitte, and as a lawyer with Hofmeyr where he was involved in structuring a number of high-profile project financings including BMW 3 Series, Ford Sierra, GM, Sappi and Mondi.

When he moved to London and joined Lazard Brothers as a corporate finance executive he was involved in a wide range of public and private transactions. Subsequently he joined Hoare Govett as an assistant director where he acted as an advisor to smaller listed companies and was involved in several syndicated Euro-Equity Initial Public Offerings.

In 1991 he joined ABN Amro’s cross border M&A team prior to being transferred to MeesPierson Corporate Finance as a Director in Cross-Border M&A where he was also involved in a number of deals in Central Europe. During this time he was a member of the EU-PHARE programme and advised the Estonian government on their privatisation programme.

He is the Programme Director at the City Business School, London, for Infrastructure Finance for the M. Sc. programme in Business Administration and Finance.

He is a member of the Institute of Chartered Accountants in England & Wales and the South African Institute of Chartered Accountants. He completed a BA and an LLB at the University of Natal and a B. Compt. (Hons) at UNISA.

“The market selloff over the past two weeks has pushed €22.7bn of High Yield Bonds into stressed and distressed territory” [Source: Credit Rubric]. Whilst oil and gas have been hit hardest, the collapse in market sentiment has not been confined to specific sectors or even names.

 

Restructuring High Yield Bonds pose a range of challenges not found in dealing with purely loan-driven structures; custody chains means that noteholders are more difficult (and take longer) to identify; the listed nature of notes means that all stakeholders need to be aware of market abuse aspects; the machinery for instituting action in bonds is more convoluted than loans, since notes are invariably governed by NY State law restructurings may need to take account of compliance with onerous U.S. securities’ laws and last, bond restructurings often use different tools not available in loan structures, such as Exchange offers and consent solicitations (which can be used to covenant strip notes in certain circumstances). The market has also experienced an increase in coercive exchange offers where parties have made use of innovative solutions to encourage holders to accept and discourage holdouts from remaining on the side-lines. DTEK’s triple track Exchange offer, Scheme and consent solicitation being an excellent example.

 

This programme summarises the methods and tools that have been used to restructure bonds and reviews some of the topical and innovative solutions that have been used to address these more complex restructurings. English schemes of arrangement have gained increasing traction in the bond markets, as they have in the loan markets, and appear to have emerged as the primary pathway of choice in a number of recent restructurings for foreign companies. Despite this Chapter 11 does offer some solutions not available in a Scheme, for example where operational restructuring is required. The programme will illustrate these methods with discussions of recent landmark restructurings including; Agrokor, Nyrstar, Syncreon and Metinvest’s Standstill Scheme

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