The bankruptcy court in In re Ocean Rig UDW Inc., 17-10736 (Bankr. S.D.N.Y. Aug. 24, 2017) determined that a decision by  an offshore drilling company from the Republic of the Marshall Islands (RMI) to shift its Center of Main Interest (COMI) to  the Cayman Islands prior to defaulting on bonds and initiating reorganization proceedings there and in the U.S., was “prudent.” The Court held that the change offered the debtors the best opportunity for successful restructuring and survival under difficult financial conditions and did not preclude U.S. recognition of the Cayman Island scheme of arrangement as the foreign main proceeding.

Foreign Debtors’ Decision to Restructure

The foreign debtors in these proceedings had significant debt payments due during 2017. They did not expect to have sufficient cash available to make these payments and failure to make any of these payments when due would trigger cross-default provisions under the Credit Agreements. Faced with expected payment defaults and cross-defaults, the debtors explored their restructuring alternatives.

The Republic of the Marshall Islands, where the debtors previously had their COMI, has no statutory laws or procedures for reorganization, making liquidation the only possible outcome. Meanwhile, the Cayman Islands provide statutory authority for schemes of arrangement as a way of permitting companies in financial distress to restructure their financial debt. Accordingly, the debtors concluded that transfer of their COMIs to the Cayman Islands offered the company the best chance of survival and they proceeded to do so.

To determine if the U.S. bankruptcy court could recognize the foreign proceeding as such, it performed a COMI analysis of the debtors’ operations and current connections with the RMI and Cayman Islands. The court determined  that the debtors conducted their management and operations in the Cayman Islands, had offices in the Cayman Islands, held their board meetings in the Cayman Islands, had officers with residences in the Cayman Islands, had bank accounts in the Cayman Islands and maintained their books and records in the Cayman Islands, and thus each of the foreign debtors had established by a preponderance of the evidence that each of their COMIs as of the filing of the chapter 15 petitions, was the Cayman Islands.

In conclusion, the Chapter 15 court held that the Cayman Islands provisional liquidation proceedings were “foreign proceedings”, that the center of main interests (COMI) of the foreign debtors had been properly and prudently changed to the Cayman Islands, and thus Chapter 15 recognition was appropriate.

 

On September 18, 2017, the iconic US-based retailer Toys “R” Us filed for Chapter 11 in the US Bankruptcy Court for the Eastern District of Virginia in front of Judge Keith L. Phillips. The company filed twenty-five entities, explaining that its $5.3 billion debt obligations and operational issues had led to the need for reorganization.

 The company’s Canadian subsidiary also began parallel proceedings under the Companies’ Creditors Arrangement Act (CCAA) in Canada. Meanwhile, the Company’s operations outside of the U.S. and Canada, including its approximately 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the Chapter 11 filing or CCAA proceedings.

 Since the company went private in 2005 it has had approximately $400M of annual debt service payments- these obligations have inhibited reinvestment in the core operations of the business.

 The company is optimistic that Chapter 11 offers an opportunity for Toys “R” Us to deleverage, relieve itself of unprofitable lease obligations, and invest back into their business in the U.S. and Canada. At present the company has a total of $3.1 billion of DIP financing, including two $450 million term loans and a $1.85 billion revolver.

 The Company intends to pay vendors in full under normal terms for goods and services delivered on or after the filing date. As the Company’s international subsidiaries are not part of the Chapter 11 filings and CCAA proceedings, Toys “R” Us’ international subsidiaries will pay vendors for all goods and services in the normal course.

 

 

In our previous blog post, we examined the decision of the New South Wales Court of Appeal to uphold the composition of classes of creditors in the Boart Longyear restructuring by way of scheme of arrangement.

Following an extensive second court hearing to approve the schemes of arrangement (which involved multiple days of hearings, several adjournments, and a court-ordered mediation), amended versions of the Boart Longyear schemes have now been approved by the Australian courts.

The decision emphasises the importance of the court’s overall “fairness” discretion in approving a scheme, irrespective of whether classes of creditors have been properly constituted. Importantly, differential treatment within a class of creditors that may not be sufficient to justify the creation of a separate class may nonetheless create sufficient unfairness to cause the scheme to ultimately fail. Significantly, the court was clear in its final judgment that the schemes as initially drafted would not have passed the “fairness” test and would have been rejected.

Continue Reading Update – Boart Longyear schemes of arrangement approved

Unitranche facilities have been a feature of the European and US markets for a number of years, and have recently been making their mark in Australia.

What is unitranche?  A unitranche facility is a single facility which replaces the need for separate senior and mezzanine facilities and carries a blended margin. It tends to be provided by a single lender on a take-and-hold basis.

Where has it come from? Unitranche began life around 2005 in the US mid-market, and spread into Europe in the wake of the global financial crisis in 2008. European banks were forced to de-lever their balance sheets post-2008, and also saw themselves subjected to more stringent capital adequacy requirements under Basel III. Non-bank lenders, the main providers of unitranche, are outside the reach of Basel III and, having initially taken the opportunity to fill that funding gap, have since seized a large share of the European mid-market.

In this article, we provide a brief introduction to unitranche, focus on the intercreditor issues which can arise when it is combined with a revolving credit facility, and look at how unitranche is evolving in Europe and may one day develop in Australia.

Continue Reading Unitranche: On the up, down under

In Re Lehman Brothers Europe Ltd (in administration) [2017] EWHC 2031 (Ch) a proposal by joint administrators to appoint a director to a company already in administration (LBEL), in order to distribute surplus funds to its sole member (Lehman Brothers Holdings plc (LBH)), as opposed to a creditor, was held to be legally permissible, as well as pragmatic and beneficial.

It is unlikely that many (perhaps any) future administrations will result in a surplus of the size that has been generated in the Lehman administrations. For that reason, the decision in this case is unlikely to be of frequent direct application. Nevertheless, the case is a useful illustration that, while being mindful of Lord Neuberger’s stricture as to the need for legal certainty and to avoid unjustified judicial creativity outside the insolvency legislation, the courts are still willing to adopt a pragmatic approach in assisting insolvency practitioners who need to act quickly in circumstances where their proposed actions are not are not expressly addressed in IA 1986. The decision also provides a pertinent reminder for insolvency practitioners that they must carry out their functions as administrators with the aim of achieving the statutory purpose of the administration—merely avoiding conflict with that purpose is not sufficient.

Hogan Lovells acted for the administrators of Lehman Brothers Holdings PLC in this case.

Click here to read more (the article previously appeared in LexisPSL).

 

In a decision that will be welcomed both by second-ranking secured creditors and by administrators, the Court of Appeal recently held that a second-ranking floating charge (SRFC) was still capable of being a qualifying floating charge for the purposes of Schedule B1 of the Insolvency Act 1986 despite the earlier crystallisation of a prior-ranking floating charge (PRFC).  In addition, the SRFC was capable of being enforceable notwithstanding the fact that there were no assets of the chargor which were not covered by the PRFC.  Accordingly, the appointment of administrators by the holder of the SRFC was valid.  Case: Saw (SW) 2010 Ltd v Wilson [2017] EWCA Civ 1001

Continue Reading Administration appointment valid notwithstanding crystallisation of prior-ranking floating charge

This article first appeared in Without Prejudice in August 2017

What can the UK and South Africa learn from each other by comparing the business rescue regime with administration?

South Africa’s relatively recent business rescue regime (introduced in 2011) has exploded into a popular process for “affected persons” facing a company in financial distress. It shares some aspects with the administration procedure in England and Wales (UK). Lessons can be drawn from both the similarities and the differences between the two procedures that may benefit restructuring and insolvency practitioners both in the UK and South Africa.  Continue reading.

We have advised the Single Resolution Board, the banking resolution authority of the Eurozone, with respect to the two Italian banks Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A.

Following the decision taken by the European Central Bank on 23 June 2017 to declare Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A. as ‘failing or likely to fail’, the Single Resolution Board has decided that resolution action by the Single Resolution Board is not warranted for these banks. As a consequence, the winding up of the banks will take place under national Italian proceedings. With the approval of the European Commission the Italian government has subsequently decided to grant aid to facilitate the liquidation of Banca Popolare di Vicenza S.p.A. and Veneto Banca S.p.A. under national Italian insolvency law.

The Single Resolution Board has been supported in this process by a cross-border team of Hogan Lovells supervised by the Frankfurt based partner Dr. Tim Oliver Brandi and Italian Partners Jeffrey Greenbaum, Luca Picone, Francesco Stella, Federico Del Monte, Fulvia Astolfi,  Filippo Chiaves and Vittorio Moresco.

 

In the recent case of Kevin Taylor v Van Dutch Marine Holding Ltd and others, the UK High Court decided that the exercise of existing rights by a secured creditor should not be regarded as a disposal by a defendant, and as a result, enforcement by a secured creditor is not an infringement of a freezing order. The High Court also clarified that it is not necessary for a secured creditor to bring an application for variation of the freezing order.

Continue Reading Secured creditors are not left out in the cold

On 13 July 2017 the High Court gave its judgment in UBS AG, London Branch v. GLAS Trust Corporation Limited [2017] EWHC 1788 (Comm), a case brought by UBS against the trustee for notes issued as part of a securitisation transaction by Fairhold Securitisation Limited (the “Issuer“). UBS disputed the ability of the trustee to absorb costs incurred by a group of noteholders pursuing a potential restructuring of the debt. The case will be of interest to trustees, investors and other stakeholders involved in the restructuring of finance transactions involving a trustee. The case provides some useful guidance on the test to be applied in determining whether expenses of a trustee have been “properly incurred“. Continue Reading Paying for a debt restructuring – can costs be adopted by the Trustee?