On 9 November 2017, in a rare example of a contested recognition hearing, His Honour Judge Paul Matthews granted recognition of Agrokor’s extraordinary administration (EA) as a foreign main proceeding under the Cross-Border Insolvency Regulations 2006 (CBIR).

Agrokor d.d. is the holding company for a group of companies specialising in agriculture, food production and related activities in Croatia.  Before its financial difficulties, the group’s annual revenue was estimated to amount to around 15% of Croatia’s GDP.  On 6 April 2017, the Law on Extraordinary Administration Proceeding of Companies of Systemic Importance for the Republic of Croatia (the Law, also known as Lex Agrokor) became effective.  On 10 April 2017, following an application by Agrokor, an order for extraordinary administration (EA) was made in respect of Agrokor itself and 50 of its affiliates. In July 2017, Agrokor applied to the English court for recognition of the EA as a foreign proceeding under the CBIR.  A proceeding will be a foreign proceeding if it is “…a collective judicial or administrative proceeding in a foreign State…pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation”  The recognition application was challenged by one of Agrokor’s largest creditors, who had also brought arbitration proceedings in the English courts, on a number of grounds, all of which were dismissed by the court.

A Hogan Lovells team led by partner Tom Astle is acting for an adhoc committee of bondholders, and providers of a c€1bn super senior DIP facility to the Agrokor Group.

Continue Reading English recognition for Agrokor insolvency: not a tick-box exercise

Continue Reading Shaun Langhorne: 40 under 40

What has the U.S. Fish and Wildlife Service got in common with the U.S. banking agencies?  Simple: the U.S. Government Accountability Office (the “GAO“), which investigates financial matters on behalf of Congress, has opined that both have wrongly published general statements of policy which are in fact rules under the Congressional Review Act (the “CRA“). The GAO issued an opinion on 19 October 2017 that the Leveraged Lending Guidance (being the final interagency guidance on Leveraged Lending issued on 22 March 2013 jointly by the US banking agencies) (“LLG”) is a rule subject to the requirements of the CRA, meaning that it should have been submitted to each House of Congress before it was implemented, and opening the door for the possibility of it being overturned. This is notwithstanding that the LLG explicitly states that it is not a rule – the GAO has reiterated that an agency’s characterization is not determinative of whether it is a rule under the CRA, and the LLG does not meet any of the CRA exceptions.

What does this mean? Read our full bulletin to find out!

On 4 October 2017 the ECB published an addendum to its Guidance to Banks on non-performing loans (click here to read our earlier report on the guidance).  On 5 October 2017, the EBA published its work programme for 2018 which included further work to assist in the resolution of non-performing loans. Both of these documents show the level of importance placed by EU authorities on the reduction of NPL levels held by European institutions.  Expect more “encouragement” for banks to deal, one way or another, with their NPLs in 2018.

Continue Reading Further guidance expected for NPLs in Europe

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