Restructuring Bonds

Course Overview:

Although high yield bonds have been part of the funding landscape in Europe for the last 10 years, the gcc and resulting contraction in traditional bank lending has catalysed the market which has seen a dramatic rise in high yield bond issue with c €70b issue alone last year. Initially high yield bonds were used as a junior, mezzanine alternative, however from around 2004 high yield bonds came to be used as both as junior and senior secured bonds, notably in TIM Hellas, Damovo and later NXP all of which were later restructured.

Since 2007 high yield bonds have increasingly been used across the capital structure, from senior secured through to PIK. Historically, high yield bonds were available only to larger companies as the liquidity meant investors were unwilling to support issues below c €250- 300 million. This changed in 2013 which saw a the capital markets open to mid-market firms with a number of issues in the €200m range and one, Soho House, as small as £115m.

The rise of high yield bonds has been accompanied by the renaissance in leveraged loans particularly the larger syndicated and clubbed deals. Together the wide availability of credit and comparatively modest investment opportunities have created a perfect storm of higher leverage lower margins and further erosion of investor lender protection in bonds and loans which culminated in, Ceva Sante Animale, the first cov-lite loan in Europe.

The continuing woes in Europe have amplified the rich leverage structures which were put in place in more benign times. Some of these groups are being forced to restructure their bonds with Wind, Ideal Standard being possibly the most recent examples but market commentators believe these are the first of many.

For European investors, restructuring bonds will prove something of a shock as they need to navigate not only domestic but also US Securities legislation which tend to be as draconian as it is impenetrable. Additionally whilst some bonds have been restructured using more familiar European methods (e.g. Schemes of Arrangement in Wind Hellas) many of the techniques and tools used to restructure bonds differ materially adopt a radically different approach (NXPs exchange offer being a good example which “flipped” the noteholder’s priority) the approach taken in Europe.

This programme is aimed at those involved in professionals investing or involved in the issuance and/or restructuring of deals which include bonds and covers topics from the perspective of both bondholders and other players in the capital structure (typically providers of senior debt e.g. RCFs). It considers the key aspects, methods and techniques of restructuring both senior bonds (NXP) and junior bonds (Truvo, Wind). The topics are illuminated with reference to a range of issues which were considered recent high profile bond restructurings, specifically, Wind’s Tender/Redemption (2014), Truvo, Ideal Standard’s and NXP’s Exchange offer and Wind Hellas CoMi shift and Scheme.

Course Content:

Bond Restructuring routemap

• Key Triggers for bond restructuring
• Position of bonds in the Capital Structure
• Identifying & Organising the Bondholders
  • Difficulties and tactics
  • Lockup Agreements

Restructuring mechanisms – overview

• Open Market Purchases
• Redemptions
• Consent Solicitations
• Cash redemptions
• Tender Offers
• Exchange offers (US vs UK/Europe)
• Schemes of Arrangement (UK)
• Chapter 11 (US)

Open Market purchases

• Two approaches
• Use and application
• Pros & cons
• Key issues to consider
• Key cases and Regulatory approach

Redemptions

• Key issues
• Funding
• Call protection
  • Hard vs soft call
  • Fixed vs FRNS
• Review and discuss Wind tender 2014

Consent solicitations

• Use and application
• Used on stand-alone basis
• Application in Tender/ Exchange offers
• Pros & cons
• Key voting thresholds and issues
• Problem areas
  • Trust Indenture Act
  • Schmolz (one euro one vote?)
  • Bakkavor
  • Snooze & lose (Monier)

Tender Offers

• US Regulations
  • Relevant US regulations (Exchange Act)
  • Key differences debt
  • Reg 14E requirements
  • Additional issues affecting equity linked securities
• Tender Offer requirements in the UK
  • Disclosure requirements
  • FSMA & Prospective directive
  • UK anti-fraud provisions
  • Dealing with holders in various jurisdictions
  • Problems with “equality of treatment” and how to resolve them
  • Different approaches to pricing in tender offers – Dutch auctions, fixed spreads
• Review Wind (2014)

Strategies for dealing with Holdouts

• Acceptance thresholds – what is the “optimum” level
• Interaction with the Trust Indenture Act
• Carrots
  • Various incentives to encourage acceptance / consent
  • Review of various cases (NXP, Ideal Standard)
  • Tender premia – do they work in Europe (q.v. Azevedo)
• Sticks
  • Exit consents – the Assenagon problem
  • Covenant stripping
  • US Pre-packs – can they work (pros & cons)
• Impact and role of CDS protection
• Review of NXP Exchange Offer

Exchange Offers

• Registered Offers
  • Use & application
  • Formalities
  • Pros & cons
• §3(a)9 Offers
  • Use & application
  • Formalities
  • Pros & cons
• Private Exchange Offers §4(a) 2
  • Use & application
  • Formalities
  • Pros & cons
• Review Ideal Standard Exchange Offer

Schemes of Arrangement, Chapter 11, Pre-packs (US and UK)

• Schemes in the UK
  • Key requirements
  • Use and application to foreign companies
• Chapter 11
• Pre-packs in US
• Pre-packs in UK
• Role and application of CoMi
• Review of Wind Hellas’ Scheme and CoMi shift

Regulatory matters governing purchase of listed securities

• Rule 144a and Regulation S – when and why they matter
• Market Abuse Directive
  • Inside information
  • Market manipulation
  • Safe harbours
• Criminal Justice Act
• • Application to companies
• Transparency Directive
• US anti-fraud provisions
  • Key rules and regulations in the Exchange Act

Aspects affecting pari loan/bond structures & junior bonds

• Instructions on Enforcement
• Standstill periods
• Issues relating to the Security Trustee
• Security release mechanisms
• Valuation issues
• Acceleration rights
• Review Truvo