Trade Alert: United States of America

UNITED STATES OF AMERICA

On 20 December 2020 Congress approved the “second-largest economic relief package in US history” of USD 900bn (the first tracking back to the beginning of the pandemic in March, securing USD 2.2tn).

Such relief was sought throughout the year, beginning with USD 3.4tn in May 2020, USD 2.2tn in September 2020 and USD 1.8tn in November 2020 albeit all attempts to secure such relief fell short with the Republicans and the White House viewing the same as excessive. This time the initiative was no doubt fuelled by the ever growing unemployment rate and business shutdowns, amid an increase in COVID-19 cases post-Thanksgiving in the U.S. Given how long it has taken to put relief mechanisms in place, the amount approved “may be insufficient to address longer-term damage from the pandemic”. Nonetheless, as U.S. Senator Mark Warner, a Virginia Democrat, stated, “the good news is, Congress is not going to be the Grinch”.

U.S. national debt stands at around USD 27tn and the Federal Reserve confirmed on 16 December 2020 that it will continue to acquire at least USD 120bn of debt consisting of Treasury securities and agency mortgage-backed securities, until such time as “substantial” progress has been made in U.S. economic recovery, maintaining that the interest rates will be kept “close to zero until at least the end of 2023”.

This relief package thus adds to the overall federal deficit and it remains a question as whether the U.S. government can “continue to borrow at such a pace”. Deloitte reported in its U.S. Economic Forecast, that there not only is a lack of concern about U.S. debt from investors’ perspective but the all-time low interest rates on such debt demonstrates that “the world wants more, not less, American debt”.

Whilst the Federal Reserve continues to buy up corporate debt, throughout 2020 U.S. companies themselves “borrowed a record USD 2.5tn in the bond market” and continue to do so with a resulting expectation of a “Fed bail-out”.

KEY POINTS FOR TRADERS - CHAPTER 11 CLAIMS

Issues that many creditors consider when trading Chapter 11 claims include: (1) the secured status of the claim and the value of the underlying collateral; (2) whether the claim is subject to attack, subordination or disallowance; and (3) the priority of the claim and the potential waterfall allocations (including what these claims may receive – cash, take-back debt, equity interests, and/or interests in a litigation trust).

The Bankruptcy Code does not allow for unmatured post-petition interest to be claimed for unless: (1) the creditor is claiming the interest as a secured creditor and the value of its security exceeds its claims; or (2) the estate of the debtor-in-possession is solvent and it is able to pay its unsecured debts in full. Thus, unless a claim is "over-secured" or the debtor-in-possession is solvent, no claim will accrue post-petition interest. For this reason, in the vast majority of cases involving the purchase of claims, the transferee will not be entitled to post-petition interest on the claim.

There are a variety of ways that the debtor-in-possession or, more usually other creditors, may seek to attack, subordinate, or disallow claims in order to increase their own entitlements. Transferees must be cognisant of whether the debtor-in-possession’s case may be substantively consolidated (i.e., the debtor-in- possession’s entire corporate structure is combined such that claims of every debtor entity receive distributions at the same "structural" priority level). This could negatively (or positively) impact the distribution a transferee receives on account of the purchased claim depending on the priority and which debtor the claim originally stood against. Other creditors may seek to recharacterise the claim in question from a debt claim to an equity interest (equity interests are subordinate to all claims for distribution purposes) based on the true character of the monies advanced in support of the claim. Moreover, other parties in interest may seek to subordinate claims based on the inequitable conduct vis-a-vis other creditors conducted by the original claim holder (or transferee). In these instances, the subordinated claim will not receive distributions unless senior claims are paid in full. Some courts have held that even innocent transferees of claims that are to be subordinated are not insulated from subordination. Finally, claims may be disallowed if the underlying debt is proved not to be owed after an objection to the claim is filed.

To mitigate these risks, many transferees seek to receive all of the relevant information from the transferor including the proof of claim and associated documentation relating to the underlying asset. The transferee familiarises itself with the history of the claim and the transferor as well as arguments in the Chapter 11 case to understand if the claim may be subject to attack. The claims trade contract often is drafted in a way that shifts the risk of any subordination, disallowance, recharacterisation or the like back on to the transferor.

Furthermore, the transferee's diligence often includes determining if a bar date has been set in a Chapter 11 case and ensuring that the claim has been properly filed before the bar date and is correctly identified by the debtor-in-possession on the case’s publicly available claims register.

OVERVIEW OF CHAPTER 11 BANKRUPTCY

Chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code") governs reorganisations in the U.S. with Chapter 11 bankruptcy cases usually the most complex and costly forms of U.S. bankruptcy proceedings. During Chapter 11 proceedings, the courts oversee the efforts by the debtor (known during this process as the "debtor-in- possession") to restructure its debts and obligations with the business generally continuing to operate. The debtor is required to obtain court permission for certain actions including asset sales (other than in the ordinary course of business), payment of pre-petition claims (i.e., claims that arose prior to the filing date), termination or assumption of executory contracts and unexpired leases, or obtaining post-petition credit to run or expand business operations. When a company files for Chapter 11 proceedings, it immediately triggers an automatic stay which is broad in scope and applies to almost all types of creditor action against the debtor-in-possession and the assets in its estate.

The debtor-in-possession initially has the exclusive right to propose a Chapter 11 plan. If it is determined at a hearing that, among other things, this plan is feasible and fair, treats similar creditors equally and is deemed to be in the best interest of the debtor-in-possession’s estate, then the Bankruptcy Court will approve the plan. The confirmation of the Chapter 11 reorganisation plan will generally discharge a business debtor-in-possession of all of its pre-petition debts to creditors.

WHAT ARE CHAPTER 11 CLAIMS?

Shortly after a debtor’s Chapter 11 petition, the debtor-in- possession will list all known claims in its schedule of assets and liabilities. Generally, for creditors with claims that are not listed in these schedules (or which are listed as "disputed", "unliquidated" or "contingent"), such creditors must file a proof of claim by a bar date set by the Bankruptcy Court. Creditors with listed claims may object to the debtor-in-possession's description of their claim. The Bankruptcy Court will set a deadline by which the debtor-in-possession and other interested parties may object to the creditors' proofs of claim.

TRADING CHAPTER 11 CLAIMS

Unlike the Loan Market Association (the "LMA"), the Loan Syndications and Trading Association (the "LSTA") does not have a prescribed form of transaction documents for claims trading. As seen with MF Global, Madoff and Lehman claims, bespoke documentation is produced for each claim depending on the basis of the claim (be it debt, bonds or of a derivative nature).

There is an active and well-developed market for trading Chapter 11 claims and, in the absence of a court order, parties may freely transfer bankruptcy claims. Partial claims can be transferred, though the documentation (both the underlying contract and notice filed with the bankruptcy docket) for such claims must be meticulously constructed to ensure ultimate enforcement. Claims involving publicly traded securities may often be traded through customary market channels without the need to provide any notice to the Bankruptcy Court. However, claims traders should be wary of court orders such as those: (1) limiting the transfer of significant percentages of equity interests or controlling interests; or (2) imposing additional notice and information requirements in respect of those trades. The Bankruptcy Court will generally set a record date for claims trades prior to distributions, and trades that occur after such date may not be recognised for distribution purposes. If a proof of claim in respect of a claim that is not based on publicly traded securities has already been filed, then the buyer of the claim must file evidence (in the form of a standardised claim form available on the applicable court's website) of the transfer of the claim with the Bankruptcy Court. Any objection to the transfer must be filed with the Bankruptcy Court within 21 days of the mailing of the notice (meaning the form filed with the Bankruptcy Court) to the seller. In the absence of any objection, the transfer is deemed valid.

Claims that are acquired for an amount lower than face value are enforced at their full face value if the claim is otherwise valid. One exception to this general rule is for claims based on bonds issued with original issue discount. In this instance, it is (again) the general rule that original issued discount is treated by the courts as if it is unmatured post-petition interest.

Unless the acquired claim is secured, and the value of the collateral exceeds the value of the claim, interest will not accrue on the claim (assuming the solvent debtor exception, discussed above, does not apply).

NOTABLE TRANSACTIONS

LMA UPDATED TERMS AND CONDITIONS APPLY FROM 1 JANUARY 2021

Following the U.K.’s departure from the EU on 31 December 2020, English law governed contracts should incorporate a specific contractual recognition of bail-in (“CROB”) clause (under Article 55 of the Bank Resolution and Recovery Directive 2014/59/EU “BRRD”), to ensure that counterparties under such contracts are bound by its requirements and provisions if scenarios, such as those described below, were to arise. With effect from 1 January 2021, the LMA provided revised LMA Terms and Conditions (the “LMA T&C”) catering for the U.K.’s departure from the EU along with the rest of the core trade documentation (revisions to the form of multilateral netting agreement and termination agreement are also anticipated in due course).

The CROB clause recognises the effect of the BRRD which is directly applicable within the EU member states and provides local authorities with powers to bail in a failing bank/financial institution. Such bail-in powers include the ability to:

1. reduce (in full or part) the principal/outstanding amount due;
2. convert (all or part) of liability into shares/other ownership instruments;
3. cancel any liability; and
4. vary terms of transaction documents to give effect to any of these bail-in.

Please note these powers are applicable to a large variety of legal “persons”, for more detail please see the definition of “Write-down and Conversion Powers” under the LMA T&C.

U.K. INSOLVENCY UPDATES

There have recently been cases which demonstrated the importance of complying with the conditions set out in intercreditor arrangements when seeking to enforce security and/or appoint administrators. More specifically, it was established that the appointment of administrators by the Junior Creditors did constitute “enforcement” (by a qualifying floating charge (“QFC”)) and written consent therefore needed to be sought from the Senior Creditors if this was required under intercreditor arrangements. In the case in question (Arlington Infrastructure Limited and another v Woolrych and others (in administration) [2020] EWHC 3123 (Ch)), the failure to obtain such consent rendered the QFC unenforceable and constituted a fundamental defect rendering the Junior Creditor appointment of administrators null and void, and not a mere procedural defect which could be cured by the court.

For more information please see the full article here.

GLOBAL BLUE GROUP HOLDING AG (“GLOBAL BLUE”)

Global Blue is a Swiss based information technology company, offering a variety of services including a tax free shopping information service through its subsidiary Global Blue SA.

On 15 December 2020, Global Blue has published its H1 results which revealed that its revenue has fallen 91 per cent to EUR 20m. (being EUR 227.7m at the same time last year) driving the adjusted EBITDA to EUR 19.5m loss (from EUR 101.3m last year)

Following the business combination with Far Point Acquisition Corporation (FPAC), Global Blue made arrangements to refinance its existing senior debt of EUR 630m as well as its revolving credit facility of EUR 100m on 28 August 2020. These are set to mature on the five-year anniversary of this date. As of 30 September 2020, the RCF remains almost fully utilized at EUR 99m bringing Gross Financial Debt to EUR 729m. Based on LTM EBITDA of EUR 50m (2019: EUR 170.7m) leverage has increased to 9.6x from 2.4x on a net of cash basis. 

EUROPCAR MOBILITY GROUP (“EUROPCAR”)

As reported in Issues 31 and 32 of our Trade Alert, Europcar began seeking to appoint a "mandataire ad hoc" in October 2020 and has commenced discussions with its corporate debt creditors to effectuate a sustainable financial restructuring. Its Q3 results were also released at the time, showing a positive EUR 45m adjusted EBITDA. In November 2020, Europcar announced that these discussions led to an Agreement in Principle and consequently to a lock-up agreement which considered various restructuring proposals.

In December 2020, Europcar has further entered into an amendment agreement to the lock up agreement, putting in place various amendments such as extension of subscription period and opening the backstop arrangement to the senior debt holders. Also, it has solicited all the requisite consents in respect of its senior debt holders in order to amend the relevant documentation and request the opening of accelerated financial safeguard proceedings which would enable the implementation of the Agreement in Principle. As part of this process, a judicial administrator of Europcar and creditor’s representative have been appointed and it is said that by mid- January 2021, “the Paris Commercial Court shall either approve the SFA plan reflecting the Agreement in Principle or decide to extend the accelerated financial safeguard proceedings by up to one additional month at the most”.

It was also noted that, Europcar will be making a Chapter 15 filing under the U.S. Bankruptcy Court, seeking recognition of the proceedings in France as foreign main proceedings.

CONTACT 

Please contact Louisa Watt, Iden Asl, Lucy Hartland or Natalie Radcenko with any queries regarding this month's Trade Alert