Whilst commonplace in the U.S., uptier transactions in which a borrower teams up with a subset of creditors to issue new “super priority” debt by amending or exchanging existing debt documents, have not been widely used in Europe.
However, with increasing macro economic pressures and financial market instability, we may see more European borrowers taking advantage of flexibility in cov-lite debt documentation to implement liability management transactions as an alternative to, or even as part of, more formal restructurings.
Differences in documentation, legal principles, and availability of other restructuring tools may mean liability management transactions might not occur in Europe in the same way as in the U.S. Here we set out some key things to look out for in European deals when considering uptier transactions.
Watch out for European intercreditor agreements which set out the ranking and priority of each creditor class and can be difficult to amend without each class consenting. This can create an impediment, although not insurmountable through use of a turnover arrangement. Some intercreditors can provide for super priority debt via a “hollow” (i.e., unutilized) tranche so amendments may not be required.
Document Terms and Majorities
There will need to be debt capacity in the debt documents or an ability to amend the same with majority consent. Some European credit agreements will incorporate indenture style covenants and allow this. In other credit agreements, permissions can be more tightly drafted and require greater majorities (such as 66 2/3% or more) to effect amendments.
Debt Buy Backs
Check whether the credit agreement allows the borrower to buy back debt from a subset of creditors. It is not uncommon to find restrictions that require the borrower to make open market purchases on a pro rata basis to ensure all creditors in the loan facility are treated equally.
Exit consents can fall foul of English law. In one extreme case, an exit consent was considered an abuse of power by the majority on the minority, where the non-consenting minority recoveries were reduced to 0.00001% of their face value. An exit consent which does not impact recovery but removes other protections might be treated differently.
The availability of other non-bankruptcy restructuring tools such as UK schemes of arrangement and restructuring plans, which have manageable voting thresholds, ability to cram down, flexibility to provide new money, and are less open to challenge once sanctioned, make them very attractive alternatives to liability management transactions.
An uptier transaction could be used to provide much needed liquidity in anticipation of a full-scale restructuring. This bridge or “debtor-in-possession” style priority funding provided by an ad-hoc majority, can be less contentious when it leads to a wider financial restructuring that protects value for the creditors as a whole.