What a Restructuring Plan Is and Why a Company Uses One

1.1A restructuring plan in one paragraph

A restructuring plan lets a company in financial difficulty change its debts with its creditors’ votes. The creditors vote in groups called classes. The High Court in London then decides whether to approve the plan. That approval is called sanction, and it binds every creditor in the plan, even those who voted no. This workbook follows one plan from the first deal to the day it takes effect. You are a trainee in the restructuring team at Pellister Treddow LLP, a law firm in London, and you act for the company.

1.2A cold-storage group that cannot repay its bond

Valkenrade Holding B.V. is the parent of a family-owned group of cold-storage warehouses in five countries. It holds the group’s cash and lends it to the operating companies that run the warehouses. It owes only two debts: a bond called the Notes, and a bank loan called the facility. Both are under English law. These are the people in the deal:

Many investors lent Valkenrade €300 million through the Notes, at 4 per cent a year. The Notes fall due on 15 September 2033. There is no trustee (one agent for all noteholders), so each noteholder acts alone.

The terms of the Notes change only if three quarters of the votes cast at a noteholder meeting agree. The Notes are listed on the Dublin stock exchange. So Valkenrade must tell the market anything that would move their price.

The facility is a loan of €150 million from the bank, drawn in full and due three months after the Notes. Neither debt is secured, so neither creditor has a better claim than the other. Three things went wrong:

• Electricity prices doubled.
• The largest customer, a supermarket chain, left in 2031.
• Nobody would lend the €450 million needed to repay the Notes and the facility.

In autumn 2032 Valkenrade said it could not refinance its debts. A fund then bought €100 million of the Notes for about half that sum. That is a third of the Notes, enough to block any noteholder vote. The fund opposes the rescue.

Yet the business still works. Customers stay while the stores stay cold, so the group trades on.

The plan changes only Valkenrade’s two debts. Suppliers, staff and landlords stay outside it. So does the warehouse loan, a mortgage that one Dutch operating company owes on its own warehouse.

1.3What each side gains from a plan

Without a deal, Valkenrade cannot pay the Notes when they fall due. The group would go bankrupt. The bank and the noteholders would then get €30 for every €100 they are owed (Chapter 7 shows why). A business that keeps running is worth more, so a plan can give each side more:

• Valkenrade trades on, and the court can bind the noteholder that says no.
• Noteholders get €70 for every €100: €50 of new Notes and shares worth €20. Together they own 80 shares in every 100.
• The bank gets all its money back, and it is paid first.
• The family pays €20 million and ends with 20 shares in every 100, instead of nothing.

Those who back the deal sign a lock-up agreement, or lock-up for short. In it they promise to support the plan and vote for it. Valkenrade, the bank, the family and many noteholders sign it. A noteholder that signs in time and votes for the plan also earns a small fee.

The fund does not sign. Its third can block any noteholder vote, so the other noteholders cannot outvote it there. That is why Valkenrade needs the court, and Chapter 2 shows why other tools would fail.

The court takes no side. It can bind a creditor that voted no, but first it checks that the plan treats that creditor fairly. Chapter 9 shows how the judge decides.

1.4The five words, and the deal on paper

The chapter has used four words of art so far: restructuring plan, class, sanction and lock-up. One more completes the set. If a class votes no, the court may still bind it, relying on another class that voted yes. This is cross-class cram down, or cram down for short. The table puts the five words to work in Valkenrade’s plan:

Before the vote, Valkenrade sends its creditors the Explanatory Statement. It sets out the plan and says how to vote. Its summary of terms gives the noteholders’ deal in two sentences:

The new Notes replace the Notes. They fall due four years later and pay the same interest. The last sentence means the noteholders will own most of Valkenrade, and the family the rest.

1.5The road from the first deal to the last step

The plan takes about seven months from the lock-up to the day it takes effect:

1.6Your job

Philippa asks you to keep the lock-up signature list. It shows who has signed, and how much of the debt stands behind the plan. For each party, record:

• Its name, and who signed for it.
• For a noteholder, the amount of Notes it signs for.
• The date its signature arrived.
• Any noteholder that joins later, with its signed letter.
• Any noteholder that sells its Notes, and who bought them.

Send Philippa the total each time it changes. Every noteholder that signs has promised its vote, and the court will later see how many creditors said yes.