The financing of debtors
and insolvent entities
17th Global Insolvency and Restructuring Conference
IBA – Paris - May 23, 2011
© De Pardieu Brocas Maffei A.A.R.P.I.
CONTENTS
I.
New Money : The French legal framework (the “conciliation” process
since 2006)
1. “Conciliation” and New Money
2. Other “benefits”
3. Limits
4. Bits and pieces about conciliation
5. Ranking issues
5.1 New money providers vs. secured lenders
5.2 New money providers vs. secured lenders having lent to subsidiaries
6. New money and Capex : new drawings under existing Capex
financing eligible to the statutory privilege ?
7. Recourses against the judgement approving a conciliation
2
© De Pardieu Brocas Maffei A.A.R.P.I.
CONTENTS
II.
Case Study (industry : maritime transportation)
1. Overall goals and principles
2. Ways and means
3. More about the liquidity line
4. More about the retreatment of existing debt
5. Legal
6. Outcome
7. Developments since
3
© De Pardieu Brocas Maffei A.A.R.P.I.
I.
New Money : The French legal framework (the “conciliation” process since 2006)
I.
New Money : The French legal framework (the “conciliation” process since
2006)

A subject matter deeply reformed in 2005.
Purpose of the reform : induce lenders / service providers
• to make new money (and services) available to a company in the early stage of
anticipated difficulties and
• to use the prepetition arrangement process known as conciliation, voluntary
and necessarily consensual but nevertheless court-monitored (see below).
Technique : statutory privilege securing new money + voidance risk eliminated +
a blanket immunity from lender liability (but for limited exception).
Prerequisite: the statutory privilege has to be granted pursuant to a conciliation
agreement co-signed by the court-appointed agent(s) (the "conciliateur(s)“) and
approved by the Court after a hearing in camera, the prosecutor in attendance
(employees' reps too, but only to express their opinion on the scheme, no veto
right).
4
© De Pardieu Brocas Maffei A.A.R.P.I.
New Money : The French legal framework (the “conciliation” process since 2006)
I.
1. “Conciliation” and New Money
Any type of new money eligible to the privilege ?
No, only “new cash (NB : including shareholders’ loans) (or services) the purpose/use of which
is to finance the continuation of the company’s activity and to contribute to a viable future”
(Com. Code art. L. 611-11).
But technique used to fund irrelevant : loans, revolvers as well as letters of credit, hedging
arrangements are eligible provided funds made available or the “service” provided are used
exclusively to finance ongoing/continuing business activity.
A contrario, no priority for providers of new cash used for the sole purpose of refinancing
existing debt.
Reminder: Courts can approve a conciliation agreement only if the following conditions are
met:
(i)
the debtor is not (or is no longer as a result of actions/measures/efforts embodied in the
agreement) insolvent ;
(ii)
the ways and means/waivers/postponements/new equity and other long-term
resources, etc... provided for in the conciliation agreement are sufficient prima facie
to warrant a viable/sustainable future for the debtor;
(iii)
the rights of creditors (usually the minor ones) which were (voluntarily) excluded by the
company from the conciliation process are not adversely impacted.
5
© De Pardieu Brocas Maffei A.A.R.P.I.
New Money : The French legal framework (the “conciliation” process since 2006)
I.
2. Other « benefits »
For lenders :
•
In case the company relapses, new money providers rank in a subsequent
liquidation immediately below employees’ pre-filing unpaid salaries,
trustee/liquidator’s unpaid fees and court costs (in a rehab situation, see below).
•
No subsequent backdating of the starting date of the so-called “période
suspecte” (i.e. the hardening period) to a date prior to that of the Court judgment
approving the conciliation agreement :
=> No voidance/claw back risk, if it was to appear, at a later stage, that the
company was already insolvent during the conciliation period and in particular
when the new money and new collateral were put in place.
For the company :
The conciliation provides, until the homologation judgment, a consensual and
confidential (in principle) framework to negotiate a restructuring plan, with the
assistance of a court agent, sometimes used by the debtor as a negotiating
leverage since the “conciliateur” – most often chosen on the list of trustees – is
likely – if the process fails – to become the future trustee of the bankrupt company.
6
© De Pardieu Brocas Maffei A.A.R.P.I.
I.
New Money : The French legal framework (the “conciliation” process since 2006)
3. Limits

Since new money providers rank below the employees’ superprivilege (see
below), in case the company is heavily staffed with few valuable disposable
assets, the new money privilege can be of limited value.

Often new money is to be extended prior to the close of the conciliation period
without any guarantee that the conciliation protocol will be ultimately approved
(an approval necessary to create the privilege)
=> the need expressed by creditors to obtain, in addition to the privilege,
specific additional collateral to also secure the new money (or at least the
drawings made prior to the approval judgement with nevertheless
theoretically a residual risk of voidance if no Court approval at the end).

No guarantee that the conciliation procedure even if successfully completed
will not be followed by the hostile opening of voluntary proceedings, such as
safeguard (procédure de sauvegarde) if the company is eligible, i.e. still
solvent, or rehabilitation proceedings (redressement judiciaire) if insolvent.
7
© De Pardieu Brocas Maffei A.A.R.P.I.
New Money : The French legal framework (the “conciliation” process since 2006)
I.

Consequences for new money providers (i) of a subsequent sauvegarde
filing, (ii) of a rehabilitation, or even (iii) of a sauvegarde followed by a
redressement /rehab (possible since 2008), themselves potentially
followed by a liquidation:
• Reminder : during the sauvegarde or redressement observation period
(debtor has 6 to 18 months max to present a plan):
-
all principal repayments and payments of interests are frozen;
-
if the initial maturity of existing facilities was less than a year, interests
cease to accrue
-
if the maturity exceeds a year, interests continue to accrue during the
observation period but cannot be paid out and will be, after the 6, 12 or 18
months of the observation period, capitalized at the time the plan is
adopted, and then rescheduled by the plan as principal.
• at plan’s adoption : privilege survives but new money, even though
privileged, can be rescheduled (since conciliation new money is technically a
pre-filing debt and all pre-filing debts are termable in the plan).
• Maximum possible length of an imposed term out : 10 years.
8
© De Pardieu Brocas Maffei A.A.R.P.I.
I.

New Money : The French legal framework (the “conciliation” process since 2006)
"Sweeteners“ (in case of such subsequent term-out):
• If an asset disposals program is part of the plan => the priority benefiting to
new money providers in case the asset is disposed of in a subsequent
liquidation is generally viewed as applying to such isolated asset disposal :
priority should be in principle granted to conciliation new money providers over
any other creditor (including mortgage creditors) on the allocation of proceeds
of the asset disposed of (but no case law yet) .
• In case new money providers also obtained specific collateral/charges on
unencumbered assets, such survive and will be enforceable if the charged
asset is subsequently sold, even if the disposal of such asset was not provided
for in the plan.
9
© De Pardieu Brocas Maffei A.A.R.P.I.
I.

New Money : The French legal framework (the “conciliation” process since 2006)
There is however a carve-out (and a caveat) to be made, and a major one:
If the charged asset is a tangible asset included in a subsequent plan de
cession (which cession plan can be adopted in rehab as an alternative to a
plan de continuation), the adoption by the Court of a plan de cession (or of
several partial plans in case of bidders bidding on different lines of business)
operates as an automatic release of all existing charges
and the secured creditor is only entitled to a share, decided by the Court
discretionarily, of the price paid by the winning bidder.
10
© De Pardieu Brocas Maffei A.A.R.P.I.
I.
New Money : The French legal framework (the “conciliation” process since 2006)
4. Bits and pieces about conciliation

Stay : none
but in practice creditors, invited to do so by the conciliateur, most often
voluntary refrain from seeking payment and/or taking enforcement actions or
even attachments/provisional remedies.
Should one or several creditors nevertheless seek payment, debtors can
obtain from the judge having opened the conciliation, grace periods up to a
maximum of 2 years, the law applicable to the loan agreement or contract and
the contractual choice of jurisdiction being irrelevant.
11
© De Pardieu Brocas Maffei A.A.R.P.I.
I.

New Money : The French legal framework (the “conciliation” process since 2006)
Grace periods an efficient remedy ?
Quite efficient vis-à-vis French creditors even though limited in time (max 2
years).
Potentially helpful vis-à-vis EU creditors (because of the EU expedited
judgment recognition system (EU Reg. n°44-2001). NB : No automatic
recognition of conciliation judgments in the EU contrary to sauvegarde,
rehabilitation, or liquidation judgments.
Can be used to temporarily protect assets located in France from seizure by
non French/non EU creditors.
Practically useless to protect assets located outside Europe, the time required
to obtain enforcement of the French Judge’s decision in a non EU country
through the Private International Law process of exequatur being generally
viewed as enabling affected creditors to take interlocutory/protective
measures or even make seizures in the foreign country.
12
© De Pardieu Brocas Maffei A.A.R.P.I.
I.
New Money : The French legal framework (the “conciliation” process since 2006)
5. Ranking issues
New money providers vs. Secured lenders
Assomptions:
-New money made
available within the
framework of the
court-approved
conciliation
agreement (accord de
conciliation
homologué)
-All structured
operating assets
pledged or mortgaged
-Conciliation followed
by a subsequent
sauvegarde or rehab
or liquidation
Hypothetical :
Pledged/mortgaged
asset sold after the
conciliation (no
subsequent
sauvegarde/rehab/
liquidation)
Hypothetical:
Pledged/mortgaged
asset sold as part of a
subsequent
sauvegarde plan
Hypothetical:
Pledged/mortgaged
asset sold as part of a
subsequent
continuation plan in
rehab
Hypothetical:
Pledged/mortgaged
asset included in a
business line
auctioned in rehab
(« plan de cession en
RJ ») or in a
liquidation with (a)
(several) cession
plan(s)
Hypothetical:
Pledged/mortgaged
asset sold in a
liquidation asset by
asset (if no bidders
for lines of business
or auctionable
surviving line)
Solution:
Proceeds paid
to pledgees/
mortgagees
(unless contractual
waterfall agreed
upon between new
money providers
and mortgagees
was agreed in the
conciliation
agreement)
Solution:
Proceeds allocated in
the following order:
(1) new money
providers;
(2) pledgees/
mortgagees
Solution:
Proceeds allocated in
the following order:
(1) new money
providers;
(2) pledgees/
mortgagees
Solution:
Price paid by bidder
allocated in the
following order:
(1) employees’
superprivilege;
(2) Court costs
Solution:
Proceeds allocated
by liquidator in the
following order:
(1) employees’
superprivilege;
(2) Court costs;
(3) new money
providers;
(4) pledgees/
Mortgagees
13
© De Pardieu Brocas Maffei A.A.R.P.I.
I.
New Money : The French legal framework (the “conciliation” process since 2006)

NB 1: As an exception to the above, in sauvegarde or in rehabilitation, the
insolvency judge may, during the observation period and at the request of the
trustee, authorise the payment of a pre-filing creditor secured by a security
interest with a retention right (droit de retention) even if such payment would
result in a pre-filing creditor being paid before post filing creditors and of
course before all other pre-filing creditors. The purpose of this exception is to
obtain that the retained asset be surrendered to the estate. Reposession of the
pledged asset must, however, be proven to the judge to be an absolute
necessity for the pursuit of the debtor's business activity.

NB 2: under French law, employee’s pre-petition claims benefit from a
preferential status (superprivilège des salariés). If it pre-financed the pre-filing
wages, the Wage Insurance System (AGS, a scheme run by the employers’
association aimed at prefinancing pre-filing salaries in arrears + post-filing
severance indemnities), as well as court costs, i.e. essentially trustee’s and
liquidator’s fees, always rank ahead of any other creditor in any type of
proceedings.
14
© De Pardieu Brocas Maffei A.A.R.P.I.
I.
New Money : The French legal framework (the “conciliation” process since 2006)
5.2. New money providers vs. secured lenders having lent to subsidiaries
French Mother
Co
Subsidiary 1
Subsidiary 2
Subsidiary 3
(French)
(French)
(French)
Liquidity line
Subsidiary4
French subsidiaries party to the court-approved conciliation
French subsidiary outside the scope of the court-approved conciliation
Foreign subsidiary outside the scope of the court-approved conciliation
15
© De Pardieu Brocas Maffei A.A.R.P.I.
I.

New Money : The French legal framework (the “conciliation” process since 2006)
Scenario 1: New money (liquidity line granted to mother co.) (no new
money granted to Subsidiary 1 and Subsidiary 2)
No preference for new money providers in the estates of Subsidiary 1 and
Subsidiary 2 should they fail (only in mother co’s estate).
The proceeds of the sale of any mortgaged/pledged asset owned by
Subsidiary 1 and Subsidiary 2 will be applied to the repayment of Subsidiary 1
or Subsidiary 2 lenders benefiting from a charge over the asset. This is true
even if the asset is sold as part of a sauvegarde or a rehabilitation process at
the level of mother co’s or at the level of Subsidiary 1 and/or Subsidiary 2, or in
a liquidation of any of them).
One exception: hypothetical of a consolidation of estates between
mother co’s estate and that of Subsidiary 1 or of Subsidiary 2: piercing
corporate veils is very rare in practice in France and subject to a strict
commingling of assets test (a test narrowly interpreted by French courts
for a recent precedent, see Metaleurop decisions).
16
© De Pardieu Brocas Maffei A.A.R.P.I.
I.

New Money : The French legal framework (the “conciliation” process since 2006)
Scenario 2: New money (ex.: privileged Capex financing) granted in the
framework of a court approved conciliation to which French mother co +
Subsidiaries 1 and 2
(a) if the mortgaged/pledged asset owned by Subsidiary 1/Subsidiary 2 is sold
after the conciliation (and before a subsequent sauvegarde/
rehab/liquidation of Subsidiary1/Subsidiary2, if any of course), proceeds
will go to the lenders benefiting from the charge over the asset and not to
the new money providers in conciliation (unless a contractual subordination
was agreed as part of the conciliation between the new money providers
and the pre-existing secured lenders).
(b) if the mortgaged/pledged asset owned by Subsidiary 1/Subsidiary 2 is sold:
•
as part of an asset disposal program itself part of a sauvegarde
or continuation plan adopted in the course of subsequent sauvegarde or
rehab proceedings opened for Subsidiary 1/Subsidiary2, or
•
in the course of a liquidation, proceeds will be applied to repay (1) the
new money providers to Subsidiary 1/Subsidiary 2 and (2) the secured
lenders.
17
© De Pardieu Brocas Maffei A.A.R.P.I.
I.

New Money : The French legal framework (the “conciliation” process since 2006)
Scenario 3: New money granted at the level of Mother Co. only and no
new money granted to Subsidiary 3 (French but not in conciliation)
and/or Subsidiary 4 (foreign)
Same as Scenario 1 above.
For foreign subsidiaries (including EU), the commencement of conciliation
proceedings in France will have no automatic immediate effect outside France.
(Indeed, conciliations do not appear in either Annex A or Annex B of EC Regulation
n° 1346/2000 of 29 May 2000 on the automatic recognition of insolvency
proceedings within the EU.)
18
© De Pardieu Brocas Maffei A.A.R.P.I.
New Money : The French legal framework (the “conciliation” process since 2006)
I.
6. New money and Capex : new drawings under existing capex financing
eligible to the statutory privilege ?
General view : new capex is eligible to the privilege.
The Commercial Court of Paris recently approved a conciliation agreement where
banks agreed to grant a new facility to a developer to allow construction works to
resume: in that case, the pre-existing facility was cancelled and replaced by a new
one benefiting from the privilege as a result of the court approval of the conciliation
agreement).
To minimize the risk that “new” drawdowns under an existing facility , if allowed, be
considered - in spite of the fact that reactivating the facility is a way to allow an
injection of new cash otherwise unavailable - as old money :
(i)
capex lenders and the company should both (i) acknowledge that several
conditions precedent to new drawdowns under the existing facility are not
fulfilled and will never be in the future, and (ii) formally agree to cancel all
undrawn amounts under the existing facility; and
(ii)
provide in the conciliation agreement that the privilege was essential to the
lenders’ consent to increase their risk exposure by reactivating a facility,
which reactivating amounts to granting a new facility which lenders were free
to refuse to extend.
19
© De Pardieu Brocas Maffei A.A.R.P.I.
New Money : The French legal framework (the “conciliation” process since 2006)
I.
7. Recourses against the judgement approving a conciliation
The Court approval protects the agreement from the risk of future challenge,
except
•
in case of fraud (i.e. of obvious misrepresentation made to the conciliateur
and/or to the Court) or
•
if parties to the conciliation agreement consider that the agreement was
not properly reflected in the judgment. (NB : The agreement is neither an
appendix to the homologation judgment nor incorporated by reference but simply
summarised in the judgment.)
The homologation of a conciliation agreement being the result of a court
process culminating in a judgment made available to the public (published in a
legal gazette), the judgment is subject to challenges (tierce oppositions) by
creditors which were not signatories to the agreement (and thus not part of the
conciliation process).
20
© De Pardieu Brocas Maffei A.A.R.P.I.
I.
New Money : The French legal framework (the “conciliation” process since 2006)
All homologation judgments can of course also be appealed by the public
prosecutor (if, for instance, the prosecutors’ objection to the granting of the
statutory privilege to certain beneficiaries was not taken into account by the
judges of the Commercial Court).
Appeals by prosecutors are extremely rare in practice and must, in any case,
be launched within 10 days of the judgment being notified to the prosecutor's
office, a very short appeal period which generally allow new money providers
to postpone any drawing on the new facility until the appeal period has
elapsed.
As far as third party recourses (tierces oppositions), they too must be filed
within 10 days, but of the publication of the homologation judgment in a legal
gazette.
21
© De Pardieu Brocas Maffei A.A.R.P.I.
II. Case Study (industry : maritime transportation)
II. Case Study (industry : maritime transportation)
1. Overall initial (i.e. when crisis hit) goals and principles of company X’s
restructuring
- Maintain group as a going concern without the need for court protection
(sauvegarde not a proper remedy essentially for its limited use outside the
EU)
- Concentrate on debt service (Cy needed the support of its Capex lenders
to finance order book of ships)
- Stabilize the capital structure of mother co. during the then expected
duration of the (one year or more) downturn
- Agree a sized down order book with the shipyards
- Agree bank funding of such orders and LTV gap funding
- Adjust contributions/efforts to the constituencies’ status
unsecured/term loans/short term RCF/hedging banks, etc.)
22
(secured/
© De Pardieu Brocas Maffei A.A.R.P.I.
II. Case Study (industry : maritime transportation)
2. Ways and means
- Liquidity line : required almost immediately; to be structured as a bridge to
equity
- Procurement of equity : in a second stage (to be raised within 9 months
max) for an amount at least equal to the liquidity line maximum amount
- Waivers to be obtained from RCF’s lenders (problem of majority) to
preserve near-term financing
- Shipyards to accept to grant vendors’ loans + cancellation of some orders
+ delayed delivery for already financed ships
- Hedge counterparties to renew hedging lines to agree to term out exposure
at maturity (to the extent no freezing)
- Increase of the maximum envelop of trade & receivables so far assigned to
a small group of banks (there was an existing securitization program)
- Assets disposals
23
© De Pardieu Brocas Maffei A.A.R.P.I.
II. Case Study (industry : maritime transportation)
3. More about the liquidity line

To be provided by existing banks (or a subset thereof)

Super senior to the secured and unsecured creditors (seniorized through
the conciliation privilege + additional collateral if available)

Maturity : bullet (+/- 1 year)

To be repaid via the equity injection, and through free cash

Use of proceeds : OPEX exclusively (employees, suppliers, etc.)
NB : The possibility to use the liquidity line to pay margin calls and to fund
« non-funded » Capex as per BP was discussed but there was no
consensus.
24
© De Pardieu Brocas Maffei A.A.R.P.I.
II. Case Study (industry : maritime transportation)


Prerequisites:
-
Governance
-
Standstill
-
Payment of all interests including those in arrears
-
Liquidity covenant
Condition precedents :
-
Bondholders’ and other’s waivers (if needed)
Homologation by the Court of the conciliation agreement recognizing the
benefit of the statutory privilege to the liquidity line lenders
25
© De Pardieu Brocas Maffei A.A.R.P.I.
II. Case Study (industry : maritime transportation)
4. More about the retreatment of existing debt


Key principles :
-
Unsecured creditors termed out
-
Short-term secured creditors (<5yrs) also termed out but with a yearly
amortization + balloon
-
Long-term secured creditors (>5yrs) forego scheduled amortization for 2
years. Accelerated amortization catch up schedule thereafter
To achieve :
-
DSCR of >1.0x
-
Net debt/EBITDA close to exiting covenant levels
-
EBITDA/interests of >3.0x
26
© De Pardieu Brocas Maffei A.A.R.P.I.
II. Case Study (industry : maritime transportation)
5. Legal

Sauvegarde not a remedy

Conciliation initiated in February 2010, reluctantly, by company to allow
new money providers to benefit from the statutory privilege

Grace periods imposed to creditors which did not participate to the
conciliation

Suppliers’ credit used to buy time and delay the moment when the liquidity
line lenders’ term sheet had to be accepted
=> provisional remedies sought by some suppliers but dealt with
27
© De Pardieu Brocas Maffei A.A.R.P.I.
II. Case Study (industry : maritime transportation)
6. Outcome
Surprising…

Unexpected upturn in freight rates and volumes in mid 2010 allowed
company to do without the liquidity line

Suppliers (some of which dependant) proved quite flexible in terms of
payment delays

Only 2 creditors representing less than 5% of the total debt eventually
signed the conciliation agreement which was approved by Court in July
2010 (conciliation process has to be completed a maximum 4 + 1 months
period)
7. Developments since
Quasi-equity raised in the form of mandatory convertibles in January 2010
28
© De Pardieu Brocas Maffei A.A.R.P.I.