Conference Restructuring – November 4, 2015

« Past Reforms and new Trends in France, Spain and Italy – A Chapter 11 in Europe ? Assessment of the EU Commission’s Strategy on Insolvency Law » – Centre de conférences Capital 8

Ouverture :

– Sophie VERMEILLE, Présidente – Droit & Croissance
– Ana BOATA, Economiste Europe – Euler Hermes

– Table ronde 1 : « New Trends and the Recent Reform in France« 

Intervenants :

– Thomas REVIAL (Keynote Speaker), Chef du Service Restructuring, CIRI
– Stephen PORTSMOUTH (modérateur), Managing Director – Société Générale (Paris)
– Arnaud JOUBERT, Managing Director, Rotschild (Paris)
– Cédric BOGHANIM, Principal – Apollo Management (Paris)
– Laurent BENSHIMON, Managing Director – Houlihan Lokey (Paris)

The restructuring of French companies can be difficult when shareholders do not fully understand they must be first in line, ahead of creditors to suffer a dilution.

The Latécoère case showed how private funds were able to invest in and restructure the balance sheet of a company by taking effective control in order to implement its industrial strategy and necessary changes.
Banks have been exiting corporate debt due to Basel III restrictions and the rise of a secondary market that has become more liquid and transparent.  As a consequence the number of debt tot equity swap transactions has significantly increased over the past few years.
Listed companies are at a disadvantage when seeking private investors because of their obligations to the market and difficulties revealing details of their future business plans which may become irrelevant.
The lack of distressed funds (Debtor In Possession) in France is another problem for French companies facing a liquidity crisis.  Many are forced to resort to creative accounting and payment terms to “create” artificial short-term liquidity, which can have a dire impact down the line on both private and public creditors.
The fact that junior creditors who are out-of-the-money have the power to block a cramdown in France is a strong disincentive for new money to come in and for in-the-money creditors to accept a debt for equity swap.  This is why most new money in French deals is injected in the form of super senior debt rather than equity.
French law still distinguishes between bank creditors and bond creditors rather than between senior and junior lenders.  Bondholders are treated as a separate class from bank creditors.  This is true even if they are more senior than the banks. This makes it impossible to cram down the banks or out-of-the money bondholders.
With respect to the concept of enterprise value, the lack of a predictable valuation framework makes France an unfriendly market for creditors.
French Law should provide a clearer path to establish the value of the company in order to distinguish out of the money creditors and keep them from blocking any restructuring process.

– Table ronde 2 : « A Chapter 11 in Continetal Europe ? Assessment of the EU Commission’s Strategy on Insolvency Law« 

Intervenants :

– Michael SHOTTER (Keynote Speaker), Head of EU Commission’s Civil Justice Policy Unit – European Commission DG Justice and Consumers
– Julie MIECAMP (Modératrice), Reorg-Research Inc.
– Adrian THERY, Partner, Garrigues (Madrid)
– Luca RAMELLA, Managing Director, AlixPartners (Milan)
– Francesco FALDI, Partner, Linklaters (Milan)

In Spain, before the 2008 financial crisis, the situation regarding insolvency instruments was quite binary. Out-of-Court or pre-insolvency instruments did not exist. Only fully consensual deals existed.  After the crisis and in line with the Euro recommendations, the government made several amendments to the Spanish insolvency law. Many pre-insolvency instruments were introduced in Spain. A Spanish scheme of arrangement was introduced.  It is very much used in practice today but it does not allow for a cramdown of shareholders. Shareholders may not be compelled to sell their shares. They are not a class, so they are kept outside of the scope of the Spanish scheme of arrangement and this allows them to have an important holdout value.
The problem in Spain with formal insolvency proceedings and the scheme of arrangement is that shareholders must approve the plan. The Court may not dilute the equity without a shareholders’ meeting. Even if a creditor led plan is approved by the creditors meeting, the equity can veto that plan and bring the company into liquidation.
It is therefore useless to reach a pre-insolvency agreement providing for the cramdown of minority creditors if shareholders can remain unimpaired and block the reorganization plan.
One thing that explains why southern European countries may be more debtor friendly in general is that the law confuse the protection of the business and of the workers with the protection of the company as a legal entity. That was a confusion that is no longer there. The laws are being adapted to protect businesses by either winding up companies or cramming down the equity and giving creditors access to the new equity. Everything is progressing in the right direction.
In jurisdictions such as Spain or probably all over Europe, where there is no guidance and certainty about valuation, shareholder cramdowns is now a central issue.

In Italy, Insolvency law was very creditor unfriendly before the recent reforms.  It is now more creditor friendly. In a concordato, you can negotiate pre-insolvency agreements with shareholders aware that you may cram them down to zero in an insolvency procedure.  In a pre-insolvency package you can cram down financial lenders: it is something that may not be used often but it is an effective threat that will make negotiations shorter, simply because small lenders know that if they don’t agree, at a certain point, they can be crammed down with a 70% majority.

– Conclusion 

– Lorenzo STANGHELLINI, Professor – Law School of the University of Florence
– Sophie VERMEILLE, Présidente – Droit & Croissance

Nombre de participants : 130

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