In continental European jurisdictions, creditors often have limited rights in court-led insolvency proceedings and can therefore exert little influence over the actions of the court and/or court-appointed insolvency practitioners. This factor alone can make a loan-to-own transaction extremely difficult to execute if the incumbent owner is unwilling to cede control and the court adopts a debtor-friendly approach at the expense of creditors’ claims.

The recent restructuring of French drinks manufacturer Belvédère illustrates the obstacles facing loan-to-own investors in these circumstances (see box, The French safeguard procedure and the restructuring of Belvédère).

The position of senior creditors in the UK is stronger than in other European jurisdictions, partly due to the availability of cram-down procedures, such as those under a scheme of arrangement under Part 26 of the Companies Act 2006 (Part 26 scheme) (see below, Executing a loan-to-own strategy via a UK scheme of arrangement).

Part 26 schemes sit outside the English insolvency legal framework and are used for a wide range of general corporate transactions. However, they can also be used to restructure a company in a way that prevents classes of creditors whose claims rank below ‘where value breaks’ from influencing the restructuring and/or being allocated any interest in the restructured entity.

During the first half of 2009, a number of UK companies, including Countrywide (see below), McCarthy & Stone (Developments) Ltd, British Vita (UK) Ltd and Crest Nicholson Ltd, used schemes of arrangement to reduce their leverage, wiping out certain junior lenders’ claims in the process.

Although the insolvency regimes in other European jurisdictions also provide for ways to cram down dissenting creditors in certain circumstances, this is usually subject to:

The ability to carry out a pre-pack sale (pre-pack) is another flexible characteristic of the UK insolvency regime that is generally not available in other European jurisdictions. In a pre-pack, a company is put into administration and its business/assets are then sold to a newly formed company under a sale that was arranged before the administrator’s appointment. (For more information on pre-packs, see PLC Finance, Practice Note, Pre-packs in administration: a quick guide.)

Pre-packs, which made up at least 29% of UK administrations during the first two quarters of 2009, are often negotiated without the involvement of junior creditors. In contrast, the sale of a company undergoing insolvency proceedings in other European jurisdictions often requires court approval and/or consent of minority creditors, which is why pre-packs are rarely seen outside of the UK.

However, a recent forward-thinking court decision has made it technically possible for senior lenders to Dutch companies to achieve a virtually identical outcome to that of a UK pre-pack.

Security over registered shares in The Netherlands usually takes the form of a pledge. The most common way for a pledgee to enforce (foreclose) this form of security, which does not require formal insolvency proceedings, is the sale of the shares to a third party with the pledgor’s consent. This consent can only be validly given after the pledgee has become entitled to enforce the pledge. A share pledge can also be foreclosed by a court-approved private sale under Article 3:251(1) of the Dutch Civil Code.

The district Court of Amsterdam’s ruling in the Schoeller Arca Systems case, delivered on 23 September 2009, was the first time that a Dutch court has approved the foreclosure of a share pledge by a private sale, which the buyer and senior lender had previously agreed, despite a challenge from junior lenders.

This court ruling opens up the possibility for pre-pack-type transactions to become more prevalent (in The Netherlands at least) and could prove useful for senior secured lenders wishing to carry out loan-to-own strategies there (see PLC Cross-Border, Secured lending Q&A: The Netherlands).

Similarly, as Latham & Watkins partner Frank Grell notes, German rules on share pledge (Pfandrechte) enforcement and credit bidding (a right enjoyed by secured creditors in some jurisdictions to use their secured claims against a debtor as currency in an auction of the debtor’s collateral) are relatively straightforward (without the need to file for insolvency), and enable loan-to-own transactions to take place in Germany in broadly the same manner as they do in the UK or the US. Even if filing for insolvency becomes necessary, German insolvency plan proceedings or sales out of insolvency have also been proven to work. Latham & Watkins has represented the lenders on major German restructurings, such as Honsel and Neumayer Tekfor, and is currently advising Bavaria Yachtbau in its ongoing restructuring, one of the latest examples of a loan-to-own in Europe. (For a quick guide to German restructuring and insolvency law, see PLC Cross-Border, Restructuring & Insolvency Q&A.)

Varying cultural perceptions of insolvency is the other key difference between the US, the UK and continental European markets. In recent years, the UK has moved towards a rescue culture closer to that of the US, as reflected in the corporate insolvency provisions of the Enterprise Act 2002. However, the key aim of insolvency procedures in many continental European countries remains the realisation of a company’s assets for the benefit of its creditors, as opposed to the survival of the business as a going concern (see PLC Magazine, Article, Distressed debt investing: UK and US markets compared).

The idea of filing for insolvency is also surrounded by stigma in some European countries. This stigma can make lenders hostile to the idea of a negotiated rescue plan and discourage distressed borrowers from starting a debt restructuring until liquidation becomes virtually inevitable. (For an overview of UK corporate insolvency law and links to US and other jurisdictional insolvency content, see PLC Corporate and PLC Finance, Practice Note, Corporate insolvency: a guide.)

The acquisition of Countrywide by Oaktree, Alchemy Partners (Alchemy), Polygon Investment Partners (Polygon) and the company’s previous private equity owner, Apollo Management (Apollo), was the first significant loan-to-own transaction involving a UK company during the current downturn.

Background. Apollo acquired Countrywide, the UK’s largest real estate services provider, on 9 May 2007 (see PLC What’s Market, Apollo Funds offer for Countrywide plc). Although Apollo financed the £1.054 billion acquisition with a complex combination of cash, securities and stub equity (see PLC Magazine, Article, Stub equity: eat your cake and have it and PLC Magazine, Article, Acquisition of Countrywide: safe as houses?), the deal left Countrywide with a substantial debt package comprising:

Countrywide's loans and notes contained several borrower-friendly provisions including:

The downturn in the housing market had a substantial impact on Countrywide’s cash flow. However, the flexibility of the company’s capital structure allowed it to delay defaulting on its debt by drawing down on its RCF and exercising the PIK option when paying coupon on the toggle notes. These measures impacted on the value of Countrywide’s debt. As of March 2008, the company’s loan debt and notes were trading at 67% and 51% below face value respectively (see Standard & Poor’s Ratings Direct, Leveraged Finance: Case Study: Countrywide PLC's Borrower-Friendly Capital Structure Wards Off Default Risk, But Weakens Secured Debt Recovery Prospects, 1 September 2008).

Loan-to-own restructuring. On 17 February 2009, Castle HoldCo4 Ltd, the company Apollo used as Countrywide’s acquisition vehicle, announced its financial restructuring plan, proposed by a bondholder syndicate led by Oaktree and comprising Alchemy, Polygon and Apollo.

The restructuring, carried out through a Part 26 scheme of arrangement in May 2009:

Although Apollo was both a majority shareholder and minority lender before Countrywide’s 2009 restructuring (having previously bought part of the company’s debt), the transaction illustrates the potential for collaboration between incumbent sponsors and loan-to-own investors.

As Richard Youle, a Linklaters private equity partner and one of the lead advisers to Oaktree in this transaction points out, “Collaborating with loan-to-own investors is a sensible step when the incumbent owner of a distressed company is a private equity sponsor”. He continues, “When a private equity owner faces a cash flow problem in one of its portfolio companies, the key question is whether it is prepared to inject more money into it. If the answer is no, the sponsor’s efforts must then inevitably shift towards avoiding the potentially adverse reputational impact of its decision, which can in turn affect future fundraising. In this situation, ceding total or partial control to loan-to-own lenders can be a suitable alternative”.

Commentators have pointed to the acquisition of Monier by a lender syndicate headed by Apollo, Towerbrook Capital Partners and York Capital Management (ATY) as a possible blueprint for future continental European loan-to-own transactions.

Background. Paris-based private equity house PAI Partners (PAI) acquired Monier (then called Lafarge Roofing) on 29 February 2007 for a €2.4 billion enterprise value, including €420 million in existing debt and pension liabilities. Lafarge co-invested €215 million in return for a 35% stake in the new company.

PAI financed the buyout with €2.07 billion of debt. After two reverse flex requests (a mechanism giving borrowers the right to negotiate a reduction in the price of debt in an oversubscribed syndicated loan), the transaction was finally structured as follows:

Monier’s debt package was typical of the covenant-lite facilities that were common during the LBO-boom (see PLC Finance, Practice Note, Covenant-lite facilities: overview).

In March 2008, PAI became an early example of the emerging trend towards sponsor-led debt buybacks when it bought some of Monier’s second-lien debt at 55% face value (see PLC Magazine, Article, Debt buy-backs: from chaos to opportunity).

In October 2008, Monier drew down on its €125 million RCF to boost its cash cushion, prompting speculation about its financial position.

Loan-to-own restructuring. On 6 November 2008, PAI sought advice on a full restructuring of Monier’s debt amid concerns that the company risked breaching its 31 December 2008 leverage covenant. This allowed PAI to delay filing Monier’s covenant compliance certificate, while it worked to devise a rescue plan for the company.

On 30 April 2009, ATY, which had acquired Monier loan participations in the secondary market over the previous months, urged the company to engage in debt-restructuring talks with its lenders.

On 11 May 2009, PAI submitted its first restructuring proposal for Monier, under which:

Monier’s senior lenders rejected the proposal reportedly on the basis that it would have caused too many debt-holders to lose out, while giving PAI too large a stake in the restructured business.

On 18 May 2009, ATY met a steering committee of five lenders, representing 30 banks, which collectively, held 75% of Monier’s senior debt, to discuss an alternative restructuring proposal.

At this stage, ATY held approximately 40% of Monier's total debt, including two thirds of its senior debt. Monier’s term loans were reportedly trading at around 32-33.5% of face value as of May 2009.

ATY's proposal, submitted in late May, consisted of:

Although ATY's proposal was technically less efficient in terms of reducing Monier’s balance sheet liabilities, the wider lender group believed that it was preferable to PAI’s solution, as it offered continued debt servicing and higher repayments.

In an attempt to retain control of Monier, PAI unveiled a final restructuring plan consisting of:

The majority lenders also rejected PAI’s final rescue plan and, on 6 July 2009, Monier announced that the requisite majorities in the lender group, two-thirds of first and second lien lenders and more than 75% of first lien lenders, had approved the ATY rescue proposal.

Although Monier’s main borrowing entity is a German entity, some of the involved parties considered shifting its centre of main interest (COMI) to the UK. This was to make use of a Part 26 scheme of arrangement to adjust by majority vote certain of the existing loans which were to survive the restructuring (which were currently not capable of being amended by majority decision). However, as Johannes Tieves from Hengeler Mueller explains, the proposed COMI-shift became unnecessary after Monier managed to secure near unanimous lender approval for ATY’s rescue plan. Moreover, had Monier migrated the COMI to the UK, there was still the possibility that the creditors whose debts were restructured would have been able to enforce their claims in Germany, as the scheme of arrangement is not a procedure acknowledged in all EU member states in accordance with the EU Regulation (see below, Executing a loan-to-own strategy via a UK scheme of arrangement).

Monier announced completion of its debt restructuring, which cut its interest payments by 80%, in October 2009. PAI’s €256 million equity write-off as a result of the Monier transaction was the second largest loss sustained by a private equity fund with respect to a European portfolio company in the last two years.

Part 26 schemes do, however, have disadvantages. For instance,