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London as a European restructuring forum reigns supreme

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    German real estate group restructuring plan sanctioned in London

    Having failed to get its restructuring solution through in its home jurisdiction, beleaguered German real estate group, Adler, turned to London. After substituting a UK plc as issuer of six series of notes in order to propose an English restructuring plan, and in the face of fierce opposition from an ad hoc committee of 2029 noteholders (AHG), the group successfully forced the plan through just in time.

    The restructuring plan is still a very new tool, and this case provides important insight into how it works, including importantly how judges will approach a highly contested valuation dispute.

    Did CIGA open the door for UK valuation disputes?

    When the Corporate Governance and Insolvency Act (CIGA) introduced the restructuring plan into our toolkit in June 2020, it was suggested that the new Part 26A so-called "super scheme" could give rise to protracted debtor/creditor valuation disputes, on account of its voting mechanism and ability to cram down whole dissenting classes.

    Until Adler came along, however, the English court was yet to see a full-blown valuation dispute. Virgin Active was the first restructuring plan in which it seemed possible that dissenting creditors might challenge the plan company's valuation evidence. Whilst dissenting classes of landlord creditors criticised the plan company's valuation evidence in that case, they declined to provide their own competing evidence for analysis. Snowden J took this opportunity to observe that it was important that "the potential utility of Part 26A is not undermined by lengthy valuation disputes" and it would be "most unfortunate if Part 26A plans were to become the subject of frequent interlocutory disputes". In Smile (No. 2), a senior lender did provide alternative valuation evidence in an effort to establish that it was not out of the money; but it did not formally oppose the plan in court, leading Snowden LJ to direct opposing creditors to "stop shouting from the spectators' seats and step up to the plate". Zacaroli J reiterated this message in Houst - the third restructuring plan which had potential to give rise to a valuation dispute – when HMRC chose not to provide alternative valuation evidence in spite of voting against the proposed plan.

    By contrast, US Chapter 11 proceedings (from which the cross-class cram down concept is borrowed) are renowned for giving rise to lengthy and costly valuation disputes in the bankruptcy courts. So common are valuation disputes in US Chapter 11 proceedings that it is a distinguishing factor to be taken into account if deciding whether to carry out a US- or UK-based restructuring.

    The market therefore watched with interest as Adler's restructuring plan was launched earlier this year. Following a failed consent solicitation process to amend the terms of certain of its senior unsecured notes (launched in accordance with German law in late 2022) in which a group of 2029 noteholders voted against the group's proposed amendments, it was clear that this restructuring might give rise to a larger scale valuation dispute in the English court.

    Adler Restructuring Plan: the Background

    Adler is a German property group which owns a large number of rental properties and its portfolio is estimated to be worth around EUR 8 billion. Due to the Covid-19 pandemic, the invasion of Ukraine, a downturn in the property market and an adverse short seller report published in October 2021, the group is facing a liquidity crisis. As a result (and following its failed consent solicitation process), the group proposed a UK restructuring plan with six classes of creditors, being the holders of six series of senior unsecured notes (SUNs) due 2024, 2025, January 2026, November 2026, 2027 and 2029.

    In brief, under the plan Adler proposed to (see diagram below):

    • extend the maturity date of the 2024 notes by one year (whilst retaining the maturities of the other SUNs); and
    • vary the terms of the SUNs in order to (a) permit and facilitate the raising of EUR 937.5 million; and (b) modify certain negative pledge covenants to permit the creation of security.

    The relevant alternative to the plan was a formal insolvency of the Group, which was accepted by both the AHG and the court.

    The plan was approved by five out of six classes of creditors. As expected, the plan was not approved by the requisite majority of the 2029 noteholders, with 37.72% voting against.

    What was decided at the sanction hearing?

    Mr Justice Leech sanctioned the plan on 12 April. An application to appeal the decision was heard by Leech J in a subsequent hearing on 25 April in which permission to appeal was denied, which started the clock on a 21-day window in which the AHG may apply to the Court of Appeal to appeal the refusal.

    The written sanction hearing judgment is lengthy (running to 164 pages in total) and covers various issues, which are briefly summarised in the table below. Our key takeaways from the judgment are as follows:

    Practical Points

    • The UK remains a leading restructuring centre: Notwithstanding the availability of the StaRUG, Adler substituted its bond issuer for a UK-incorporated entity in accordance with the substitution procedure under the German law-governed SUNs in order to make use of the English restructuring plan, demonstrating that the UK remains a desirable forum for foreign companies to carry out restructurings in spite of the development of new European restructuring tools.
    • Majorities matter: The judge attributed weight to the fact that a simple majority of the dissenting class (62.28%) voted in favour of the plan together with the requisite plan majorities of each of the other creditor classes, accepting that creditors are generally the best judges of their own interests.
    • The court's role: Echoing Trower J in Deep Ocean, who noted that a plan company will have "a fair wind behind it" provided the voting requirements are satisfied, the court reiterated that it does not have to be satisfied that the proposed plan is the best or fairest plan available. It was accepted that once a plan reaches the court, it is the product of lengthy negotiations between the plan company and its stakeholders and is likely to be the only compromise expected to obtain the requisite approvals. It is therefore not the role of the court to interrogate whether a better or fairer alternative is available.
    • May the best evidence win: When the plan company's valuation evidence is challenged, the court's decision will inevitably come down to the strength of each party's evidence. This gives rise to the question on everybody's lips: how will smaller creditors meet the cost of mounting an adequate challenge, particularly in an SME restructuring plan context? Perhaps the key to a successful "challenge" is engaging with the plan company and reaching a compromise before the plan even gets to court.
    • Appeal process: The AHG indicated that it would appeal before the written sanction judgment was handed down, by which point the plan company had filed the sanction order with Companies House and proceeded to implement the plan (by raising new money benefitting from super senior priority in order to repay looming maturities). The AHG now has a 21-day window in which to seek permission to appeal from the Court of Appeal. The AHG have not yet indicated whether they intend to do so; but if permission is granted, how will the practical implications of unwinding a partially-implemented plan be dealt with? This was not addressed in the hearing or judgment.

    The No Worse Off Test and Valuation Evidence

    • The court will take a broad approach to the no worse off test: Leech J noted that the valuation evidence provided by both the plan company and the AHG was "complex and uncertain" and that there are uncertainties when considering whether dissenting creditors would be any worse off, but took guidance from Virgin Active and Deep Ocean and observed that a broad approach could be taken, holding that "all of the legal consequences" of the restructuring plan for dissenting creditors should be considered.
    • The court does not have to satisfy itself that a particular event will definitely occur when considering the outcome for dissenting creditors if the plan is sanctioned (i.e. the third limb of the no worse off test): The court must simply be satisfied that the event is the most likely of the alternatives presented to court. In Adler, Leech J observed that the principal point of contention between the plan company and the AHG was not what the relevant alternative was and what the outcome would be for the 2029 noteholders in the relevant alternative, as had been the case in Virgin Active; but what the outcome for the 2029 noteholders would be if the plan was sanctioned. However, he adopted the approach taken in Virgin Active and held that he did not have to be satisfied that the noteholders would definitely be paid in full if the plan were sanctioned (as per the plan company's evidence), simply that this was the most likely alternative.

    Olga Galazoula, Global Practice Head of Restructuring and Special Situations, says:

    "This is the first major use of a restructuring plan post-Brexit by a substantial German group and proves that despite Brexit, London is still the go-to place for European restructurings. Domestically, it is one of the first plan cases involving a serious valuation dispute and increases our journey of understanding how the restructuring plan will respond in those scenarios."

    Issues considered at the sanction hearing
    Did the proposed restructuring contravene the pari passu principle?No. The plan preserves the existing maturities of the SUNs (save for the 2024 notes) and noteholders will be paid in full.
    Were the conditions for cross-class cram down satisfied and should the court exercise its discretion to cross-class cram? This required a detailed analysis of whether the 2029 noteholders (as the dissenting class) would be "any worse off" under the plan than they would be in the event of the relevant alternative, for which the court considered the valuation evidence provided by the plan company and the AHG.Yes. The court preferred the plan company's valuation evidence and accepted that the 2029 noteholders would be paid in full if the plan was sanctioned and would receive 63% of their principal in the relevant alternative.
    Was the substitution of the issuer (to avail itself of the English court's jurisdiction) valid?

    Yes. The issuer substitution was valid and effective and the English court therefore had jurisdiction to sanction the plan.

    Note that the AHG are also litigating the validity of the issuer substitution in Germany.

     Were there any "blots" on the plan? In this regard, the AHG argued that they had accelerated EUR 185 million of the 2029 notes and the court should therefore refuse sanction. No blots on the plan. It was unnecessary to decide whether the 2029 notes had been accelerated, because acceleration of the notes would not render the plan unlawful or inoperable.
     Was the company's explanatory statement adequate? Yes. The explanatory statement did not fail to include sufficient information to enable the plan creditors to make an informal decision.
     Was it appropriate for the equity to retain their 77.5% shareholding when they were not injecting new money into the group?

    Yes. Although Leech J noted that he had the "greatest concern" about the fact that existing shareholders would benefit from the plan if it succeeds, despite providing no support for the plan or any additional funding, it was ultimately held that this was not a reason for declining to sanction the plan. This could, however, be a point of focus in future plans.

    In short, Adler has reaffirmed that London is a major European restructuring hub, which can offer a restructuring solution that may be unavailable in the home jurisdiction and provide certainty of execution via its restructuring-friendly court system.