Smile Telecoms - Out of the money means out of the vote
10 February 2022
10 February 2022
In what is the first landmark restructuring case of 2022, Smile Telecoms made history last month: for the first time, the English court has made a convening order that excluded its shareholders and all but one creditor class from voting in a restructuring plan on the basis they were "out of the money". The sole creditor class which will now vote on the plan is the group's super senior lender who will be taking full ownership of the group as part of the restructuring plan.
This is the first case where a company has sought the exercise of the court's power to exclude creditors and shareholders from voting on a restructuring plan, even though the plan levies substantial compromises on those stakeholders, on the basis that they have no genuine economic interest in the company. The key takeaways are as follows:
The starting point for a restructuring plan is that every creditor or shareholder of the company whose rights are affected must be permitted to vote on the restructuring plan by participating in a meeting convened by the company with the approval of the court.
Where you have one or more dissenting classes of creditors, the cases in 2021 show that the court is willing to exercise its power to sanction a restructuring plan notwithstanding the votes of the dissenting class(es) (the "cross-class cram down" power) as long as:
Clearly it is one thing to sanction a restructuring plan when faced with one or more classes of dissenting creditors, but it is quite another to simply exclude those classes from voting in the first place. That power to exclude a class from voting (under section 901C(4) of the Companies Act 2006) requires the company to satisfy the court that none of the members of the classes to be excluded have a "genuine economic interest" in the company.
In other words, whilst cross-class cram-down requires a comparison of the outcomes for the affected classes under the plan as opposed to under the relevant alternative (the so-called 'no worse-off' test), for a company to exclude classes from voting altogether the court has to be satisfied that the excluded classes have a complete absence of economic interest in the relevant alternative.
This was not a marginal case – the senior lenders were found on the evidence accepted by the Court to have repeatedly admitted to the Company that they were out of the money; and they had been given the time, with advice, to review the valuation evidence and did not provide any competing evidence at the convening hearing to counter the position of Smile. A more marginal case, or situations where lenders have not made such admissions in negotiations, will fail to provide such a clear route to the utilisation of 901C(4).
It will be interesting to see how such cases play out in light of the unwillingness and, in our view justified, reticence of English judges to date to engage in lengthy and protracted valuation disputes as part of the main restructuring plan proceedings. Those valuation disputes appear in Chapter 11 reorganization plans in the US and can delay the proceedings for months, with substantial costs incurred by the estate as the court has to reach a valuation determination in the presence of competing arguments from valuers providing expert evidence for varying levels of creditors.
Speed and expediency seems to be the UK's differentiating factor. In this regard it will need a fairly borderline mix of factors to depart from this premise: it will be where you have a marginal case, with competing evidence in front of the court as to where the value breaks, and perhaps where there are questions as to the quality of any market testing in support of the valuation.
In our last legal update, we predicted that 2022 will be the year that the restructuring plan takes off, and this case significantly develops our understanding of when the power to exclude "out of the money" stakeholders from voting will be available. That was one of the key points that we hadn't seen analysed by the courts in the detailed judgements on restructuring plans since their introduction into English law in June 2020.
Restructuring plans have not in any way displaced creditor schemes of arrangement in the UK. But the impact on senior creditors of Smile's two restructuring plans in as many years highlights how powerful the tool can be: the first plan saw the dissenting senior lenders have further super senior debt layered in ahead of them and the second plan sees the senior debt and related security released in full without the beneficiaries' consent. The potential to use a plan to implement balance sheet restructurings of this nature, as well as a compromise of operational liabilities (as seen in Virgin Active), means we now have the tool, and a supportive judiciary, to envy the world.
Restructuring plan #2 for Smile Telecoms
The name Smile Telecoms may be familiar to those who have read our previous briefings on restructuring plans and that is because the company already had an earlier restructuring plan sanctioned by the court in March 2021. In that plan, the company, which operates a telecoms group in Nigeria, Uganda and certain other countries in Africa, benefited from the court's cross-class cram down power to facilitate further super senior borrowings, notwithstanding that the senior lender class did not approve the plan (with only 71% voting in favour) and that the group's senior facilities did not permit the incurrence of that new debt.
For the second plan, the court convened a meeting for a single class (of the company's super senior lender) and excluded the six other classes of creditors (including the company's senior lenders and shareholder-related subordinated creditors), together with its shareholders, from voting.
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