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Minter Ellison

Boart Longyear Recapitalisation

05.09.2017 Ron Forster, Michael Hughes, Michael Scarf and Anthony Sommer

Boart Longyear completed a debt to equity recapitalisation and restructuring of its US$738 million USA based finance debt by way of two schemes of arrangement. The schemes were contested by a group of secured creditors and two shareholders. MinterEllison acted for Centerbridge Partners LP, the largest creditor and largest shareholder in Boart Longyear.

 

 

Debt for Equity Recapitalisation Schemes: Resolving the Class Struggle and Wider Implications for Solvent Restructures

Introduction

Boart Longyear (BLY) completed a complicated restructuring today involving a debt to equity recapitalisation and restructuring of its US$738 million USA based finance debt by way of two inter-conditional Australian Court-approved schemes of arrangement. The schemes were contested by a group of objecting secured creditors and two objecting shareholders. MinterEllison acted for Centerbridge Partners LP (Centerbridge), the largest creditor and largest shareholder in BLY. 

The matter involved several Court proceedings before Justices Black and Brereton in the NSW Supreme Court and two appeals to the NSW Court of Appeal (and a special leave application to the High Court of Australia, which was discontinued as part of a settlement agreement following a court-ordered mediation). 

The process clarified important areas of law applying to the scheme process which will have implications in facilitating solvent creditors' and members' schemes of arrangement going forward.

Overview and Wider Implications

Although BLY was bordering on insolvency and experiencing serious cash flow deficiencies, it was able to continue to trade throughout the restructuring process. It was able to avoid insolvent administration and the disruption this can cause to the business and the high expense of an insolvent administration including a Chapter 11 bankruptcy in the USA and an insolvent administration in a number of other overseas jurisdictions. The ability to obtain a stay at the outset of proceedings against any enforcement by creditors under s 411(16) of the Corporations Act and to have this stay filed and recognised in USA, enabled a solvent restructure to occur even though interest due on 1 April 2017 had not been paid on the 10% senior secured notes (SSNs).

The delineation of the classes in any scheme of arrangement is critical because depending on which creditors are included in a class this may influence whether the required vote can be obtained at a meeting of the relevant class of creditors (75% by value of the debts or claims and 50% in number of debt holders voting in person or by proxy at the class meeting). This matter explored the outer limits of when it is appropriate to include creditors with different rights into the one class which will provide guidance for future schemes.

The decision of Justice Black in the NSW Supreme Court in ordering the scheme meetings to occur as originally proposed was appealed by the objecting creditors to the NSW Court of Appeal (Bathurst CJ , Beazley P and Leeming JA) which upheld Black J's decision. In summary the Court found that where a company is facing potential insolvency it is possible to include creditors with different rights and who are to receive different benefits under the scheme, including different equity interests, in the same class for scheme meeting voting purposes. This may be of significant importance to companies in proposing creditors' schemes as it clarifies some of the limitations when defining the classes of creditors for the purposes of a scheme.
The Court approval process was a forum for disgruntled creditors and shareholders to raise their objections to the schemes and have those objections heard and ruled upon in an efficient manner which did not unduly delay the implementation of the Schemes.

The Court also took the unusual step in ordering a mediation between the objecting parties during the course of the second Court hearing. This provided an opportunity to agree some changes to the Secured Creditors Scheme with the objecting creditors which resulted in those creditors removing their objections and supporting the (amended) scheme. The objecting shareholder continued its objection.

The Court also clarified the ambit of power it has to approve amendments to Schemes without those amendments having to be put back for approval to another meeting of creditors. This was the first decision of this kind where the Court has been asked to approve substantial amendments to a scheme after the class meeting had been held and where the amendments were substantial rather than technical or insignificant. The decision of Black J in the NSW Supreme Court in finding the Court does have power under s 411(6) of the Corporations Act to amend the scheme in a substantial manner was appealed by the objecting shareholders to the NSW Court of Appeal (Bathurst CJ , Beazley P and Leeming JA) which upheld Black J's decision . This is an important decision as it clarifies that the Court has a substantial degree of flexibility in approving amendments to schemes pursuant to s 411(6) of the Corporations Act without the delay in having to put those amendments back to another creditor vote.

Further Details of the Schemes and Issues Involved

Details of the Schemes

The first scheme involved the 7% unsecured notes issued in the USA comprising a principal of US$284 million and accrued interest of US$9.5 million which converted into 42% of the post reconstructed equity and received replacement notes at a 1.5% per annum interest rate with varied covenants.

The second scheme involved the SSNs, also issued in the USA, with an amount owing of US$204 million (including unpaid interest due on 1 April 2017) and Term Loan A securities (US$113 million) and Term Loan B securities (US$137 million) both held by affiliates of Centerbridge which were also amended in various ways.

The main changes to the SSNs include allowing BLY to pay interest in kind (PIK) instead of cash interest for two years, at the higher rate of 12% instead of 10% for cash, extending the maturity of the SSNs for approximately 4 years, and waiving a change in control approval right to enable the holders of the Term Loans A and B to receive equity over 50% of the post reconstructed share capital of BLY. The Term Loans A and B were also amended as part of the scheme to extend their maturity dates to 31 December 2022 and reducing the interest rate from 12% to 10% through to the end of 2018 then 8% thereafter. The Term Loan A and B holders were to also to receive over 50% of the post reconstructed equity in exchange for the reduction in interest over the life of the Term Loans A and B.

Basis of Objections as to the Class

The objecting creditors (which held approximately 29% of the SSNs) objected to the SSNs being included in with the Term Loans A and B in the one class of secured creditors under the secured creditor scheme for voting purposes. The effect of the proposed class construction meant the objecting creditors did not have sufficient votes at a class meeting to determine whether the scheme could be approved or not.

In arguing that the holders of the SSNs should be a separate class of secured creditor, the objecting creditors pointed to the changes arising under the scheme to rights of holders of the SSNs compared to holders of the Term Loans A and B, including the fact the maturity date was being pushed out 4 years, instead of 2 for the Term Loans A and B, the fact the SSNs currently received cash interest and were being required to forego this for PIK interest until the end of 2018, whereas the Term Loans A and B were only entitled to PIK interest and some of that interest was unsecured because of the operation of a secured debt cap.

The most significant objection of the creditors was that it was inappropriate to have the holders of the Term Loans A and B as part of the same class of creditors because, affiliates of Centerbridge would have nomination rights to appoint the majority of directors to the BLY board and receive in excess of 50% of the post reconstruction ordinary shares as part of the reconstruction by agreeing to reduce the future interest on its loans to the value of approximately US$83 million in foregone interest.

Court's Decision on Class

Justice Black held that the class of secured creditors could include both the SSNs and the Term Loan A and B lenders. The Court found the difference in extension of maturity dates by 2 years was not material in this case given that if the schemes were not implemented the company would likely be insolvent triggering immediate repayment well before the maturity dates. Similarly the requirement for the SSN to forego cash interest in favour of PIK interest and the waiving of the change in control approval right is of lesser significance where the company is not in a position to pay any interest and insolvency is the likely alternative outcome to implementation of the schemes. Also it was found the right of Centerbridge to receive in excess of 50% of the equity post reconstruction was not such as to mean the two groups of secured creditors could not consult together about their common interest in view of BLY's likely insolvency. It was recognised in this instance that the value of the equity was speculative given the debt position of BLY. The Court held that the votes of the holders of the Term Loan A and B securities should be tagged at the meeting of secured creditors and left open what weight those votes would be given at the second Court hearing to approve the scheme.

The objecting creditors appealed to the NSW Supreme Court of Appeal which upheld Black J's decision and dismissed the appeal. The Court of Appeal found the issue of equity to Centerbridge, the director nomination rights and the waiver of the change in control approval of the SSNs, were not sufficient to mean the two groups of creditors could not consult together with a view to their common interest in the context of BLY's potential insolvency. The Court of Appeal found the issue of the equity did not affect this as the objecting SSN holders did not presently hold equity, that Centerbridge already has significant equity of 48.9% (which would be significantly diluted as part of the reconstruction) and that the value of the equity is uncertain. This is in the context where insolvency of BLY would cause a far more detrimental impact to the parties rather than the implementation of the schemes.

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