Drilling contractor Boart Longyear completed a debt to equity recapitalisation and restructuring of its US based debt of US$738 million by way of two court approved schemes of arrangement together with shareholder approval.
MinterEllison acted for Centerbridge Partners LP, the largest creditor and largest shareholder in Boart Longyear.
The restructuring was complicated due to Boart Longyear having different tranches of US based debt, with the 7% unsecured bond holders, 10% secured bond holders, and secured term loans from Centerbridge. The matter involved liaising with a number of interested parties, many of them based in the US, and their Australian and US lawyers.
Also, before the recapitalisation, Boart Longyear was in cash flow difficulties and did not pay when due the interest on the 10% bonds as under the scheme this was to be deferred until maturity of the bonds. As a result of the non-payment of the interest it was necessary to obtain an order from the NSW Supreme Court restraining any creditor from taking enforcement action until the schemes had been considered by the Court and these orders were, in turn, entered and recognised in the US, as that is where most of the creditors are located.
The two schemes of arrangement were contested by a group of the 10% secured bond holders who considered that they should have been treated as a separate class of creditors under the scheme, and not included in the same class as the Centerbridge term loans.
Two related shareholders also raised objections on the basis that they were being diluted too much due to the issue of shares to Centerbridge in exchange for reducing interest on its term loans and due to the shares being issued to the 7% bond holders by way of reduction of most of their loans.
The matter involved several court proceedings 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).
Implications of the case
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 NSW Supreme Court found that where a company is facing potential insolvency it is possible to include creditors with different rights and which are to receive different benefits under the scheme, including different equity interests in the same class for scheme meeting voting purposes.
The NSW Supreme Court held that for the purposes of convening the scheme meetings the 10% bond holders could be treated in the same class as the holders of the Centerbridge term loans even, though under the scheme the term loans were treated differently. The main difference being Centerbridge receiving shares for a reduction of interest going forward, whereas the 10% bond holders were to receive an uplift of 2% interest to delay payment of their interest until maturity. Also, the maturity date for the 10% bonds was extended by 4 years, instead of 2 years, for the Centerbridge term loans. The decision of the NSW Supreme Court was upheld by the NSW Supreme Court of Appeal.
This matter is likely to 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 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 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.
