|End-of-day quote - 09/23|
Matalan: (Some) Additional Clarity On The Impact Of English Schemes And Chapter 15 On CDS
|10/26/2020 | 07:11am|
English Schemes, the New Restructuring Plan, and Chapter 15
The English scheme of arrangement is a long-established procedure that can be used to alter the rights of creditors. Companies that would otherwise be unable to implement corporate actions due to unanimous consent requirements under their finance documents may be able to use schemes to effect such actions if: (i) they can obtain the support of a statutory majority (>50% in number and ≥75% in value of creditors voting in person or by proxy) of each affected class of creditors; and (ii) the scheme is sanctioned by the court.
In addition to the English scheme, the new
Chapter 15 was added to the
Thomas Cook Scheme and Chapter 15
Matalan Scheme and Chapter 15
Like Thomas Cook,
The Bankruptcy Credit Event DC Determinations
Following the chapter 15 filings of both Thomas Cook and Matalan, the DC was asked to consider whether a Bankruptcy Credit Event had occurred for credit default swaps subject to ISDA's 2014 and updated 2003 Credit Derivatives Definitions ("2014 Definitions" and "2003 Definitions"). The primary analysis conducted by the DC in each case was under limb (d) of the definition of "Bankruptcy." As set forth below, an important modification was made to this provision when the 2014 Definitions were published:
a the Reference Entity ... institutes or has instituted against it a proceeding seeking a judgment of insolvency or bankruptcy or any other similar relief under any bankruptcy or insolvency law or other similar law affecting creditors' rights....
As a result, under the 2003 Definitions, any proceeding seeking relief under a bankruptcy or insolvency or similar law will trigger a Bankruptcy Credit Event. Under the 2014 Definitions, however, the relief sought must be similar to a judgment of insolvency or bankruptcy.
The questions before the DC under the 2003 Definitions were fairly straightforward in connection with the
The questions under the 2014 Definitions were far more complex. The key issue in each case was whether the relief sought was "similar" to that of a "judgment of insolvency or bankruptcy."
In considering the
As foreshadowed, the DC indeed reached the opposite conclusion in connection with Matalan's (more typical) chapter 15 filing. It determined that Matalan's chapter 15 had triggered a Bankruptcy Credit Event under the 2014 Definitions, as Matalan sought additional consequences affecting creditor rights (including the automatic stay) that, combined with the effect of the scheme itself, would constitute "similar relief" to a judgment under bankruptcy or insolvency law.
Can an English Scheme Itself Constitute a Bankruptcy Credit Event?
DC determinations in recent years have provided insight regarding which types of proceedings are likely to trigger Bankruptcy Credit Events under the 2014 Definitions. We now have evidence that a Brazilian RJ plan, a Dutch moratorium, an Italian concordato con riserva, or a French sauvegarde can constitute "similar relief," but a Spanish preconcurso likely will not. We have less clarity in connection with English schemes.
The DC did not directly address whether the Matalan scheme itself constituted a Bankruptcy Credit Event (and
However, in many situations, a scheme is not an arrangement with or for the benefit of its creditors generally. As in the case of Matalan, a company that has multiple outstanding financial obligations and implements a scheme that impacts only certain of those obligations would be unlikely to constitute a scheme or arrangement with its creditors generally. Accordingly, the question as to whether an English scheme will constitute a Bankruptcy Credit Event pursuant to limb (c) needs to be considered on the facts of each case.
A Bankruptcy Credit Event could also arise in connection with a scheme under limb (b) of the Bankruptcy definition on the basis that the reference entity "becomes insolvent or is unable to pay its debts or fails or admits in writing in a judicial proceeding ... or filing, its inability generally to pay its debts as they call due." While many scheme applications will include an admission that a default or insolvency is imminent if relief is not granted, as illustrated by Thomas Cook and Matalan, that will not always be the case.
Can an English Scheme Itself Constitute a Restructuring Credit Event?
Whether or not a scheme will trigger a Restructuring Credit Event will also depend on the specific facts and circumstances of the scheme. The DC was asked to consider whether the Matalan scheme gave rise to a Restructuring Credit Event but deemed such a decision unnecessary following the bankruptcy determination. Given that the scheme involved a deferral of interest (one of the enumerated types of events that may constitute a restructuring) that was binding on all holders of the second lien notes, the key question for the DC would have been whether the modification resulted from a deterioration in the creditworthiness or financial condition of the company. This consideration is always fact-intensive and adds an element of uncertainty to all restructuring determinations.
Four Key Takeaways
- Together, the
Thomas Cookand Matalan determinations provide important guidance regarding the factors a DC is likely to consider in deciding whether a chapter 15 filing seeks "similar relief" to a judgment of insolvency or bankruptcy and thus triggers a Bankruptcy Credit Event under Section 4.2(d) of the 2014 Definitions.
- The DC decisions are less instructive regarding when an English scheme will constitute a scheme or arrangement with or for the benefit of its creditors generally and thus trigger a Bankruptcy Credit Event under Section 4.2(c) of the 2014 Definitions.
- Consideration of whether an English scheme or
U.S.chapter 15 is likely to trigger a Bankruptcy Credit Event or Restructuring Credit Event under the 2014 Definitions requires thoughtful analysis and will largely depend on the facts and circumstances of each case.
- The growing usage of schemes, and now super schemes, is likely to significantly impact the CDS market over the coming years, and we should expect many of such schemes to be crafted with CDS implications in mind.
A version of this article was published in the
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
© Mondaq Ltd, 2020 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source