Hold-Outs Beware: UK Schemes Of Arrangement And Chapter 11 Lie In Wait

The recent Thomas Cook refinancing and Cortefiel scheme of arrangement offer contrasting examples to investors of the risks and rewards of adopting a hold-out position in complex multijurisdictional restructurings. The rationale behind a hold-out strategy is simple enough: A prospective creditor will seek to acquire a portion of debt large enough to ensure that the debtor's restructuring, amend and extend or other objective cannot proceed. In larger situations, the blocking stake may be acquired by a group of like-minded funds acting in concert. Such a strategy is, however, beset on all sides by the risk of cram-down, jurisdiction shopping and specific industry pressures that may compromise the hold-out creditor's initial assessment of its position. An early step in any prospective hold-out creditor's formulation of its strategy will be the calculation of a sufficiently large blocking stake. While this can be relatively high if buying into bonds (between 25 and 34, depending on the voting thresholds), it can drop to a far more attractive level in respect of bank debt, with the principal, interest and maturity provisions often requiring 90 percent or unanimous consent to amend. However, as the English court's reach stretches further and further in claiming jurisdiction over restructurings with a peripheral connection, at best, to England, so does the risk of miscalculation of the blocking stake. While a hold-out creditor might buy on the basis that a small stake will be sufficient to obstruct amending and extending bank debt, it can quickly find itself subject to an English law scheme of arrangement, which allows the majority creditors to compromise its debt with 75 percent support. Such a pitfall has recently befallen the hold-out creditors in the Cortefiel restructuring, where the company, a Spanish clothing retailer, reacted to its failure to reach a 90 percent extension rate across creditors by pushing the company into a scheme of arrangement to utilise the 75 percent approval it did obtain. Although assessing the availability and likelihood of a scheme of arrangement for a debtor is a difficult and constantly evolving analysis, it behooves a prospective hold-out creditor to consider the factual matrix surrounding the debtor. Global operations may be a key complicating factor in limiting a debtor's (or its creditors') choice of restructuring paths. For example, although Cortefiel, Global Investment House KSC and Icopal demonstrate that...