Shearman & Sterling advised the Frigoglass Group on its successful capital restructuring (the “Restructuring”), which included the use of an English scheme of arrangement.
The parent company, Frigoglass S.A.I.C. (the “Parent”) is incorporated in Greece and listed on the Athens Stock Exchange; it has subsidiaries in various EU countries and elsewhere in the world, but not in the UK. The Frigoglass Group manufactures packaging products and retail coolers for beverages, and is a leading supplier of high-quality glass bottles and related products to selected markets in Africa, Asia and Oceania.
In 2013 the Frigoglass Group issued €250 million high yield notes due 2018 (the “Notes”) through a Dutch finance subsidiary, Frigoglass Finance B.V. (the “Issuer”). The Notes were issued under a New York law governed indenture. At the same time, the Issuer incurred revolving credit facilities of up to €50 million with two international banks under English law governed facility agreements. These facilities were in addition to other existing credit facilities that were available to the Parent, the Issuer, the Issuer’s direct holding company, and certain other operating subsidiaries of the Frigoglass Group.
The Frigoglass Group’s operations were materially affected by adverse macro-economic conditions, which resulted in covenant breaches under its revolving credit facilities. In addition, the Frigoglass Group faced looming maturities on its bank and bond debt in 2017 and 2018, and had to examine its options in terms of restructuring and deleveraging its capital structure in the light of the upcoming maturities.
A reduction in debt and an extension of maturity would have required the approval of at least 90% in principal amount of the Notes, and the approval of each lender under its bilateral bank facilities. It was considered impracticable to achieve these consent levels on the Notes on a consensual basis, given the Notes were widely held (including, it was believed, by retail investors in Greece).
Consideration was given to legal processes which could be used to reduce the consent thresholds for the required restructuring, but at the same time bind any dissenting minorities. While we considered alternative processes in the relevant jurisdictions, being The Netherlands, Greece, the United States and England, ultimately it was decided that an English scheme of arrangement would be the most practical means of achieving a compromise of the Notes, as it had the advantage of:
- reducing the required consent threshold to 75% by value (and 50% by number) of those voting;
- requiring only the principal debtor and not the guarantors to be a party to the scheme itself, but with the ability to compromise the related guarantee claims, and thus preserving value in the guarantors and the Frigoglass Group; and
- significant precedent and recent case law for similar restructurings involving foreign principal debtors and guarantors.
In addition, while a sufficient connection in England was lacking, there were several ways in which such a connection could be created (as further described below).
- A group of Noteholders (the “Ad Hoc Committee”) and the participating bank creditors entered into a Lock-Up Agreement pursuant to which they agreed to support the Restructuring and underwrote the provision of the €40 million of new monies described below.
- The Restructuring comprised a number of different elements, namely:
To fund working capital, restructuring costs and improve liquidity, the Frigoglass Group would receive:
- new funding of €40 million, to be structured as first lien secured debt. The holders of the Notes and certain core banks providing credit facilities to the Frigoglass Group (together the “Participating Creditors”) would be given the right (pro rata to their exposure) to provide these new monies; and
- an additional €30 million of new monies from its principal shareholder by way of an equity contribution (as described in the paragraph titled principal shareholder support below).
Roll-Up of Existing Debt (the “Roll-Up”):
For each €1,000 of new monies provided by a Participating Creditor, €2,000 of their existing debt exposure would be exchanged for an equal principal amount of new first lien secured debt.
The remainder of the debt exposure of the Participating Creditors was to be treated as follows:
- for holders of the Notes: (A) 50% of the remainder was to be exchanged for second lien secured debt; and (B) the balance, after applying a discount, was to be exchanged for shares in the Parent (and, if existing shareholders of the Parent (other than its principal shareholder) subscribed cash for shares in the Parent pursuant to the rights offering described below, a pro rata share of the cash proceeds of such subscription); and
- for bank lenders: (A) 82.5% of the remainder was to be exchanged for second lien secured debt; and (B) the balance, after applying a discount, was to be exchanged for shares in the Parent (and, if existing shareholders of the Parent (other than its principal shareholder) subscribed cash for shares in the Parent pursuant to the rights offering described below, a pro rata share of the cash proceeds of such subscription).
Principal Shareholder Support:
The principal shareholder of the Frigoglass Group was to convert a €30 million existing shareholder loan for, and to subscribe an additional €30 million of cash for, shares in the Parent pursuant to the rights offering described below.
Greek Rights Offering:
Existing shareholders were to be invited to subscribe for shares in the Parent pursuant to a rights offering. Any cash proceeds would be applied to repay existing indebtedness and any unsubscribed shares would be allotted to creditors as part of the equitisation process described in the paragraph titled equitisation above.
Operating Subsidiary Indebtedness:
Other existing credit facilities of the Frigoglass Group (at the operating company level) would be left unamended.
The Scheme of Arrangement and Related Issues
A scheme of arrangement is a compromise or arrangement provided for under Part 26 of the Companies Act 2006, and will take effect between a company and its creditors or members (or any class of them) and become binding on all the creditors or members to whom it applies if: (a) it is agreed to by the requisite majority; and (b) the English court subsequently sanctions the scheme. The requisite majority is a majority in number representing 75% by value of the creditors or members of the relevant class present and voting at a meeting.
We advised the client on a number of issues in connection with the Restructuring, including:
Which Elements of the Restructuring Could Be Dealt With Through the Scheme?
- Should we include the bank debt?
While we explored various options in terms of what debt should be included in the scheme, ultimately it was decided to include only the Notes, and the restructuring of the participating credit facilities was effected through bilateral agreements with the lenders.
- How do we structure the new monies option?
The Restructuring included a requirement for new monies to be provided to the Frigoglass Group. However, it is well-established that a scheme of arrangement cannot impose new obligations on scheme creditors. There are certain exceptions, for example where the obligations are of a minor or technical nature and replicate existing obligations (e.g. indemnities given to Note trustees) or where such obligations are an integral part of the new rights received and are customary (e.g. turnover obligations imposed under an intercreditor arrangement). We structured the provision of the new monies as an option that was made available to scheme creditors, but was not an obligation imposed on them. To mitigate the risk of any shortfall in the event that the option was not subscribed in full, the Frigoglass Group entered into underwriting arrangements with the Participating Creditors who agreed to underwrite the provision of the new monies.
As There Was No Connection With England, What Alternatives Were Available for Establishing the Jurisdiction of the English Courts?
- Can you scheme a foreign company?
A scheme of arrangement under the Companies Act is available to a “company liable to be wound up under the Insolvency Act 1986.” This includes foreign companies such as the Issuer, as “company” includes “unregistered companies” for this purpose.
- Sufficient connection?
Each of the following routes has been found by the English courts to be a “sufficient connection:”
- shifting the centre of main interest (COMI) of the Issuer from the Netherlands to the UK. The additional benefit of this was that if Chapter 15 recognition of the proposed scheme was sought in the US, it would be necessary to show that the Issuer had its establishment, or COMI, in the UK;
- changing the governing law and jurisdiction of the Notes to English law and the exclusive jurisdiction of the English courts; and/or
- incorporating a new member of the Frigoglass Group in the UK and having that new company accede as a co-obligor with the Issuer for the Notes. It is critical for this purpose that the new company is a principal debtor in respect of the debt to be schemed; a guarantor would not be sufficient for this purpose.
The Selected Approach
It was decided in this case to adopt a “belt and braces” approach and both shift the COMI of the Issuer and change the governing law and jurisdiction of the Notes. This raised the following issues:
- A COMI shift involves a number of practical steps and careful planning. Because it is ultimately a factual determination, it is open to challenge by a dissenting creditor.
- The change to the governing law and jurisdiction of the Notes was done through a consent solicitation process which clearly outlined the fact that the reason for the change was to facilitate the jurisdiction of the English courts for the purposes of a scheme. This was a helpful fact pattern when it came to the timeline for the scheme process itself (see the paragraph on the issues considered in the course of the Frigoglass transaction below).
- There was concern, based on the views expressed in Global Garden  EWHC 1884 (Ch) that if the Issuer relied solely on a COMI shift, it might have been necessary to ensure that a sufficient number of scheme creditors were domiciled in the UK. Subsequent cases indicate that a single creditor alone is sufficient. However, depending on the nature and identity of the scheme creditors, suitable evidence to substantiate the domiciliation may be required by the English court.
Timing and Conditionality Issues
- Can we have a conditional scheme?
The scheme was only part of the Restructuring, which included a Greek rights offering. The Greek rights offering (and approval from the Greek regulator) could only be launched (and obtained) after the scheme had become effective, i.e. once it had been sanctioned by the English court and filed with Companies House. The rights offering would also take several weeks to complete. If for some reason the rights offering could not be completed, then the Restructuring would fail and the scheme would need to be of no effect, with the holders of the Notes retaining their claims in respect of the Notes.
Every effort was made to complete as many of the Restructuring steps in advance of the sanction hearing; however, there were a number of steps which could not be initiated or completed prior to the scheme being sanctioned and becoming effective. We note that an English court has been willing to sanction a conditional scheme where the conditions fall to be satisfied after sanction. Precedent shows that some conditionality is acceptable, but there is concern about conditionality which may be discretionary (such as consents and approvals from third parties or regulators) and not simply mechanical. Early engagement with regulators and third parties is critical, and pre-sounding any required consents and approvals can also help mitigate that uncertainty.
Some of these concerns may also be mitigated through the use of a restructuring agreement which sets out a step-by-step process for the completion of the Restructuring, in particular any steps to be taken following the sanctioning of the scheme. This gives clarity on the roadmap to completion and reduces uncertainty around the process and the scope for unforeseen changes. It can also give the English court some comfort that there is a clear process to achieve the fulfilment of the scheme and the completion of the Restructuring.
- Is the scheme timetable fluid?
- Timing around the scheme process is critical. Usually:
- the Practice Statement Letter is issued 14 days prior to the convening hearing;
- the notice of the creditors’ meeting and the Explanatory Statement is issued 14 to 21 days prior to the date of the creditors’ meeting;
- the sanctions hearing is scheduled a few days after the creditors’ meeting; and
- the court order sanctioning the scheme is filed with Companies House the day after the sanctions hearing.
- The process may take up to 6-8 weeks to complete, once initiated; however, in practice preparation begins long before launch (depending on the complexity, one to two months).
We Considered The Following Issues In The Course Of The Frigoglass Transaction:
- Consideration by scheme creditors
It was believed that a number of holders of the Notes were Greek retail investors. Given the complexity of the overall Restructuring, it was critical that scheme creditors were given sufficient time to consider the details of the proposed scheme. The preceding consent solicitation process to change the governing law of the Notes from New York law to English law included disclosure around the proposed Restructuring, and in particular the fact that the change in governing law was intended to facilitate the proposed scheme. As a result, we took the view that Noteholders had in fact been aware of the Restructuring and the proposed scheme long before the launch of the scheme itself, and would have had sufficient time to prepare any objections.
- Disclosure issues
The timing of disclosures is also critical, both in terms of subsequent events and also given the Parent’s disclosure obligations as a listed company on the Athens Stock Exchange. The Explanatory Statement has to be filed with the court in advance of the convening hearing, and is expected to be in substantially final form by that point. However, in the context of a complex and substantial restructuring, where negotiations with creditors are ongoing, it is often the case that significant work will often continue after that date. As such, disclosures and the timing, and the scheme process, have to be carefully managed to avoid having to issue a correction to the Practice Statement Letter or the Explanatory Statement once issued—which may well result in a delay to the timetable.
- Insolvency comparator and valuation issues
This is critical for an “insolvent” scheme, and required to demonstrate that a scheme creditor will achieve a better outcome from the compromise proposed by the scheme than if the scheme fails. This is usually shown as a percentage recovery (or range of recoveries) on a scheme creditor’s claim under different scenarios; one alternative being the liquidation or insolvency of the group, and another, the valuation of the consideration being offered to the scheme creditors as part of the scheme. The valuation of the latter may not always be straightforward, depending on the nature of the consideration being offered, particularly if it involves the issue of new debt instruments for which there is no existing market.
- Class and fairness issues
For the purposes of a scheme, the analysis of what constitutes a class of scheme creditors is important. Case law establishes that a class is made up of creditors whose rights are “not so dissimilar as to make it impossible for them to consult together with a view to their common interest.” The analysis will include present rights and rights as they would exist were the scheme to become effective. Only the Notes were included in the Frigoglass scheme, so the analysis there was fairly straightforward, as there was no disparity in contractual terms.
However, we considered a number of issues in this context:
- The company entered into a Lock-Up Agreement with the Ad Hoc Committee and the participating banks. It is well-established that the mere fact that some scheme creditors enter a lock-up agreement pursuant to which they agree to support the scheme does not automatically mean that they should be treated as comprising a separate class. However, a lock-up agreement may give rise to class issues if not properly structured.
- There was an underwriting fee paid to the Ad Hoc Committee who signed up to the Lock-Up Agreement and agreed to underwrite the provision of new monies. This fee was not available to the Noteholders who did not participate in the underwriting. However, provided that the amount of such fee can be shown to be within normal commercial parameters, this should not pose class or fairness issues to the scheme. The underwriting was also restricted to the members of the Ad Hoc Committee; this was justifiable on the basis of the need for commercial certainty, and securities laws concerns (given, as discussed, it was believed that a number of holders of the Notes were Greek retail investors).
- We also considered the issue of cross-holdings between the bank lenders and the Noteholders. Although the credit facilities were not included in the scheme, given there were slight differences in the outcome for the lenders of those credit facilities and the Notes, one of the issues we considered was whether, in the event there were cross-holdings (i.e. to the extent the bank lenders also held Notes, or Noteholders also held an interest in the credit facilities) there might be an argument that the relevant creditors (to the extent there were cross-holdings) had an ancillary interest in how their votes were exercised.
- The structure relating to the provision of the new monies and the Step-Up was also considered in detail. The structure could be argued to benefit large commercial holders of the Notes over retail holders; as discussed above, it was assumed that, due to KYC, regulatory and other concerns, the retail holders might not subscribe to the option to provide the new monies. However, overall recovery to a Noteholder would be materially higher if it subscribed for its pro rata share of the new monies to be provided to the Frigoglass Group (and even higher if, as an underwriter, it picked up a further allocation, due to the operation of the Roll-Up). Our analysis, however, was that provided all Noteholders were given the opportunity to take up their pro rata share of the option, this should not of itself be an issue, given the commercial need for the new monies and the potential regulatory and practical issues in having retail holders as underwriters.
Given the complexities of the Restructuring, we also considered the necessity of including a mechanic for incorporating amendments to the scheme documents which were included in the documents submitted to the English court as part of the scheme process, both at the convening hearing stage and ultimately for the sanction hearing. This was particularly critical given, as discussed above, there were a number of steps which remained to be completed following the sanctioning of the scheme, including the satisfaction of certain conditions which were not just mechanical. Any process for amendments to documents and the Restructuring itself, particularly where the amendments are more than just administrative and technical in nature, must be structured carefully to ensure that the English court does not conclude that it undermines the validity of the scheme voting.
The scheme was sanctioned by the English court on 1 August, 2017 and the Restructuring completed on 23 October, 2017. The key benefits to the Frigoglass Group are:
- Significant deleveraging: The Group’s outstanding gross indebtedness was reduced by approximately €138 million (before the incurrence of the €40 million new monies);
- Improved liquidity: The Group received €70 million of additional liquidity to fund its business needs and Restructuring-related expenses;
- Reduced interest cost: Significant reduction of annual interest cost to approximately €13 million through the reduction of indebtedness and lower interest cost on the Group’s remaining indebtedness; and
- Extension of maturity profile: The maturities of almost all of the Group’s indebtedness were extended and committed for an additional 4.5 years.
We were very pleased to have advised the Frigoglass Group on this significant Restructuring.
The Shearman & Sterling team that represented the Frigoglass Group was led by partners Marwa Elborai (Capital Markets, London), assisted by Philip Stopford (Finance Group, London), Simon Letherman (Tax, London) and James Duncan (Finance Group, London). They were assisted by of counsel Clifford Atkins (Finance Group, London), counsel Jonathan Handyside (Capital Markets, London), and associates Tom Berisford, Michèle Smith, Ellaine Gelman, Brittany Roger and Charlie Marmion (Finance Group, London), Carla Russo and Evangelia Andronikou (Capital Markets, London) and Sarah Moir-Porteous (Tax, London).