London Lure for Troubled Firms Threatened by Spanish Gamble

  • Codere restructuring bid raises U.K. jurisdiction questions
  • U.K. lawyers may lose out on lucrative debt dispute cases

A ruling in a little known Spanish company’s debt restructuring may curtail London’s role as the global port-of-call for troubled firms.

A court questioned last week whether Codere SA, a Madrid-based gaming company with no U.K. offices or debt before the case, could restructure 1.2 billion euros ($1.3 billion) of bonds issued under New York law in the British capital.

“It seems to me that this is at the edge of what an English court can do,” Judge Christopher Nugee said in a preliminary ruling Oct. 29 that allowed Codere to push ahead with the restructuring plan until the jurisdiction issue is decided. If the court can rule on Codere, “you could do it with any company anywhere in the world,” Nugee said.

The ruling will test a decade-old trend of U.K. judges relaxing rules allowing them to overhaul the debt structure of companies with, at times, flimsy connections to the U.K. London courts helped foreign companies to cut and amend terms on more than $5 billion in distressed debt this year, according to data compiled by Bloomberg.

Lawyers said Codere could be the first to see its request for a so-called scheme of arrangement turned down on jurisdictional grounds and set a new precedent limiting the reach of English law.

Complacency Risk

"With so many schemes coming through the courts unopposed, perhaps the judges are concerned that some complacency has crept in,” said Richard Tett, a partner at Freshfields Bruckhaus Deringer in London, who isn’t involved in the case. “The judges have begun to be more rigorous.”

More than 30 companies -- generally with more debt than name recognition -- have turned to the stability of London courts since 2009 where they can amend their loans and bonds more easily without filing for bankruptcy. The biggest case involved a Spanish real-estate investor, Metrovacesa SA, which restructured almost 6 billion euros of debt in 2011.

Codere’s management applied for a ruling from an English court after incorporating a holding company in the U.K. last year without shifting its center of main economic interest to the country and while its bonds remained governed by New York law.

‘Forum Shopping’

Both the center of economic activity and bond jurisdiction have been key issues for U.K. judges. Apcoa Parking AG, a German company that restructured 640 million euros in debt last year, made it even easier for international borrowers to seek help in the U.K. as the court agreed to rule on the case after lenders voted to switch the law governing its loans from German to English.

“It’s quite an extreme form of forum shopping,” Nugee said, in reference to Codere. “It’s like grabbing someone else’s debt just to get rid of it.”

Codere is seeking a ruling before a Dec. 4 shareholder meeting. Failure to approve the deal could push the company into insolvency, with a risk of losing licenses it holds to operate in several countries, David Allison, a lawyer for the company, said at last week’s hearing.

Officials at the company and Clifford Chance, the law firm advising Codere on its restructuring, declined to comment on the case.

Respect Urged

Lawyers argue that the U.K. court should still respect the fact that Codere’s creditors voted overwhelmingly to approve the deal. 

More than 90 percent of Codere’s bondholders approved the restructuring agreement before the case was brought to court after two years of negotiations. Creditors including Silver Point Capital LP and M&G Investment Management Ltd. are set to take control of the firm after the completion of the process, Nugee said.

“If 95 percent of creditors have locked up to support the deal, there is not much in it for a judge to refuse the deal on jurisdictional grounds,” said James Roome, senior partner at law firm Akin Gump Strauss Hauer & Feld in London, who isn’t involved in the case.

Along with debt overhauls, U.K. courts have become popular forums for all sorts of global disputes from complex litigation to divorces. In a current trial, the East African nation of Djibouti is suing a former port official who it alleges enriched himself during public deals.

Ukraine Conflict

U.K. courts have also been a haven for companies damaged by the conflict in Ukraine. DTEK Energy BV and egg-producer Avangardco Investments Public Ltd., unable to repay their debts because of the conflict in the east of the country, managed to extend their maturities through a London court ruling this year.

But the popularity of English courts have forced other countries to update their laws. European countries, including Spain, have been trying to catch up with the English system to encourage investment and stop local firms fleeing across the Channel to restructure distressed debt.

“The ruling is not going to stop foreign companies seeking to restructure debt in London, but it may force them to be more careful,” said Alberto Nunez-Lagos, partner at law firm Uria Menendez in Madrid. “Spain reformed laws last year and can now compete with the scheme of arrangement. Restructuring debt can now be even cheaper and simpler in Madrid than in London.”

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