Global Borrowers Avoid $70 Billion Debt Distress in U.K. CourtsJulie Miecamp
U.K. courts, which processed $24.3 billion of distressed debt in the past year, are increasing their advantage as a jurisdiction by making it easier for global companies to avoid insolvency.
Borrowers from Vietnam to Germany used English schemes of arrangement to reorganize more than $70 billion debt in the past five years, with French swimming-pool products maker Zodiac Marine & Pool becoming the latest non-U.K. incorporated firm to ask a London judge to help it amend 1 billion euros ($1.36 billion) of loans last week.
It’s become easier for international borrowers to seek help in the U.K. courts since Apcoa Parking AG won approval to switch the law governing its 640 million euros ($885 million) of debt from German to English earlier this year. Companies like schemes of arrangement because the process typically allows them to overcome objections from minority creditors and implement a debt deal without applying for insolvency.
“English restructuring procedures are now often the first port of call for many non-English companies in distress,” said Kon Asimacopoulos, a partner at Kirkland & Ellis International LLP in London. “Schemes are, more than at any time previously, very effective restructuring tools.”
The conditions global borrowers have to meet to use schemes of arrangement have been relaxed over the past four years. Whereas companies used to have to be based in the U.K. and their debt governed by English law, they now no longer need a geographic connection.
Zodiac Marine sought the court’s help to postpone debt repayments to as late as 2019, according to a court filing. The Paris-based company, which has subsidiaries in the U.S. and Finland, said it’s seeking to “address ongoing financial difficulties.”
Washington-based private equity firm Carlyle Group LP acquired Zodiac in a 2007 buyout financed with almost 1.2 billion euros ($1.6 billion) in loans, according to data compiled by Bloomberg. The company’s loans are governed by English law.
Officials at Zodiac, who asked not to be identified citing company policy, declined to comment about the court hearing.
“For now the U.K. has an edge as clients favor London for its strong predictability and because there have been many schemes before,” said Paris-based Laurent Assaya, a restructuring and distressed mergers and acquisition specialist at law firm Jones Day LP.
European countries are overhauling their insolvency and pre-insolvency laws in order to provide faster and more predictable regimes and limit court shopping.
France changed its procedures this year to shorten restructuring disputes and encourage the use of a court-appointed mediator. Spain signed a decree in March to make it easier to get agreements on debt write-offs, maturity extensions and debt-for-equity swaps, as well as reducing the number of creditors required to agree to a deal.
It takes almost two years on average to resolve an insolvency process in France, 1 1/2 years in Spain and one year in the U.K., according to data compiled by the World Bank in June 2013.
“Having a fast-track mechanism to deal with financial debt makes sense and pretty much everyone wants to be able to do that in their jurisdiction,” Jo Windsor, a partner at Linklaters LLP in London, said in a phone interview on July 3.
When Vietnamese shipping company Vinashin reorganized $3 billion of debt in the U.K. in 2013, its only connection to England was the law governing its debt, Freshfields Bruckhaus Deringer LLP data show.
Spanish clothing retailer Cortefiel SA amended 1.2 billion euros of loans through the U.K court for the second time in June. The Madrid-based company, which said it was at risk of breaching debt covenants, had used a scheme in 2012 to extend maturities.
“Very few of the recent run of schemes that pushed the envelope were challenged in court,” said Adam Gallagher a partner at Freshfields Bruckhaus Deringer LLP. “However, there is a risk that an undeserving case is successfully challenged and it sets us right back in terms of being open to restructure foreign companies.”