The Milbank European Restructuring Briefing 2010 Applying the lessons from last year January 2010.

The Milbank European Restructuring Briefing 2010

Applying the lessons from last year

January 2010

2

Overview

Introductions

Nick Angel - Milbank, Tweed, Hadley & McCloy

Jacques Henrot and Philippe Dubois – De Pardieu Brocas Maffei

Giovanni Domenichini and Andrea de Tomas – Bonelli Erede Pappalardo LLP

Martin Erhardt – Milbank, Tweed, Hadley & McCloy

Dennis Dunne – Milbank, Tweed, Hadley & McCloy

Lessons from Lehman.

European restructuring techniques at the end of 2009.

Choosing your restructuring regime.

3

Lehman Brothers Chapter 11 Cases

4


Chaos and Its Cure

Freefall filing necessitated six months of damage control

Stabilizing assets

Reconstructing systems and controls

Mapping out task list

5


Asset Rationalization

Ensuing period during which extensive efforts were undertaken to catalogue, value and preserve assets in various classes, including derivatives, loan book, private equity, and real estate.

Current holdings include:

More than $15 billion in cash

A loan book portfolio with a funded value in excess of $10 billion

Private equity and principal investments with a value in excess of $8 billion

Real estate assets with a carrying value in excess of $14 billion

In excess of $8 billion in cash collected from derivatives portfolio

6

Claims Measurement

Bar Date in the U.S. was September 22, 2009

Over 64,000 claims filed, with a face amount of $820 billion

Numerous errors and duplicates, so final amounts may be lower

However, contingent and unliquidated claims are yet to be valued, so precise numbers are difficult to predict

In addition to the claims filed against the chapter 11 Debtors, more than 20,000 claims, with general unsecured claims exceeding $60 billion, have been filed in the SIPA proceeding against LBI

Bar dates have been set in some but not all foreign jurisdictions. Claims in non-U.S. jurisdictions remain unknown

Lehman Brothers Chapter 11 Cases (continued)

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Lehman Brothers Chapter 11 Cases (continued)

Plan Formulation

Exclusivity terminates in March 2010 Chapter 11 plan or plans will need to be filed Issues to be addressed include:

Business structure and asset rationalization upon emergence

Treatment of intercompany claims

Validity and treatment of certain guaranty claims

Allegations of substantive consolidation

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Transnational Scope and Issues

Foreign Proceedings

Insolvency proceedings have been commenced by or against nearly 80 of Lehman’s foreign direct and indirect subsidiaries

Proceedings are ongoing in 17 foreign jurisdictions across six (6) continents (North America, South America, Europe, Asia, Africa, Australia), including:

United States Bermuda Cayman Islands United Kingdom Netherlands Germany Switzerland France

Luxembourg China Korea Japan Hong Kong Philippines Singapore Australia

9

Transnational Scope and Issues (continued)

Protocol

Cross-Border Protocol approved by the U.S. Bankruptcy Court on June 17, 2009

Signatories included administrators from 12 of the 17 jurisdictions

Administrators from other jurisdictions who are not signatories are cooperating

LBIE is not a signatory but productive bilateral discussions have commenced

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Transnational Scope and Issues (continued)

Global Meetings

Four global meetings of the Protocol signatories have occurred to date

Issues addressed include information access, jurisdictional cooperation, and claims resolution

Results to date have been promising

Complex issues remain, such as harmonizing petition date intercompany balances in multiple jurisdictions

Efforts to date may ultimately yield a solution of unprecedented utility

11

Lehman Brothers Program Securities

Program Securities

Lehman Brothers issued more than $40 billion in medium term note securities

More than 6,000 issuances

Primary issuer was Lehman Brothers Treasury Co. B.V.

12

Lehman Brothers Program Securities (continued)

Claims Process

The Lehman Program Securities were and continue to be subject to a streamlined claims process

However, due to the nature of the investors in those securities (foreign and retail, primarily) some confusion has arisen as to the filing of claims and the claims settlement process

We continue to work with LBHI to clarify

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Valuation

The Program Securities are linked to many underlying reference values

It is presently unclear how and when appropriate valuations can be accomplished

In the next few months, the Dutch trustee plans to outline valuation principles to be applied in Lehman Brothers Treasury Co. BV’s Dutch insolvency proceeding

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Acceleration

In many cases, valuation is linked to acceleration

This raises difficult issues under Dutch and U.S. law, particularly with respect to giving notice of acceleration

Notice of acceleration is required under terms of notes, but LBHI has argued that it violates automatic stay under U.S. Bankruptcy Code

15

Developments in England

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2009 - The Year of the Non-Consensual Pre-Pack Treat terminology with caution: “loan to own”/ “debt control”/ “pre-pack”/ “cram

down” are all confusing and used inconsistently.

The non-consensual, financial restructuring of a complex multi-lender group, outside of a formal insolvency process (and thereby freed from a value destructive insolvency taint) in a way which transfers equity to “in the money” lenders while “out of the money” debt is removed and trade creditors are largely unaffected.

Pre 2009, restructurings of this sort were largely theoretical, based on a mixture of corporate law (Part 26 Schemes of Arrangement), In re Tea Corporation [1904], and techniques developed under, and peculiarities of, insolvency law (pure insolvency based pre-packs and our “wrongful trading” regime).

2005, MyTravel – an early form but inconclusive.

2009, McCarthy & Stone, Crest Nicholson, Countrywide and other “consensual deals” – provided confidence but some execution risk remained.

2009, IMO Carwash (Bluebrook Ltd and others [2009]) - argued in the High Court, subject to a reasoned judgment confirming that the non-consensual pre-pack works.

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The Basic Non-Consensual Pre-Pack

The Starting Position

Opco Spain

Opco France

Opco Italy

Opco Germany

Sponsors

Mezzanine £50m)2nd Lien (£100m)Senior (£500m)

AgentSyndicate of Lenders

Guarantees & Security subject to Intercreditor

Lux Co

Lux Co

Bidco Ltd(England)

Target Ltd(England)

PIK/Bonds (£50m)

Let’s say EV = £400mEquity

Share Pledge

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What We Are Trying To Achieve

Sponsors

PIK/Bonds (£50m)

Mezzanine (£50m)2nd Lien (£100m)Senior Debt (£100m)

Equity Senior lenders

Senior Debt

Equity

Opco Spain

Opco France

Opco Italy

Opco Germany

Guarantees & Security

Newco(£400m)

£400

m (v

ia cr

edit

bidd

ing

mec

hani

sm)

Shar

es in

Tar

get s

old

in

exch

ange

for r

educ

tion

of

debt

Bidco Ltd

Target Ltd

Lux Co

Lux Co

Let’s say EV = £400m

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How Do We Get There?

First, you need lenders who:

are motivated to act (problems with: write downs/CLOs and CDOs/Cross holdings/decision makers);

have security in the right place and a default (above operating companies in fast and controllable jurisdiction); and

have the fulcrum debt (i.e. debt in which the value breaks).

Valuations are key because if junior creditors are “out of the money” they cannot realistically challenge the transaction

valuations need to be based on the facts - and the realistic alternatives (e.g., liquidation or going concern – depends on the alternatives);

valuations are questions of evidence not fact - more in number, more in quality is better; and

the door is still open to new arguments, where the facts allow.

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Second, you need to muster consent from the lender syndicate

generally, the contractual requirement under the finance documents will be 100%

but, IMO confirms that:

this can be overcome with a Part 26 Scheme of Arrangement, allowing a compromise agreed between a company and 75% (by value of those voting) of a class of creditors to be binding on all creditors of that class; and

“out of the money” creditors cannot vote on the scheme and cannot object to it on the grounds of fairness.

This cram down mechanic will see development in 2010:

there may be greater flexibility in some finance documents which obviate the need even for a Part 26 Scheme (e.g. Dometic).

Part 26 Schemes can be used by foreign companies where there is a “sufficient connection” with England and adequate recognition is available in the foreign jurisdiction.

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Third, the mechanics include:

acceleration (relying on a default);

a sale of secured shares (at the right level) plus any intra group receivables to a vehicle established by the lenders; and

consideration via some form of credit bidding.

The sale may be by the directors, or more commonly by an administrator. In both cases it must be at the proper value.

A “pre-pack” administration is quite proper and avoids an insolvency taint.

Credit bidding works.

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Lastly, the claims of the junior creditors over the assets acquired must be released.

This is achieved through contractual provisions contained in a properly drafted intercreditor agreement.

But many intercreditors suffer from:

bad drafting;

releases only over the specific asset sold;

conditional releases;

etc.

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Why It Works This Way In England

England is very secured-creditor friendly and senior lenders can take enforcement action quickly and control its outcome.

There is no legal requirement for an “insolvent” company to file for a bankruptcy process.

We can choose whether or not to use an insolvency process and if we do, we can reduce it to a 5 minute process and we can choose our administrator and plan with him.

These factors give us, in England, a relatively efficient and speedy restructuring process.

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Developments in France – De Pardieu Brocas Maffei

Jacques Henrot

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Content

Part I: Main features of French insolvency proceedings

1. Sauvegarde proceedings

2. Rehabilitation proceedings

3. Judicial liquidation

Part II: Case law overview

1. Thomson

2. Coeur Défense

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Part 1

Main features of French insolvency proceedings

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1. "Sauvegarde" Proceedings

Global purpose of a “sauvegarde”:

Enable debtors able to demonstrate that they are potentially in financial distress, but not yet insolvent, to restructure under court protection (i.e. essentially with a stay of all pre-filing enforcement/payment actions/demands) and negotiate a consensual restructuring plan with creditors. If no consensus, limited cram-down.

Two tests : the company must be solvent (cash flow test) face existing financial/commercial difficulties which the company

cannot overcome (the former necessity to prove the existence of difficulties which could lead to an insolvency situation was deleted in the December 2008 reform of the 2005 legislation).

The three objectives set by the statute (in that order):

1. to allow the company’s business activities to be continued

2. to preserve jobs

3. to restructure the company’s indebtedness NB: 1 and 2 are often deemed one and the same – 3, systematically,

comes last

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Observation period

Proceedings start with an observation period (usually 6 months renewable once). Can be extended, in exceptional circumstances upon petition by the attorney’s general office representative, for an additional 6-month period (total 18 months max).

Automatic stay / freezing of antecedent debt

The judgment opening “sauvegarde” proceedings prohibits the payment of pre-filing claims; pre-filing creditors are barred (with very few exceptions) from initiating any legal action to enforce their rights against the debtor.

NB: If actions against the debtor are stayed, there is however no stay of actions against corporate guarantors.

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Two classes of creditors must be created for companies of a certain size (optional for small businesses) The “Bank class” gathering banking institutions or creditors having purchased bank debt

(which the December 2008 ordinance confirmed can be non-banks) or credit insurers being subrogated in, or factors (or others) having purchased, suppliers’ claims;

The ”Trade creditors class” gathering suppliers holding 3% or more of the total of suppliers' claims.

Voting rules: A plan is deemed approved by each one of the 2 classes if a 2/3 majority in amount of the creditors attending or represented at the meeting in each class votes in favor of the plan.

Once adopted by the Court, the plan is enforceable against all classes’ members, including the dissenting minority. But if a class votes for and the other one against (or if the bondholders (if any), which are called to vote after the 2 classes (see below), vote against the plan), the plan is circulated to each creditor individually; it can be the initial plan, or an amended one. Eventually, the plan can be imposed by the Court to reluctant creditors if it does not call for more than a term- out of existing debt (max 10 years).

Bondholders: The plan must be approved by a 2/3 majority in amount applicable to all bondholders (attending or represented) gathered in one single meeting whatever the currency or the law applicable to their indenture.

No cram-down in France in the US Chapter 11 sense of the word. Indeed for creditors that are not members of the classes/bondholders or where the classes/bondholders fail to reach a consensus, the Court can impose a ten-year maximum term-out but not more. The Court cannot impose any debt write-off or interest reduction or conversion of debt into equity.

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1. "Sauvegarde" proceedings

The "sauvegarde" plan: All plans must be submitted to the review of the Public Prosecutor. They are also to be submitted to the employees’ representatives, so that they can give their opinion to the Court.

The Court, if it finds that creditors’ interests are protected in a fair and equitable way, approves the plan.

The "sauvegarde" plan may provide for:

A recapitalization of the company, by way, for example, of a debt conversion which, since the December 2008 ordinance, the 2/3 majority within a class can impose to the minority, but which the judge, if no majority is found within the classes, cannot impose; and/or

Disposal(s) of assets or of autonomous business lines

The sale of the business as a whole is only possible in rehabilitation proceedings, (or of course in liquidation which in France can either take the form of an auction asset by asset, or of a tender process for the whole business (tangibles + intangibles) or for lines of business). However,

If the adoption of a safeguard plan proves impossible and,

if it is clear that the debtor shall become insolvent in the short run,

the Court can order the immediate conversion of the safeguard into rehabilitation.

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2. Rehabilitation Proceedings

Any company must file for rehabilitation no later than 45 days from the date on which it becomes insolvent (debtors which filed for the opening of a pre-bankruptcy “conciliation” process during that 45 days period are not eligible). In addition, any filing should be accompanied by a statement under oath that the company did not undergo a conciliation during the last 18 months. If the company did, details of the previous conciliation proceedings must be provided.

Rehabilitation proceedings are court-monitored proceedings like sauvegarde: the major difference is that rehabilitation is aimed at reorganizing insolvent debtors.

The main advantage of rehabilitation– as for sauvegarde – is the automatic stay: all pre-filing creditors are barred from enforcing their rights against the debtor.

Rehabilitation (like sauvegarde) starts with an observation period of up to 6 months. This period can be extended once for six months and, in exceptional circumstances, for an additional six-month period at the Public Prosecutor’s request.

Two exits possible: “continuation” or “cession”: A rehabilitation plan by way of continuation can combine a debt restructuring

and/or a re-capitalization of the company and/or the sale of certain assets, or of lines of business.

Auctioning the business as a whole (“plan de cession totale”) is possible upon petition by the trustee provided the Court rules that the company cannot continue to operate as a going concern even with a debt rescheduled over 10 years.

In such circumstance, the “plan de cession” is implemented within the legal framework of the rehabilitation process (but following the same rules as those applicable to liquidation when the liquidator, instead of auctioning the assets, opts for a tender process over the business).

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2. Rehabilitation Proceedings

Two classes of creditors are created for companies of a certain size (and for small companies subject to court approval): one for credit institutions (the “Bank class”) and one for major suppliers the “Trade creditors class”).

The plan is submitted to the Court for approval (essentially a confirmation ruling) if the requisite number of creditors (a 2/3 majority in amount of all creditors attending the meeting in each class) votes to approve the plan.

Bondholders: all bondholders vote together in one single meeting at a 2/3 majority in amount after the two creditors classes approved the plan. If not, bondholders are not to be consulted in one single meeting.

Should the classes/bondholders fail to reach a consensus, the Court may, after the plan (or an amended one) has been circulated individually to all creditors, impose to reluctant creditors (and to creditors that are not members of the two classes or are not bondholders) new maturity dates up to 10 years maximum but cannot order any debt-forgiveness.

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3. Judicial Liquidation

Any debtor which no longer meets the cash flow solvency test must file for liquidation no later than 45 days following the date on which it becomes insolvent. The Court can, even upon a liquidation filing, order a short rehabilitation period, but liquidation must be ordered immediately if the Court finds that the rescue of the company - be it by way of “continuation” or of “cession” - appears clearly unrealistic.

The judgment opening liquidation proceedings triggers – like in sauvegarde or rehab – an automatic stay.

Liquidation lasts until the business (as a whole or line of business by line of business) is sold and until any residual assets have been auctioned and proceeds distributed to creditors.

After two years (computed from the judgment ordering liquidation), any creditor can petition the Court to issue an injunction to the liquidator to close liquidation operations.

A simplified form of liquidation proceedings is available for the liquidation of small businesses (duration of one year maximum).

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3. Judicial Liquidation

If the circumstances so require, in particular when a plan to transfer the whole business to a third party purchaser is contemplated, the company may be authorized by the Court to continue operating the business for a maximum period of three months (renewable once at the Public Prosecutor’s request).

The liquidator is vested with all management responsibilities.

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Details of the new safeguard proceedings issued from the July 26, 2005 law and from

the December 18, 2008 order

Opening Judgment

Observation period

If it appears that the debtor was already insolvent before the opening judgment

If the debtor becomes insolvent during the observation period (i.e if the debtor cannot pay post-filing claims,

and only those since by definition it is prohibited to pay any pre-filing claim)

Safeguard plan under the control of the « commissaire à l’exécution du plan »

Success of the plan

Failure of the plan Termination

Recovery

Safeguard plan not voted or not

individually approved by

creditors / Court refuses to impose

plan

If the company is insolvent:rehab or direct judicial

liquidation

Finally no safeguard plan

Without insolvency: no judicial liquidation

or rehab

If termination is followed by insolvency:

rehab or judicial liquidation (L. 626-27)

Should the adoption of a safeguard plan prove impossible and should the closing of the

safeguard inevitably lead to insolvency (L. 622-10)

Judgment ordering the end of the proceedings

End of the « commissaire à l’exécution du plan »’s mission

Conversion into Rehab / Judicial Liquidation

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Opening Judgment

Observationperiod

Immediate Judicial Liquidation

With a resulting insolvency:

judicial liquidation

Rehab Continuationplan

Success

Judicial liquidation

Sale plan

Liquidation asset by asset

Termination

Sale plan (exception)

Without a resulting insolvency: no judicial

liquidation

Rehab and Liquidation issued from the July 26, 2005 law and from the December

18, 2008 order

Failure

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Part 2

Case law overview NB: information provided below was extracted solely from

publicly available information on both companies and their ongoing proceedings

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1. Case study – Thomson

The company

Thomson SA, a French Technology and media services company listed on Euronext Paris and the New York Stock Exchange:

Holding company of a group of 200 companies operating in 30 countries and employing 21,000 people (3,000 in France);

World leader in solutions for creating, managing, broadcasting and accessing video content intended for the communications, media and entertainment industries.

Clients include major film studios, television broadcasters and telecom operators.

Debt structure

A gross financial debt of € 2.9 billion which consists of: a credit agreement (revolving multicurrency credit agreement) of € 1,750,000,000

signed with the financial institution;

six note purchase agreements of € 1 billion through private placements mainly with US and UK investors;

super-subordinated notes (“TSS”) without a fixed maturity and with a nominal value of € 500 million, listed on the Luxembourg Stock Exchange (payments due on those TSS, including payment of interests, are conditional /optional - no covenants).

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First financial difficulties

2008: Thomson’s activities, strategy, operating performance and financial situation were such that one could conclude that the company would be in breach of ratios in 2011 and 2012.

Risk of acceleration.

An analysis of the situation which led to opening negotiations with senior creditors in February 2009

April 2009: waivers obtained from senior creditors (who agreed to suspend their right to call for the acceleration until June 16th 2009) / waivers extended until July 24th 2009.

July 24, 2009: The « Agreement relating to the restructuring of Thomson » entered into between the debtor and the majority (over 50% but below 2/3) of its senior creditors set the basis for the financial restructuring + extended the waivers until November 30, 2009.

July 24, 2009 to November 30, 2009, the company attempted to reach an agreement with creditors which did not sign the restructuring agreement. Negotiations were unsuccessful (one of Thomson’s big private-placement debt holders refused to participate). Some creditors activated the hedging protection offered by Credit Default Swaps (“CDS”).

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November 30, 2009: Opening of a sauvegarde in order to have all creditors vote on the sauvegarde plan and have the plan adopted by a 2/3 majority of creditors (Bank class, Trade creditors class and bondholders).

December 21, 2009: the Bank class and the Trade creditors class were convened to vote on the sauvegarde plan (100% positive vote)

December 22, 2009: bondholders were convened to vote on the sauvegarde plan (a 98% positive vote).

Main provisions of the sauvegarde plan

Essentially based upon the terms agreed by the majority of senior creditors on July 24, 2009:

Conversion of € 1,289 million of debt into equity instruments;

Conversion of € 1,550 million of debt into reinstated debt to be repaid within 6/7 years;

Modification of Thomson’s rules of governance providing for the appointment of non-executive directors to the board of directors and the submission of decisions considered to be strategic to a qualified majority of 2/3 of the directors.

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Final steps to have the sauvegarde plan approved

January 27, 2010: shareholders to approve the sauvegarde plan’s provisions and provisions regarding Thomson’s new corporate governance.

Approval of the sauvegarde plan by a judgment of the Nanterre Commercial Court, which judgment should be appealable by the creditors’ representative and the Attorney General only (and of course by the company and its trustee in case the judgment is not one of approval or if the plan is modified by the Court in a way that the company does not want to accept).

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2. Case study – Cœur Défense

Main issues

Application of the sauvegarde law to a pure holding through which you could not see a company operating as a “real” enterprise, but in fact, an asset generating rental income;

Opening of a sauvegarde in France for a Luxco using the COMI rule;

Enforcement, after the opening of sauvegarde, of the assignment of 100% of the receivables (agreed upon as initially one of the two essential security interests for the lenders having accepted that their loans be non-recourse);

Forced rescheduling imposed by the Court to the quasi-sole creditor, i.e. the securitization vehicle ;

Appeal launched by the Attorney General’s office of the Court of Appeals against the judgment of the lower Commercial Court having approved the plan.

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A holding structure aimed at optimizing the tax treatment of capital gains if any Luxembourg Holding: Dame

Luxembourg

(0 employees – tax driven)

Heart of La Défense SAS

(0 employees – asset and property

management fully subcontracted )

Asset = one single office building

known as Coeur Défense

± 10/15 tenants

5% of the total available square

meters in the Defense area

100%

LB Bankhaus/GSIB

FCT (issuer)

Noteholders

note

s

pro

ceed

s

Acquisition facility

tran

sfer

44


Application of sauvegarde proceedings to holdings

Hold and its Luxembourg holding are not “enterprises” in the common sense of the word:

No business (“fonds de commerce”): no clients which have a decisive reason to choose renting in the Coeur Défense building rather than in one of the similar office complexes in the Defense area

No employees at the holdco level and as a matter of fact, also at the French "operational" company’s level (asset and property management fully subcontracted)

Yet the Commercial Court opened two sauvegarde proceedings to the benefit of both applicants: The French (SAS) and its Luxembourg shareholder (of which Lehman - managed investment funds were the funding and still major shareholder together with a GE fund)

The Court took into consideration, quite surprisingly, the "disturbance" that would have caused the exercise by the creditors of their rights (i.e. the enforcement of their collateral over 100% of Hold SAS’ shares) as being “the” relevant test for the opening of the sauvegarde; the Court did not even try to characterize difficulties which a change of shareholder would /could have caused for the French company holding the property.

All what mattered for the Court was the alleged consequences of an enforcement of the creditors’ rights

1. on the lease management of a 180,000 sqm building,

2. and more generally on the real estate market.

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Questions

46

Break

BREAK

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Developments in Italy – Bonelli Erede Pappalardo

48

Key Developments in 2009

Frequent use of the new restructuring agreements recently introduced by the Italian Insolvency Law

Several successful consensual restructuring cases (Risanamento, Ferretti, Damovo, Magis, Gabetti, Pininfarina and others)

Tendency to avoid enforcement and court administrated proceedings due to considerable value leakage and time constraints

Time consuming negotiations to reach a consensus among the parties involved

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Risanamento

In-court restructuring agreement involving the Italian listed company, Risanamento S.p.A., together with its five Italian subsidiaries and its three majority shareholders

Indebtedness spread out over few lenders, owning both secured and unsecured debt (approximately 3 billion Euro)

The restructuring: rescheduling of the secured debt, debt/equity swap of part of the unsecured debt, new money, strong business and financial restructuring plan

Involvement of the public prosecutor who filed an autonomous request for the bankruptcy declaration of Risanamento S.p.A.

Restructuring reached through Article 182bis of the Italian Insolvency Law

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The New Italian Insolvency Law

Amendments introduced in years 2005, 2006 and 2007

New, more efficient rules for the sale of the assets of the debtor

Less invasive claw back actions

Debt/equity swaps

Creditors divided into classes, different treatment to creditors in different classes (cram down applies)

Possibility to partially pay the secured creditors

Greater flexibility in restructuring through the introduction of brand new restructuring agreements

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New Restructuring Agreements

Out-of–court restructuring agreement:

Unilateral plan to restructure debt and reach financial balance

No initial court involvement

Expert’s opinion and ancillary agreements with creditors

In-court restructuring agreement:

Restructuring plan of debtor

Formal agreement executed with at least 60% of all value claims (financial and trade)

Expert’s opinion

Court approval

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New Restructuring Agreements

Concordato preventivo:

Court supervised proceeding to restructure or liquidate the debtor

No minimum recovery for unsecured creditors

Automatic stay

Expert’s opinion

Approval of claims (financial + trade): more than 50%

Concordato fallimentare

Court supervised proceeding within a bankruptcy

Approval of claims (financial + trade): more than 50%

Used by creditors or third parties to acquire claims and/or assets

53

Key Features of Italian Restructurings

Pre-packs: usually and frequently implemented through a lease of going concern with a put/call to be exercised after admission to insolvency proceedings or through SPA conditional upon the approval of the Court after admission to insolvency proceedings

With the new restructuring agreements there is the possibility to achieve in Italy a pre-pack sale outside a formal insolvency proceeding provided that a cram down is not needed

Key elements of the restructurings:

Valuations

Motivated and pro-active lenders

Intercreditor

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Key Features of Italian Restructurings

Directors need to be on board: no formal need to file upon insolvency, but personal liability having worsened the insolvency status of the company

“Out of the money” creditors have a vote: necessity to have them on-board or rely upon cram down

Enforcement actions are rare, mostly slow, sometimes heavily court supervised and subject to great value leakage

Claw-back fear might drive decisions relating to a restructuring

55

Questions

56

Developments in Germany

57

Introduction

Germany – The “nightmare” jurisdiction for restructurings?

Truths and myths.

58

Main categories of German restructuring cases in 2009:

High number of successful consensual pre-insolvency work-outs (Honsel, Monier, Treofan, Neumayer Tekfor, Orion Cable and many others).

Significant number of so-called “extend and pretend” cases (submission of IBRs; covenant reset and adjustment of debt service in hope for better times) where creditors could not (yet) agree to a consensual deal (e.g. Carl Zeiss).

Major insolvency proceedings providing for the sale of the ongoing business by the administrator (Edscha, Escada, TMD Friction). It is worth noting that these insolvency proceedings were the consequence of unsuccessful restructuring negotiations, i.e. involuntary, non pre-packed filings.

Pre-packed insolvency proceedings and share pledge enforcements continue to be a rare exception.

Key Developments in 2009

59

Key lessons learned in 2009:

Insolvency proceedings (including the insolvency plan procedure) do not provide the preferred framework for today's restructurings.

Administration sales yield low returns. The ongoing Arcandor cases underline timing issues and uncertainties of German insolvency proceedings.

Consensual restructurings do work in Germany and have almost become the norm.

Senior secured lenders prefer consensual deals over security enforcement (recently exemplified by the Orion Cable case).

The “extend and pretend” cases nevertheless demonstrate the difficulties in getting multi-layered creditors to agree to a joint effort.

Lessons Learned

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Main Disadvantages of German Insolvency Proceedings/Laws

Lack of any meaningful out-of-court / pre-insolvency rescue proceeding.

Court-appointment of administrator.

Inefficiencies of the insolvency plan procedure.

Timing issues

Substantive prerequisites for a cram-down

Broad rights of creditors to contest the plan.

Risk of equitable subordination (i.e. treatment of shareholder loans as equity).

Insolvency stigma / value destruction.

Strict directors’ filing requirements.

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The spectrum of possibilities to effect a pre-pack includes

Pre-packed insolvency plan

Pre-packed administration sale

Pre-packed enforcement.

In practice, pre-packs are still the exception from the rule.

However, the threat of a pre-pack agreed between the relevant stakeholders is successfully used to achieve a consensual restructuring.

Pre-Packs Under German Law

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How To Achieve a Consensual Deal

Key threats to be applied against minority hold-outs:

Insolvency threat

“Make the undesired insolvency proceeding your ally”.

Works against all stakeholders that have more to lose.

Preparation for a pre-packed insolvency plan increases leverage.

Share Enforcement threat

Works if intercreditor release provisions work.

However, a number of technical issues to be taken care of.

COMI and “COMI-like” threats

Shift of COMI, namely to the UK.

Applying a UK Scheme of Arrangement without COMI-Shift.

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Key steps to be taken include the following points:

Thoroughly analyze (i) the lender composition and cross-holdings, (ii) the security package, (iii) voting requirements in the credit agreements and (iv) the release provisions contained in the intercreditor agreements. These items are pivotal to define:

The overall structure of the restructuring proposal.

The consents required from each class of lenders.

The strenghts and weaknesses of the enforcement/insolvency threats and, therefore, the likelihood that the restructuring proposal will go through.

Prepare a valuation to demonstrate fairness of the proposal.

Deal with tax issues of restructuring proposal on time.

Potential tax issues include (i) loss of loss carried forwards, (ii) cancellation of debt income, (iii) real estate transfer tax.

Advance ruling from tax authorities may be required.

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Avoid subordination risks.

Making use of “restructuring exemption” requires structuring measures.

In Orion Cable, lenders did not become shareholders.

Deal with directors’ filing requirements.

Particularly relevant in enforcement scenario (especially in the event of required regulatory clearances).

Solicit consent from required lender classes.

Prepare and commence execution of alternative strategies.

Again, in Orion Cable, a fully-fledged share auction process was prepared and only cancelled last-minute in favour of a consensual arrangement.

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Why it Works That Way in Germany

Germany may have a complex legal regime that does not provide for a quick and painless statutory tool to cut-off out-of-the money creditors.

Nevertheless, the absence of these tools as well as the undesired results of insolvency proceedings increase the readiness of stakeholders to agree to a consensual or partly-consensual deal.

If properly prepared and structured, a consensual deal can be effected in Germany and achieve the same or similar results as in a pre-pack in the UK.

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Questions

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European Union: Council Regulation (EC) No. 1346/2000 of 29 May 2000 on Insolvency Proceedings

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EC Insolvency Regulation

The EC Insolvency Regulation provides a limited but important co-ordination of European insolvency regimes.

It is intended to facilitate recognition of insolvency officers across borders.

But, the Regulation provides that:

the insolvency law applicable to a European company is that of the jurisdiction where the company has its “Centre of Main Interests” and

a company is presumed to have its COMI where it has its registered office but this presumption is rebuttable.

Leading to:

the possibility of restructuring a pan European group using one set of laws and

the possibility of choosing your insolvency regime.

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EC Insolvency Regulation

How do you determine a company’s COMI?

How can you change it?

Why might you want to change it?

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How Do You Determine a Company’s COMI?

COMI is presumed to be the place where a company has its registered office unless there is proof to the contrary.

The proof needs to demonstrate that there is somewhere else where, as a matter of fact, the debtor conducts the administration of its business on a regular basis which is both objective and ascertainable by third parties.

The cases rely on matters such as:

where management decisions are made

where offices are based

the location of bank accounts;

where the financing is from and what law it is governed by and

where creditors deal with the company.

There is no group COMI, the issue needs to be determined for each member of a group.

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How Can You Change the COMI?

Incorporate a company in your chosen jurisdiction.

Open an office in your chosen jurisdiction.

Open a bank account.

Hold meetings in the new office.

Arrange and hold negotiations at the new office or in the country of the new office.

Ensure the balance of administrative functions has shifted.

Possible for a holding company (NB: does not necessarily affect tax domicile), hard for an operating company.

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Why Move COMI?

To get access to the English system:

a company can stay out of an insolvency process while a solution is negotiated

England has effective cram-down tools (the Part 26 Scheme and the CVA)

a secured creditor can act quickly and control the process

you can pre-arrange an insolvency process with your chosen administrator

England has a reliable court system and

England has significant experience and limited execution risk.

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Germany

Current trends:

COMI-shifts to the UK have been done in the past (e.g. Schefenacker, Deutsche Nickel), but we do not see them happening currently.

However, COMI-shifts are a key subject of discussion in every restructuring case in Germany.

Previously, purpose of the COMI-shift was to effect a CVA. Today's focus is more on doing a Scheme of Arrangement. Reason is that a CVA cannot deal with minority hold-outs among secured creditors.

Recent court decisions in Germany have held that a Scheme of Arrangement will not be recognized in Germany.

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Italy

Current trends:

COMI-shifts are not the norm and COMI discussions are not extremely frequent

No significant trend of COMI shifting outside Italy. The few attempts have been predominantly challenged in Court with success

Few attempts to shift COMI to Italy

Tendency of Italian courts to establish COMI in Italy in cases of group insolvencies (Parmalat, Cirio, Itierre) or to open secondary proceedings

In-court and out-of-court restructuring agreements are not insolvency proceedings pursuant to the EC Insolvency Regulation

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France

In spite of the debtor friendly reputation of the French Commercial Court’s system and of the French legal system, there was no recent significant examples of COMI shifting for operational companies.

There were however attempts not so much to shift COMI but to convince French courts that the COMI of foreign holding companies has always been in France.

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France

Example : the COMI issue in the Cœur Défense matter

Presumption provided for by the European Regulation n° 1346/2000 of May 29, 2000:

The registered office is presumed to be the Center Of a company’s Main Interests (COMI)

To reverse the presumption:

Need to show evidence to the contrary (i.e. essentially that the place where important decisions are made and from which they are communicated is not the registered office).

Proof of the knowledge by third parties of the fact that the company’s center of decisions is indeed in a place different from that of the registered office.

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France

COMI rule misused?

The point was argued last week in front of the Paris Court of Appeals.

What is certain is that the Paris Commercial Court decision challenged in front of the Court of Appeals had for a practical result to buy time for the shareholders of the Luxembourg holding.

The Prosecutor representing the attorney’s general office in front of the lower court was opposed to the opening in November 2008 of the sauvegarde for the Lux holdco: Indeed, his argument was that the applicants should admit, for the record, that the Lux holdco was a pure shell (with no real existence of its own (what is usually referred to in French case-law - very restrictive in general to adopt “piercing of the corporate veil” theories - as “société fictive”). Applicants refused to do so.

NB: the attorney general’s office is always represented at the opening and closing hearings of all sauvegarde, rehab and liquidation proceedings; this is also the case for closing hearings of “conciliations homologuées”.

Indeed, the Court found:

i. That the COMI of the two companies was in France, which was, for the Luxco, quite interesting since it amounted to admitting impliedly that the Luxco was a mere shell created for tax purposes only ... the only connecting link with France being the location of the building in La Defense, and

ii.That third parties dealing with the Luxco (i.e. essentially, if not only, the Luxembourg and French tax administrations + the company’s accountants in Luxembourg) had full knowledge that the COMI of the Luxembourg holding was in France (even more surprising…)

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France

Pending recourses

December 8, 2008: Third party recourse filed by the securitization vehicle against the judgments (rendered ex-parte) opening sauvegarde proceedings

October 7, 2009: Paris Commercial Court’s judgment holding the third party recourse admissible procedurally-wise (such admissibility was an issue because of the 2007 Eurotunnel appellate decision partially quashed on June 30, 2009) but rejecting, on the merits, the demands of the securitization vehicle to reverse the opening judgments.

January 14, 2010: Oral arguments in front of the Paris Court of Appeals.

February 25, 2010: Decision expected from the Paris Court of Appeals.

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Questions

The Milbank European Restructuring Briefing 2010

Applying the lessons from last year

January 2010

The Milbank European Restructuring Briefing 2010 Applying the lessons from last year January 2010.

Documents

Transcript of The Milbank European Restructuring Briefing 2010 Applying the lessons from last year January 2010.