Liability management exercises in the spotlight - episode one

Welcome to the latest Anno Sherman restructuring podcast series. Over three episodes we'll be looking at the latest themes and alamies, where the European alamie playbook has got to, how the courts are testing alamie outcomes, what protections or defensive measures are available and whether alamies are set to break through in the Asia Pacific region. In today's episode we cover how alamies are evolving in Europe and how litigation risk is increasingly shaping alamie planning and strategy. I'm your host, Bayaba RF, Council on the Restructuring and Capital Solutions team at EOS London, and delighted to be joined by a brilliant panel of my colleagues. Let's have each of you introduce yourselves. Hi everyone, I am Tim Watson, I'm a partner in the Restructuring and Capital Solutions team here in London. Everyone, I am Rishi Hendocha, I am a partner in the Restructuring and Capital Solutions team in Singapore. Hi everyone, I am Simon Arts, I am a council in the Dutch Restructuring team. There are always different definitions of alamies, but for our purposes we are talking about work apps which involve interclass non-parietal treatment as well as interclass non-parietal treatment within four corners of the document. Now as we know, alamies have challenged the notion that creditors within the same class should expect to be treated equally, either now generating a wave of litigation, testing the extent to which a majority can exercise its powers to affect a transaction which might not be in the interest of a descending minority. Looking at the U.S., we have seen aggressive alamies such as CERDA, PEDSMAR CHUEY, which were 51, 49 creditors split, which were exclusionary and binary, evolved to alamie 2.0, such as Tropikana Brands, which were sponsored driven deals focused on more inclusive approach with tear-treats. We are now seeing alamie 3.0 such as Better Health, Argon Tool, which are essentially extend and exchange transactions. I would say some of this is also driven by the reason for alamies or what it is trying to achieve with recent alamies focused on pushing out the 2028 maturity wall with new money injection, utilizing existing permissive lesson documents and basket capacities, which requires higher consent threshold and are less focused on capturing discount, so can provide for more parato treatment and participation. We have also seen a proliferation of alamies in Europe now, despite deterrence which have been discussed in the past, such as smaller relationship-driven markets, is the juice worth the squeeze in terms of cap-duck and different director duties regimes across Europe. This is against the backdrop of continued loose or covalite documents in the primary markets driven by a lot of capital to deploy or dry powder and sponsor-friendly terms. It is also against the backdrop of evolving jurisprudence around fairness and allocation of restructuring surplus and restructuring plans in the UK, and you know a string of appeals, Adler, Thames, Patrick, and then Waldorf failing at first instance have introduced an element of uncertainty around restructuring plan implementation. This has led a shift away from end court processes to exploring out-of-quart liquidity and restructuring solutions. We have recently seen innovative structuring of alamie transactions that is distinct in Europe compared to US alamie transactions, which combine an ICA drag with some form of liability management tools such as an exchange offer to implement a restructuring solution. Thanks, Tava. It might be worth pausing here and for listeners who aren't as familiar with the ICA drag, can you briefly explain what that tool is and why it's become so central to the alamie playbook? Yeah, of course, Rishi. So by way of reminder, an ICA drag is a distrust disposal under the inter-cryder agreement. It can usually be implemented at a lower consent threshold than the consent threshold for restructuring processes such as restructuring plan in the UK or the consent thresholds to month's sacred rights. The release provisions enable debts and security claims to be released so there's no stub left over to deal with. The consideration for the disposal is then distributed down the waterfall, which can take the form of take-back paper, meaning new to instruments, and this is something that's been used in Europe, including on free-go-glass, clappagus, etc. And recently on selector alamie, we saw an ICA drag followed by an exchange offer for the take-back paper, which ultimately resulted in a non-parada outcome. Another interesting point about selector was the offensive use of co-op at the other side of the transaction, which resulted in the same paper with the same economic and legal terms treating at significantly diverging prices. So turning first to you, Tim, can you talk us through the interesting aspects of this selector alamie transaction at a high level? Sure, selector is a pretty complex transaction, but I think the key salient points are it was effectively a debt for equity restructuring in a very delivered and implemented, in a very very structured manner. It saw a transfer of ownership of the group to two creditors, new money, a debt reduction, and extension of materialities. Prior to the implementation of the restructuring, the selector documents had a lot of covenant flexibility, but that covenant flexibility wasn't used to implement a liability management excise or restructuring solution. That was all done, really, through the ICA distressed disposal and drag mechanic. So the key point, and to have as you said, this is a very common mechanic and with a long traditional history in European restructuring, there has typically been directed at dealing with sort of junior and senior classes from a vertical perspective. So, and in the money class and an alamoney class, and that's going back to the post-GFC era. The key point about selector was that the distressed disposal transaction was implemented, so the shares at a sort of top coast, a structural point, move over into new credit ownership. There is then a very complex, tiered debt structure on the other side, where first lean creditors, rather than receiving what we refer to as take back paper that's also first lean, received effectively third lean take back paper, add a discount with a 15% haircut, and mean stated sort of interest and extended maturity terms. Then on top of that, in the new credit award fall, sat new money that was actually provided by the prior to the restructuring junior creditors, and that new money had attached equity entitlements as well, and then effectively an empty first ranking first out paper slot. And that level in the award fall was unoccupied at day one of the restructuring, but there was then a choice for previously first lean creditors and reinstated third out creditors to exchange their debts, their third out debt for new first out debt. That first out debt low came with a number of conditions, but also had a number of benefits. The first was that it was reinstated at past, you effectively recovered your 15% haircut. The second was that it had a much lower consent threshold set of protections or sacred rights, so the terms of that debt were amendable on a significantly lower threshold, and therefore in order to block amendments, minorities couldn't block amendments in the way they could in the third out notes. And then I think the other dynamic there was that you had to agree as part of this to effectively accept and waive any dispute challenge to the terms of the recapitalization. So creditors were effectively given a choice, and they could choose to better their position in the capture structure to a super senior instrument. But that came and also recover the 15 cents discount, but that came with an acceptance of the terms of the restructuring. And then critically, this forward looking dilemma or risk that a subsequent transaction, an let me transact in a restructuring transaction would prove. prejudiced their first out position by, for example, waving debt with a much less threshold than you expect to see in mark instruments, or even demoting them in the wall fall, and anything else. So, the position at Super Senior re-instated paper had a certain amount of sort of forward-looking risk on it, and that risk was, and the dilemma, and the sort of cost-benefit analysis, and the risk profile associated with that, this sort of choice that creditors had, drove an interesting and very complicated set of considerations for creditors. That was then compounded by the concentrated group of creditors, the ad hoc group, who had implemented the restructuring and really shaped it, forming a co-op on the other side of the transaction, that then aggregated their commitments and their participation in the first out, all of whom selected to move into the first out paper, and the concern was, if you weren't in that group, and part of the sort of in-group for these purposes, you were at particularly high risk of being compromised or having your claims, or we were Super Senior position, adversely affected in the subsequent re-structuring. And what we saw, which is, as a very stark example of that, is that after the re-structuring was completed, there was an enormous delta between the trading price in the market of first out paper that was subject to the co-op, which traded at a relatively small discount to par, and then first out paper that was not, which traded very poorly at between ten to thirty cents. So this dynamic of a complex set of choices, from what began as, broadly, a pro-rata deal, was on day one a pro-rata deal, but then had a set of in-built choices and considerations, which then drove different outcomes and different risk profile assessments. That was this non-pro-rata element that started off always shaped through a pro-rata transaction. Thanks, Tim. That's a great overview for complex transaction, drawing out the various stakeholder considerations. What other recent enemies have stood out in the markets recently and what type of enemy structures were used? I think just a couple of examples from me, and I think maybe thinking about them mathematically, we have seen, I think, liquidity, liquidity raisings as being really one of the key drivers, and that, I think, can take the form either of fresh new money coming in to solve a particular capital problem, so particularly where there is maturity, there are a number of years ahead, and the company is looking for an interim financing capital solution. We've also seen, I think, as a big theme, particular creditors looking to up to or affect a capture reel by a subset of creditors or a subset of instruments participating in a up-tier transaction or a peri-plus transaction, or any other financing that can take the form of both new money and also a sort of exchange offer element, that results in the change in the catch structure where some creditors have a better position on the other side of it than they did before, but it's solving something. I think an interesting, very topical example is junior creditors, junior paper that has a, that matures earlier than senior paper, and that is very topical in Merlin as a recent example. So, we're seeing, I think, in Europe a lot of liquidity driven solutions, and that is, I think, a very common theme that is most catch structures have a lot of flexibility for duty way their covenants are set up. Simon, we've seen a lot of topical enemies with a Dutch nexus, why are enemies happening in the Netherlands and what's the big picture? Yes, thanks. We typically see is that international groups may well use a Dutch hold co and Dutch share pledges at top co-level making the Netherlands a potential venue for both implementing and challenging an enemy, and this is regard as where the borough groups had office it, which law at finance documents are governed. So, typically, in these kinds of structures, there may well be an English law governed ICA and/or New York government law bonds, but what we typically see, and this is, of course, the case in the, in selector, is that there was a Dutch share pledge, which is then the venue to implement a distress disposal using and enforcing that share pledge. And I should note that the Dutch LME law is now actively developing. As you already mentioned, the key test cases are the hunker miller and the selector cases and these are still being litigated. Selector's appeal is still before the Netherlands commercial court of appeal, and we'll get to a important decision by that court later on, and there was also being further litigation in the hunker miller case as well. Interesting Simon, and I think a good segue into our next theme, which is litigation. So Tim, when it comes to implementation risk and scrutiny of LMEs, what are the main roots or strategies for challenging them? It really depends on the LMEs, but I'd say it starts with the contract, because generally, if you want to think about LMEs versus what we might call traditional restructurings, LMEs depend typically on one or more contractual mechanisms that are used to affect a broader capital restructuring of some sort. When we think about schemes of arrangement, we think about Dutch woes, we think about restructuring plans, the way they work is they ignore the contracts. They override the contracts. So the contracts become irrelevant, and they get superseded by a set of statutory requirements that you need to satisfy in order to ignore those contracts effectively all to override them. So the first port of call is definitely whether or not what happened was allowed under the contract, and there's a couple of really key inflection points in high yield and leverage finance, style, governance that really drive a lot of this and merger covenant is where a lot of values being moved is always this big point of focus. So it's a very detailed review of governance. I think the other thing as well is that in a group with a lot of different instruments, there tends to be a very complex analysis around whether or not it's a kind of lowest common denominator view of the governance, because if you've got a bond, a TLB, an RCF, another bond, all of which have been originated in slightly different markets, they're going to have some differences. So there's a whole range of analysis about that. I think then when you get out of the contractual world, you're looking at direct as duties, you're looking at then other non-contractual forms of action and a thing or a claim. And so in the US, it would be things like forging conveyance in content of Europe, it's an attiope how we are in a claim. So there's sort of things that are used not very frequently and certainly not in that we wouldn't see in sort of commercial finance documents, but where the four corners of the contract are not providing all the solutions, that's an area that is very often examined and is argued. And I think particularly in European enemies where you can have multiple jurisdictions all operating in tandem because of complex cross-border group structures, there is a lot of scope for different types of challenge risk and also challenges happening in different forms concurrently occurring. So that key. And then I think the other thing that we're seeing, and this is something that's very topical in selector, is where there is, and the LME involves, a majority of creditors making some sort of collective decision under the terms of the documents that results in a non-pro-rata transaction. Then there is a lot of scrutiny at the moment around whether or not collective votes can be delivered and collective instructions that do not benefit the entire constituency, that collective vote sort of represent or effects. We're coming back to some quite old case all around these sort of minority protection principle under English law and we'll come to that a bit later. But really litigation is a kind of core part of LMEs and the risk associated with them and really it's a very wide approach I think in terms of what issues are being litigated on what claims are being pursued. Thanks Tim, that's a great overview. So then turning to some of the key litigation challenges to date, selector and hunkamore transactions are still being litigated and at the time of recording. We understand that bondholders have sought discovery in New York to support a planned English claim in relation to the recent Aston Martin drop down. Turning first to selector, this is being litigated in multiple jurisdictions. Simon, can you briefly outline the latest developments in the Dutch litigation? Yes, of course. As I just mentioned, selector's balance sheet restructuring was implemented via amongst other things a Dutch share pledge enforcement. The Netherlands commercial court also called the NCC has become a much used form for these kinds of enforcement proceedings. It offers English language hearings and a specialist commercial bench and that NCC approved the seal on 13th of May 2025 without an oil hearing. So the implementation was done without hearing the minority noteholders in the selector case. And those minorities alleged that the court was expressly told that there were no other interested parties and that crucial information was withheld from the courts. And they appealed that decision by the NCC. And that brings us to the NCC's Court of Appeals ruling of 30 of June of this year, which is very key and noteworthy decision. And the main legal question in that case was whether the minority qualified as an interested party for the purposes of being a party in proceedings regarding a Dutch chapletge enforcement and also consequently whether they could appeal the primary NCC original approval of the chapletge enforcement. And having heard all the parties and their lawyers pleading, the NCC ultimately said yes, these minorities also qualify as an interested party in the chapletge enforcement. And it helped that the purpose of the private seal procedure is to safeguard the interest of the pleasure and other creditors and that there was consequently no basis for limiting to the formal parties to a pledge. So the minority noteholders' economic interest had been according to the court directly and substantially affected and that they should have been heard by the courts when considering the request for chapletge enforcement. Now that may well sound reasonable, but the consequences could be far reaching and commentators have pointed out that the NCC's Court of Appeals reasoning is likely heavily context dependent against the background of the LME with a non-paratter outcome. But the decision may then well be understandable against that background, but the question is whether it offers a workable criteria for future cases. And the practical implementations may be significant if all noteholders holding beneficial interest in these kinds of structures must be heard and chapletge enforcement. In a complex bond structure, of course, you can have dozens or even hundreds of beneficial holders mainly for when holding through chains of intermediaries, sub-intermediaries in clearing systems, and these interest can be traded daily. And if all those holders potentially qualifies interested parties to security agents and the court may well have quite some difficulties to summon all these parties to be heard as interested parties in a chapletge enforcement. And to put that a bit further perspective in an earlier Hema decision, so in relation to the chapletge enforcement in Hema, the court then refused to hear these kinds of minority noteholders because it then holds that health that these parties should turn to the trustee and that the enforcement procedure was not the right form. So there was some deviating decisions on this point, but this is ultimately now the decision by the court of appeal. And it's our understanding that is now being appealed to the Dutch Supreme Court. Thanks, Simon. Tim, can you briefly outline the latest developments on selector in the U.S.? In particular, the expert evidence from Dame Elizabeth Gloucester and Lord Newberger makes for some compelling reading. Yeah, absolutely. Definitely compelling reading for lawyers. Alpha potentially less so, but it's an interesting situation where some of the sort of pre-eminent judges in the UK are arguing points of English law in U.S. proceedings. But effectively, one of the key points in selector is an argument about whether or not the instruction to the security agent to implement the transaction via the distressed disposal, which is based on a sort of instructing group constituency under the creditor. Whether or not that was a valid instruction or it breached a number of key issues, none of which is contractual. So we come back to that. All the features of a contract were expressly complied with. You had the right number of creditors and a fairness opinion was obtained, etc. But then key question being litigated there and being argued is whether or not there are curbs and restraints and limitations on the discretion or on the shape of the restructuring, the shape of sort of what's being done under the ICA drag that are either employed into the contract or alternatively are inherent limitations on the exercise of those powers. And that has resulted in two very erudite and sophisticated sets of opinions that have been, yeah, publicly available in the selector litigation in the US arguing the case and effectively it comes down to an argument about whether or not in exercising those in a majority exercising a power that has an impact or effects or binds a minority of creditors that those powers are either subject to implied terms or limitations as to what they can or can't do and either because that those are implied into the contract as a matter of good faith and fairness and fair dealing or alternatively that those are that there is an inherent limitation on the exercise of the powers which is effectively what Elizabeth Gloucester's opinion is really contending. And that's in the face of very standard language in intercultural agreements in Europe that tries to make it clear that there are no implied terms and in order to give certainty to the security trustee and the creditors as to what the document is doing. I think that's it's a really important and wider market critical feature of that litigation that potentially has very wide consequences although because it's being argued in the US, it's not going to bind any English courts at all but the quality of the judges arguing it is all the extractors arguing it is pretty compelling. And I think it does have some much wider market implications around the certainty of intercreditors, what they do, what their parameters are, and selector is a very structured example of what can be done in an ICA drag. But ICA drags on more sort of vanilla conventional side are done all the time in all sorts of different situations. And I think there is some level of anxiety and concern in the market about how important that mechanic is for delivering restrictions and recapitalizations and ensuring that there is certainty and reliability of these kind of key mechanics in finance documentation and ensuring that people can rely on those in terms of managing their capital structures. So it's all very mid-trained, it's all very topical. And wherever selector comes out on it, whether or not we get a judgment is I think going to be very far from the end of the road in terms of those discussions and debates. I think as lawyers we're hoping that we get a judgment instead of it settling for the law. So talking briefly about hunkumler assignment, can you update us on the litigation proceedings? Yes, happy to do that. It's, as I mentioned, still a live matter. In this case, the minority noteholders commenced proceedings in New York in late 2024, challenging the uptiring of certain notes and subsequently the enforcement. In this proceedings followed in October 2025 targeting the trustee and the security agent over the enforcement. And there were also Dutch proceedings aimed at obtaining information for an alleged claim against the directors of hunkumler. And let me just first turn to a recent decision of the Amsterdam Court of Appeal in relation to Hamar, which is noteworthy also in relation to that claim, alleged claim against the directors. And the Court of Appeal addressed tort claims brought against Hamar for its restructuring back in 2020. And there were some noteworthy things in that decision, because the Court confirmed that the board of directors of company must act in the interest of the company and its enterprise, including its stakeholders. But it is a genuine discretion in choosing a proportionate restructuring solution when continuity is at risk. It also confirmed that a duty of care that the ways have very limited duty of care to sophisticated investors who normally assumed structural subordination risk. And that typically these holders have also been warned for the consequences of answering in financial documentation. And there was a third noteworthy decision on valuation where the Court articulated an important standard, namely that a borrower is entitled to rely on an independent third party valuation report unless it had the value or incorrect data. It knew the figures were plainly wrong, or it had reason to believe the underlying information was no longer defensively accurate. So this is, I think, a very important framework. And it confirms that the board has a lot of discretion in these kinds of restructuring scenarios. And in the Hunkermell case itself, we consider the recent English high court judgment in which the just at least state the English proceedings arising out of the Hunkermellell Army until the first instance judgment in the related proceedings in New York have been finalized. And that basis for that decision was because New York proceedings were far more advanced in those proceedings. Discovery was completed. Witnesses had been the most expert reports were exchanged, and the Court found substantial overlap between these proceedings and a real risk of inconsistent judgment if both cases ran in parallel. The decision to stay is one of the first English rulings to emerge from that wave of cause-border disputes generated by enemies and from that use of distress disposal mechanism in English law governed into credit agreements. And this particular decision highlights the limitations on a pursuit of a multigerestictional litigation strategy, challenging cause-border restructurings. And the sequencing and formulation of claims in different jurisdiction will need to be considered therefore carefully when commencing a litigation strategy looking to challenge complex cause-border enemies. And it highlights the need for noteholders to carefully assess the effect of jurisdiction agreements in contractual documentation as well, and to understand whether the benefit of such terms is limited only to registered holders of such a note and/or does also create any rights on the part of the ultimate beneficial holders of such a note. So, quite some interesting decisions giving a lot of insight on multigerestictional litigation following such an enemy. I think Simon that is interesting indeed. And just to draw everything together, generally enemies do push the envelope in terms of creditor dynamics, non-parry outcomes, and documentary interpretation. Although these are implemented out of court and therefore do not create a natural form for challenge or a free shot for dissenting creditors, there is still tail and risk of litigation. Tim, do you think this has now accepted part of LMI landscape and being factored into contingency in options planning and downside risk analysis? I think absolute years are on both sides, so I think the first is the litigation as a potential outcome I think is absolutely assumed, not least because litigation is I think in an LMI context a not only part of a challenge decision matrix for non-participating and sort of disenfranchised creditors, and actually trying to overturn, but it's also a route to assessment, and we're seeing a lot of that. And also I think particularly in the US, it's a mechanism for information gathering as much as anything at least at the early stages. So we're also seeing that because of the wide discovery rules in the US. So I think on the data side, companies are becoming very thoughtful around litigation risk and also assessing that, and also I think assessing the impact of the business on the other side if it is in very public litigation, particularly in the risk of multiple forums and what that would do to its business, the occupation of management time, and just really the fact that the restructuring in inverted commas is still ongoing and is not final and sort of all that litigation is dealt with. So I think that is key. One development that we are seeing as well on the credit side is not only the willingness to do that, but the willingness to do that particularly in large cap structures and the emergence of what's called litigation committees or litcos, where there are certain tiers of creditors who are willing to litigate and may also have only bought into the debt after the enemy transaction, whether that has the residual debt has traded down. We're seeing that as being sort of developing as a differential from a value perspective where creditors who are willing to litigate potentially for the benefit of creditors generally are negotiating themselves a non-pro-rotor set of sort of costs, incentives and economics on the basis that they are willing to put ahead above the parapher and implement development pursue a litigation strategy. So I think it's being seen increasingly as very much part of the landscape, part of the risk analysis and also in certain circumstances as well, there being a sort of set of opportunities that come with litigating if particularly for creditors who have bought into debt on a sort of distress basis after the implementation of an enemy. Yeah, thanks Tim. Litcos and evolving developments in the litigation space will be interesting to follow and watch. And on that note, that's a wrap for our first episode. Thanks everyone for listening. Be sure to tune into the second episode of our series where we will take a look at some of the protections and defensive measures being developed to counter perceived enemy risk, including cooperation agreements.