Restructuring infrastructure debt-

Despite best intentions, not all infrastructure projects go according to plan. Financiers should be mindful that in circumstances where under an infrastructure bond issuance or syndicated facility requires restructuring, any contractual power of the majority to effect the requisite amendments, or grant waivers/consents may be subject to further legal restrictions.

The documentation for infrastructure financing in Southeast Asia is often governed by English law. Hence recent developments under English law will be of relevance for creditors considering a debt restructuring in the region.

In equity financings, it has long been established that majority shareholders voting on a resolution altering the articles of a company must do so in a “bona fide” manner and for the benefit of the company as whole. A similar restriction in relation to the power of majority debenture holders was considered in British America Nickel Corporation, Limited, and Others v. M.J. O’Brien, Limited [1927] AC 369. In that case, the court held that the power of the majority debenture holders in amending the terms of the debenture “must be exercised for the purpose of benefiting the class as a whole, and not individual members only. Subject to this, the power may be unrestricted.” Similarly, the Singapore Companies Act, among other things, allows a debenture holder of a Singapore company to challenge the resolution of debenture holders on the basis that the resolution unfairly discriminates, or is prejudicial to, one or more debenture holders.

While it is clear that the powers of the majority are not unrestricted, what constitutes “benefiting the class as a whole” is less clear. The uncertainty surrounding the restriction is further complicated by the use of consent solicitations in the bond market.

Benefits to the class as a whole

In 2002, the Chancery Division of the English High Court was asked to consider the validity of a lenders’ resolution amending the terms of a syndicated facility in Redwood Master Fund Ltd and others  v. TD Bank Europe Ltd and Others [2002] ALL ER (D) 141 (Dec). The majority lenders in Redwood had consented to the debt restructuring of a distressed facility whereby the relevant facility agreement was varied by a waiver letter. As the facility contained three tranches of loans, the waiver letter, among other things, required a further contribution of funds by the Tranche A lenders to pay down some of the Tranche B facility. As not all of the Tranche A lenders held proportional commitments in the Tranche B facility, the waiver letter produced the net effect of requiring a minority of Tranche A lenders to contribute further advances to the distressed facility. In dismissing the claim, Justice Rimer held that it was not sufficient merely to show that the waiver letter adversely discriminated against a minority. Rather, the “adverse effect was simply part of the price of achieving the overall facility reduction which was for the benefit of all lenders”. Thus, given there was no evidence of bad faith on the part of the majority lenders, the waiver letter was a commercial decision which the majority were entitled to.

In validating the waiver letter, Redwood recognised that the power of the majority (in a debt restructuring situation) is often exercised in difficult circumstances. The relative disadvantage of the minority as compared to the majority may not, in and of itself, be sufficient to show that the majority had exercised its voting power improperly.

Consent payments and exit consents

More recently, and in two separate cases, the English High Court considered the bond issuers’ employment of consent solicitation techniques in debt restructuring. These techniques, known as “consent payments” and “exit consent”, utilise financial incentives (or disincentives) to encourage bondholders to approve the relevant amendment proposal. In case the requisite majority approves the amendment, the majority bondholders receive an economic gain and/or the minority bondholders suffer an economic loss. While these cases constitute the first forays of English courts into the consideration of the use of consent payments and exit consent, their usage has generally been considered to be permissible by US courts.

Consent payments

In Azevedo & Anor v. Imcopa Importacao, Exportacao E Industria De Oleos Ltd & Ors [2013] EWCA Civ 364, the English courts were asked to consider the amendment of certain terms of debt securities whereby “consent payments” were offered by the issuer to all bondholders voting in favour of the amendment. If the amendment was approved, those bondholders who voted in favour of the amendment would receive a fee payment, while any dissenting minority bondholders would not.

Ultimately, the consent payments were found to be valid, even though this produced different economic outcomes for the different members of the same class of bondholders. One factor that contributed to this finding was the open disclosure of the consent payments and their availability to all bondholders. However, this factor may not be sufficient in all cases.

Exit consent

The Assenagon Asset Management S.A. v. Irish Bank Resolution Corporation Ltd [2012] EWHC 2090 (Ch) case concerned the use of a technique known as “exit consent”. Where exit consent is utilised, bondholders are invited to accept an exchange of their notes for replacement notes on different terms. Bondholders willing to accept the exchange are then irrevocably committed to vote at a bondholders’ meeting for a resolution amending the terms of the existing notes, so as to seriously destroy the value of the existing notes. As a result, minority bondholders who do not accept the exchange of new notes would be left with notes of little, or no, value.

In finding the use of the exit consent as a “coercive threat [that] the issuer invites the majority to levy against the minority”, Justice Briggs noted several distinguishing features between the facts of Azevedo and Assenagon. In particular, while the resolution voted on in Azevedo could be beneficial to the bondholders, the Assenagon resolution, on its own, destroyed the value of the notes; hence, it was of no benefit to the bondholders.

Though the decision in Assenagon contradicts the common market practice and judicial authority in the US, the use of exit consents (in the form found in Assenagon) is unlikely to be valid under the English law. This should be distinguished from proposals containing “drag-along” provisions that force the minority into the same note exchange as the majority.

Common grounds for consideration

While Assenagon seems to constitute a retreat from the market-friendly approach of Redwood and Azevedo, the three cases, nonetheless, share common grounds that should be considered in any infrastructure debt restructuring. The following questions should be posed when considering the validity of the terms of any infrastructure debt restructuring:

  • Good faith: Are the powers of the majority being exercised in good faith?  While the answer to this question is often an evidentiary matter, bad faith of the majority may be inferred from the content of the resolution itself.
  • Benefit: Does the resolution benefit the lenders (or bondholders, as the case may be) as a whole? While a resolution that discriminates against some of the class may, nonetheless, be valid, a resolution that does not provide any value to the class as a whole may be overturned by the courts (even if a benefit is provided through other avenues outside of the resolution).
  • Open disclosure and equal access: Are the terms of the resolution and any associated incentive arrangement fully disclosed and available? Two points are relevant here.

First, the open disclosure of such an incentive arrangement must be made to all lenders (or bondholders, as the case may be). Second, any incentive arrangement must be available to all lenders/bondholders. Prior to Azevedo, the “safe” view was that, for a resolution to be valid, consent payments must be made to “all” bondholders of the class (that is, including dissenting minority bondholders). Following Azevedo, it seems that such a payment could be restricted to consenting bondholders only.

About the Authors

Saugata Mukherjee

Partner, Stephenson Harwood LLP

 

James Yao

Associate, Stephenson Harwood LLP