English High Court approves latest fully contested restructuring plan: Adler group – PART ONE
- The English High Court has sanctioned a restructuring plan under Part 26A of the Companies Act 2006 that aims to rescue the Adler property group. This was the latest fully contested hearing of a restructuring plan, involving cross-examination of expert witnesses
- The plan was opposed by a group of ad hoc note holders, who contested the plan on several grounds including in relation to valuation evidence
- The dissenting note holders have, following sanction, been bound by the plan as a result of the cross class cram down mechanism in section 901G of the Companies Act
- The Adler case provides a framework for challenging future restructuring plans, offering insights into how the court will approach issues of fairness and conflicting valuation evidence
- The Adler plan also showcases the flexibility of the English restructuring plan as a tool to restructure non-English law governed debt issued by (originally) a non-English company. It further demonstrates the inherent flexibility within the pari passu principle as a matter of English law, to allow shareholders to retain their equity stake in a restructuring where they do not inject new money
Background to the plan
The Adler group has a substantial residential property portfolio in Germany worth approximately €8b. A key element of the group’s funding originates from six series of German law governed unsecured loan notes, with maturity dates from 2024-2029. The group had encountered financial difficulties and was facing a liquidity crisis as a series of separate notes, issued by Adler Real Estate A.G. (a German group company) was due to mature on 27 April 2023. The group did not have resources to meet the payment.
It was common ground that failure to pay those note holders would result in cross-defaults across the group, requiring the directors to file for insolvency in Germany. All parties agreed that liquidation would be the relevant alternative to the proposed restructuring.
The issuer of the remaining series of notes was a Luxembourg incorporated entity, Adler Group S.A. However, after an unsuccessful attempt to restructure its debt using a contractual Consent Solicitation procedure, the group decided to propose an English restructuring plan to achieve that result. To bring the restructuring within the English court’s jurisdiction, an English Newco, AGPS Bondco plc (the Plan Company), was incorporated and substituted as loan note issuer under contractual provisions.
The six series of notes, worth €3.2b, had staggered maturity dates, but otherwise ranked pari passu.
In broad terms, the plan proposed the creation of a new special purpose vehicle (SPV), funded by participating creditors taking a pro rata equity stake. The SPV would hold a 22.5% equity state in the Luxembourg parent company, Adler Group SA. The remaining 77.5% equity stake would remain with the existing shareholders, who themselves were not required to inject further capital. Conversely, the new creditor funding would provide €937.5m of super senior secured funding to the group to allow the notes maturing on 27 April 2023 to be paid in full, as well as allowing the group to continue trading.
The plan also sought to vary the terms of the notes due to mature in 2024 (extending the maturity to 2025) in exchange for second ranking security. All other notes would retain their existing, pre-plan maturity dates and would benefit from new, third ranking security. There would also be an interest payment holiday and a temporary swap to PIK interest.
Crucially, the plan envisaged that all note holders would be paid in full.
The group confirmed its intention to begin divesting itself of assets and then liquidating the group companies by 2027, prompting the opposing note holders to describe the plan as a ‘liquidation plan’ (an approach not dissimilar to the DeepOcean restructuring plan, covered here: DeepOcean – The first UK cross-class cram-down case under the Corporate Insolvency and Governance Act 2020 | Belgium | Global law firm | Norton Rose Fulbright).
An English restructuring plan requires two court hearings: a convening hearing (to convene meetings of creditors) and a sanctioning hearing (where the court will decide whether the scheme can and should be sanctioned to take effect). Given the imminent debt wall, the court agreed to take a light touch approach to the convening hearing, deferring questions that would usually be determined at the convening stage to the sanctioning hearing. These included the validity of the issuer substitution as a matter of German law and allowing a shorter timetable within which opposing creditors could produce counter evidence.
At the subsequent meetings of creditors, the holders of five series of notes voted in favour of the plan by between 80-90%. However, the class of note holders with notes maturing the latest in time (the 2029 note holders) voted against the plan. Of the 2029 note holders, 62% approved the plan, falling short of the 75% threshold under English law.
The Plan Company therefore applied to court to have the plan sanctioned and the 2029 note holders crammed down under the Part 26A cross class cram down mechanism.