For Premier, a company founded in 1934 as the Caribbean Oil Company to pursue oil and gas exploration and production activities in Trinidad, and floated on the stock market as Premier (Trinidad) Oilfields two years later, the merger marks the start of a new chapter in its long history. At the same time, it represents the culmination of Premier’s efforts – which have been ongoing for the past five years – to address its over-levered balance sheet. These included the first schemes of arrangement in either England or Scotland to receive organised creditor opposition for several years, and the first use of the new restructuring plan procedure by a listed company.
This Horizon Scanning piece provides an overview of the complex events over the past two years and draws out a number of themes which will be of relevance to future restructurings.
Themes for future restructuring transactions
Use of M&A
Each of the 2020 Transaction, the Standalone Transaction and the Chrysaor Transaction combined M&A with a restructuring of Premier’s debt facilities. In the case of the first two, the acquisition of producing assets – which was expected to facilitate a future refinancing – was a central part of the story to creditors for the proposed maturity extensions. With the Chrysaor Transaction, the combination of a significant base cash recovery and the choice between participating in potential equity upside or exiting completely with a further cash payment was important in winning support for the transaction across Premier’s diverse creditor group. These features were achievable because the merger created a combined group with a stronger balance sheet and larger portfolio of producing assets and growth opportunities, and would have been difficult to replicate through any alternative structure.
In some ways, the use of acquisition structures is fairly unique to the specific circumstances of these transactions – it is an unusual feature of oil and gas financings that debt capacity is tied to production and reserves, and Chrysaor’s private equity owners were drawn to the reverse takeover structure as a way of achieving a listing for Chrysaor. However, as the global economy emerges from the COVID-19 crisis, with consolidation likely across a range of sectors, it would not be surprising to see companies (both those in distress and potential acquirers) and their advisers thinking creatively to develop similar structures. There could well be other scenarios (for example, where the debtor company has a particular regulatory status) where the blueprint of reverse takeover combined with debt restructuring has advantages versus purchasing assets out of an insolvency process.
While it is unusual for restructuring transactions to be twinned with acquisitions, they are more frequently conditional upon the execution of major disposals or equity raises. In any of these scenarios, the debtor company and its creditors are exposed to the risk that failure to satisfy some condition (including as a result of a change in market conditions) may prevent the corporate transaction from being executed.
This risk materialised on a number of occasions during Premier’s restructuring process. The acquisitions and equity raise which formed part of the 2020 Transaction ceased to be commercially viable as a result of the convergence of the fallout between OPEC and Russia with the onset of COVID-19. Fortunately, there proved to be time for Premier to develop alternative options before the May 2021 maturity date. Similarly, the decision to proceed with the Chrysaor Transaction as opposed to the Standalone Transaction was informed in part by the uncertain market outlook at the time. The Chrysaor Transaction itself was subject to a reasonably significant degree of execution risk, given the range of regulatory and antitrust conditions. The risk was mitigated to some degree by creditors’ agreement to an interim maturity extension (to March 2022), which would have given breathing space to finalise the transaction if completion was delayed, or to develop an alternative if it fell over entirely.
Although the need to prepare fall-back plans is not specific to restructuring transactions executed during this stage of the economic recovery, the number of companies seeking to raise new financing as an alternative or condition to a wider restructuring and the challenges in forecasting future financial performance do increase the importance of contingency planning and running alternative options in parallel for as long as possible.
Risk of opposition
The 2020 Schemes were the first schemes of arrangement in either England or Scotland to receive organised creditor opposition for several years. Since then, however, there has been a proliferation of contested schemes and restructuring plans, including the Codere and Sunbird schemes and the Virgin Active restructuring plan which is currently ongoing. This trend seems likely to continue, not least given the likelihood of dissenting creditors seeking to challenge the application of cross-class cram-down within the restructuring plan procedure. Where a scheme or restructuring plan is contested, the process can take on some of the characteristics of commercial litigation – and debtor companies will be well-advised to tailor their approach and dealings with third parties accordingly (for example, taking steps to control creation of documents and maintain privilege).
One area of focus from ARCM on the 2020 Schemes was the adequacy of disclosure in the explanatory statement. Although Premier made a significant amount of additional information available to ARCM in response to its requests, Lady Wolffe was satisfied that Premier’s explanatory statement was sufficiently detailed without this information. As Snowden J acknowledged in his Virgin Active convening judgment, there will often be a tension between acceding to disclosure requests from opposing creditors and seeking to minimise the disparity of information between creditors. Requests for information will likely need to be considered on a case-by-case basis but, in order to keep on the front foot, it may nevertheless be prudent for debtor companies to put in place a disclosure process which maintains a balance between these competing objectives.
Another theme which runs across the 2020 Schemes and other recent restructurings is the prospect of an opposing creditor seeking to extend the scheme or restructuring plan timeline. While ARCM argued that it needed additional time to prepare evidence and that a two week sanction hearing was required in order to allow full cross-examination on both sides, Lady Wolffe accepted Premier’s position that this was unnecessary and – by running up against the long-stop dates under the acquisition documents – would effectively cause the 2020 Transaction to fail. In cases like the 2020 Schemes and Virgin Active, where the debtor company can point to good reasons for maintaining a conventional (or even slightly compressed) timeline, it seems likely that the court will do its best to accede to that request. Debtor companies will though need to provide sufficient evidence as to the timing imperative, and may be expected to work to very tight timelines in order to prepare evidence and respond to information requests, which can represent a significant strain on company resources.
Scrutiny of comparator
As part of the 2020 Schemes, Premier’s presentation of the comparator – namely that there was a very substantial risk of entry into a formal insolvency process before May 2021 if the schemes were not sanctioned – came under considerable scrutiny. ARCM submitted a report from an insolvency practitioner which stated that there should be time prior to the maturity date to consider and negotiate alternative restructuring options. In her judgment, Lady Wolffe found the evidence from Premier’s finance director significantly more convincing than this expert report, placing considerable weight on the fact that he had first-hand experience of the challenges in developing and negotiating the 2020 Transaction and Premier’s previous restructuring, whereas the report was effectively a theoretical exercise.
Given the fundamental importance of the “relevant alternative” under Part 26A restructuring plans, the comparator is likely to remain a key area of focus for opposing creditors. In cases where this is an immediate liquidity shortfall it may be relatively clear that the relevant alternative is an insolvency process, in which case the battleground is likely to be how the group has been valued and the administration outcome modelled – an area where financial experts will be best placed to express a view. However, where insolvency is less imminent or inevitable, opposing creditors may also seek to argue that the relevant alternative is not an insolvency process but another deal entirely. It seems likely that director evidence will continue to be important in these circumstances, with opposing creditors facing the difficulty of not necessarily understanding all the background and dynamics to the restructuring and of explaining why an alternative would command sufficient support among other creditors.
Approach of FCA
In connection with the Chrysaor Transaction, Premier sought a derogation from Listing Rule 9.3.11 (which requires any issue of shares for cash to be made on a pre-emptive basis) in respect of shares that were being issued to its creditors. This requirement conflicts with the disapplication of statutory pre-emption rights in respect of shares issued pursuant to restructuring plans. The Financial Conduct Authority (FCA) would grant the derogation only if Premier could satisfy the conditions in Listing Rule 10.8.3 (which apply to companies in severe financial difficulty). Those conditions – which the FCA admitted set a very high bar – could not be met in the circumstances, and so Premier proceeded with seeking a shareholder resolution to disapply statutory pre-emption rights in parallel with its restructuring plans. The FCA was also clear that it would not be prepared to relax the requirement for shareholder approval of Class 1 transactions or reverse takeovers.
In the event, the FCA’s decision did not have a detrimental effect on the Chrysaor Transaction since each of the required shareholder resolutions was approved by a very high majority. However, it serves as a reminder that the FCA’s priorities as a regulator are not necessarily aligned with facilitating restructuring transactions, even if that would appear to be inconsistent with Parliament’s objectives in introducing Part 26A of the Companies Act. As other listed companies come to restructure using the restructuring plan procedure (Premier was the first of these), it will be interesting to see whether the FCA takes a more flexible approach – particularly in circumstances where the company can show that the alternative to its restructuring is an immediate administration in which shareholders will receive nothing.