During the first half of 2009 the number of corporate bankruptcies in Finland increased by 38% to nearly 1800. The number of statutory restructurings tripled to 289 compared to the first half of 2008. The number of distressed companies that are not formally insolvent is far higher. This means that the number of voluntary corporate restructurings is likely to increase significantly in the latter part of 2009 and throughout 2010. Furthermore, the situation will create good opportunities for distress investing in the Finnish markets.
Finnish law is favourable in terms of facilitating private workouts management liability can be controlled, debt-equity swaps are relatively easy to carry out, divestments and creditor control can be arranged contractually, and the lender liability risk is not too high. In addition, expedited corporate restructuring procedures provide interim freezes on enforcement and enable negotiation of pre-packaged plans that can be approved by a court.
Finnish restructuring environment
There is no established manner of carrying out corporate restructurings outside the formal insolvency procedures. The only way of binding hold-out creditors is through statutory corporate restructuring. Private workouts can be achieved, but a successful private workout requires in practice 80 to 90% creditor approval if the parties wish to minimise court involvement.
The Finnish Restructuring of Enterprises Act (the Restructuring Act) was implemented in the early nineties and the latest amendments were made in 2007. Statutory restructurings have traditionally focused on debt composition, which is often inadequate for facilitating business recovery. Furthermore, restructurings were often carried out bilaterally between a bank and a borrower. There was often no need to address multi-creditor restructurings or issues arising with complex financial instruments and multi-layered debt.
During the last few years statutory restructurings have become more advanced. This is partially based on stronger presence of business recovery specialists, investment banks and the development of restructuring law.
Finnish private workouts tend to mirror the priority structure and rights of various parties in the statutory restructuring and bankruptcy because hold-out creditors holding a controlling interest in a particular debt-class can effectively block approval of the reorganisation plan, and because any large enough a creditor can file a bankruptcy petition based on a payment default of the borrower.
The Finnish statutory restructuring is a debtor-in-possession (Dip) procedure much like the US Chapter 11 procedure. Although the debtor retains the control of its assets throughout the procedure, management actions are substantially restricted in order to make sure that the assets are not unduly depleted and that the restructuring plan can be negotiated.
Commencement of a corporate restructuring triggers the statutory freezes to make payments, grant security for a reorganisation debt, carry out or continue debt collection measures (for example, enforcement of security) and seek interim injunctions.
The reorganisation plan is, in practice, prepared by the estate administrator in consultation with the creditors and the debtor. Although the substantive measures needed to effect the rescue are not regulated, the administrator can only submit a plan to the court that can realistically be expected to be approved by the creditors.
The creditors vote on the restructuring plan within their respective creditor groups. Generally, the plan must be accepted by more than half of the creditors representing majority of each group's claims. The terms of the restructuring debts are replaced by the terms stated in the restructuring plan. All secured debts are subject to the restructuring plan, but the composition of debts cannot be applied to their capital amount.
There are certain detailed rules for a court to 'cram down' dissenting creditor groups even if the majority vote is not reached. Furthermore, creditors that receive full payment as well as last-ranking creditors that are not entitled to any distribution under the plan are discarded in voting.
As only the debt restructuring part of the plan is specifically enforceable against the debtor, the debtor's restructuring obligations often need to be reinforced through separate contractual commitments and legal measures. This can be achieved by making creditor approval conditional on entering into other corporate restructuring measures (for example, divestments, debt-for-equity swaps, share issues and the like).
In cases where financing structures are not overly complex, it may be feasible to opt for an expedited pre-negotiated deal instead of a full-scale statutory restructuring. The reorganisation plan can also be prepared prior to the commencement of the reorganisation. The same applies for solicitation of creditor approvals.
As of June 2007 it has become easier to carry out an expedited reorganisation procedure. This requires that the debtor, as well as creditors representing at least 80% of the claims and any creditor representing at least 5% of all claims, give their written approval for the process. In this case, there is no need to hear various parties concerning the reorganisation plan proposal, no process for disputing restructuring claims, no division of the creditors into creditor groups and no voting procedures.
Because the expedited procedure may save a considerable amount of time, it also creates substantial pressure to prepare the pre-packaged plan with diligence.
The debtor is entitled to incur indebtedness and grant security interests in the ordinary course of business even after the commencement of a corporate restructuring. Dip financing is not generally considered to be within the ordinary course of business, and any such new indebtedness and granting of security interests requires the estate administrator's consent. A court may on the estate administrator's application permit new super-priority financing and order that such new financing has same or better priority to the debtor's assets than existing secured debt. However, the arrangement must not considerably increase the risk of the secured creditors who hold the existing security interest. It is often advisable, in order to ensure the priority of new Dip financing, to submit to the court consents from the creditors affected by the order.
Bond buy-backs and voluntary exchange offers
The negotiation position
In a case where the company has listed bonds or other debt securities, it may be advisable either to buy back such bonds, to the extent they are traded at a discount, or, in case the company does not have the required liquidity to carry out a buy-back, to make an exchange offer for such securities.
Unlike the company's bank creditors, the debtor may not know the identity of its bond creditors or their objectives (for example, are they control investors or institutional investors looking for a secure investment?). The negotiating position of bond creditors in restucturings, debt buy-backs and exchange offers can be summarised as follows.
First, a creditor's right to receive a full payment of capital and interest on its receivable cannot be cancelled or reduced in any other manner than in bankruptcy or in statutory restructuring in which appropriate creditor majorities approve the reorganisation plan.
Second, without specific contractual provisions, creditors have no right to convert the debt into an equity interest or require owners to give up their ownership in the company. Creditors' control is based on loan covenants and negotiating power upon debtor's failure to make the agreed capital and interest payments.
Third, a creditor who in a voluntary arrangement is proposed to be treated in a less favourable manner than what would be the case in a formal insolvency process is likely to object to the proposed voluntary arrangement.
Fourth, the rule of absolute priority sets boundaries for all arrangements. It is a part of mandatory legislation and covers also ownership interests, which are always the last in priority.
Amendment of bonds terms
The terms of Finnish listed bonds vary from one case to another. Usually any amendments require two-thirds majority in a creditors' meeting. The same applies, for example, to covenant waivers. The meeting is usually convened by the debtor alone or together with creditors representing at least 10% of the bond capital. The quorum requirement for a first meeting is usually 50% of the bond capital and 10% for the second meeting (if the threshold cannot be reached in the first meeting). As is the case in a number of other jurisdictions, the following amendments cannot be made without all creditors giving their consent:
(i) reduction of the debt capital or interest;
(ii) extending the maturity of the bond; and
(iii) changes to the quorum and voting thresholds.
Buy-back and pre-payment
Generally, debt buy-backs and exchange offers can be carried out unless such measures have been restricted in the terms of the bond.
On the other hand, a bond has to be repaid in accordance with its terms. Therefore, a mandatory redemption or pre-payment of a bond is not possible without specific contractual provisions in the terms of the bond.
Tender offers and exchange offers
Unlike with share tender offers, the success of a bond tender offer is not as dependent on the premium offered for such securities. A bond creditor is entitled to a full repayment. Therefore, a consideration which is below the combined capital and discounted interest amounts accruing to the bonds is often not accepted.
The likelihood of success of a voluntary bond exchange offer is in practice increased if the position of the non-accepting bond creditors deteriorates as a result of the implementation of the offer. The position of the remaining bondholders can be changed in two ways:
(i) The seniority of the new bonds may be better than the ones subject to the exchange offer (through new security or subordination of the old bonds by amending its terms).
(ii) The terms of the existing bonds can be otherwise be made less advantageous for the hold-out creditors.
The majority threshold for implementing these changes in Finnish listed bonds is usually two-thirds. However, there is little case law concerning duties owed by the debtor and the majority creditors to the minority creditors.
Bondholders in private workouts
As the structure of private workouts is often influenced by the voting thresholds in a statutory restructuring, it may be easier to amend the bond terms in a private workout by using a court-approved pre-packaged plan. In such a situation, the voting threshold is 50% of the capital of the creditor class. It should be noted that in the expedited corporate restructuring procedure the thresholds are much higher.
Unlike in exchange offers in which a reduction of the capital or interest payments of the bond or extending its maturity requires unanimous bondholder consent, such changes can be implemented as a part of the reorganisation plan with a majority approval by each creditor class. Therefore, in practice all debt compositions involving bondholders need to be carried out through a court-approved restructuring plan.
Alternatively, the bondholders may be crammed down by the court even if they do not support the reorganisation plan. However, such cram-down is unlikely to be approved by a court if the reduction of the debt is excessive and the reorganisation plan does not affect the shareholder structure or require adequate participation in the restructuring by the shareholders as well. In effect, this means that a distress investor holding a control position (51%) of the creditor group often has considerable leverage in negotiation a debt-equity swap in the restructuring.
The structure of a private workout depends fundamentally on the details of each particular company and situation. In a private workout, the parties must respect the priority order that would apply under the general insolvency laws. Otherwise, a creditor that has a lower priority in a contractual arrangement than in a formal procedure can effectively block the procedure. Furthermore, unlike in solvent restructurings, in private workouts, the question is primarily about to what extent each creditor participates in the sharing of financial losses and only as a secondary matter about who gets the benefits of a successful restructuring.
The following structure sets out in general terms the various phases that a Finnish private workout might consist of:
- Entering into a standstill agreement (which may also be a common understanding instead of a binding agreement): banks, other creditors and the debtor agree that debts will not be accelerated during the standstill period, and no debt enforcement measures will be taken.
- The auditors or investment bankers prepare a feasibility study concerning the recovery prospects with the assistance of the management.
- The banks and major creditors form a creditor committee and nominate a person or persons to administer the arrangement.
- The creditors enter into loss-sharing agreements.
- The parties prepare a restructuring plan concerning the company and the group.
- The restructuring plan is approved in an expedited statutory restructuring as a pre-packaged restructuring plan.
- The banks grant new secured financing in accordance with the plan.
- A part of the existing debt is converted into equity to restore the solvency of the company or the group.
- The parties start implementing the restructuring actions.
It should be noted that certain transactions which have no commercial rationale for the debtor company may be void under company legislation. Private workouts have generally a genuine commercial motive and, therefore, a financially justifiable structure will most likely not be caught by any ultra vires provisions.
Liability issues may be pronounced in distressed companies. The members of the management are liable for damages caused to the company by deliberate or negligent violation of their duty of care. In addition, the management may be liable for damages caused to the company or a third party by breach of the explicit provisions of the Finnish Companies Act or the company's articles of association. Importantly, in these cases and in affiliated party transactions, the burden of proof is reversed. However, if the decisions of the management are based on careful evaluation of the alternatives and diligent review of the particular situation, the management will not generally be found liable.
Management's decisions may not cause undue benefit to a shareholder or another person at the expense of the company or another shareholder. This issue is encountered in a number of private workouts. Importantly, liability for damages is likely to arise if the company enters into credit transactions while its ability to make the repayments can be seriously doubted or when there is no commercial rationale to continue the financing. Failure to take action or continuance of trading when the grounds of insolvency are apparent, increase the monetary liability of the management.
In practice, in order to mitigate the above risks, it is recommended to engage specialists to carry out a feasibility study or a restructuring analysis prior to making actual decisions on the restructuring. Another way is to sign an indemnity with the management so that they are able to take the restructuring decisions with controlled liability.
Risks with avoidance of transactions
In private workouts, the transactions that are most likely to be challenged, should the debtor become insolvent are: premature payments made, for example, to trade creditors, bond repurchases, sales of assets to entities affiliated with the creditors or shareholders, and granting of new security. On a general level, Finnish law on voidable transactions is more extensive than, for example, the corresponding English law.
The preference rule and gift-like transactions
A transaction may be avoided under the general preference rule if it inappropriately prefers a creditor, results in transfer of property outside the reach of the creditors, or increases debts at the other creditors' expense. The rule may not be invoked unless the debtor was insolvent at the time of the transaction or became insolvent due to the transaction. However, a duly structured reorganisation plan or a workout arrangement that respects the statutory priorities of the creditors and treats similar creditors equally is unlikely to be caught by this provision.
The rule may apply also if the transaction is based on pressure exerted by a creditor. This means that, for example, the integrity of the restructuring valuation will be of the utmost importance. It should, among other things, be ensured that there is no financially more advantageous way of divesting a part of the business (bids have been solicited from other potential purchasers) and that the divestment produces a better overall result than a hypothetical insolvency sale would do. These measures often provide protection against avoidance of gift-like transactions as well.
Avoidance of certain payments
A payment that is premature, excessive or made with uncommon consideration may be avoided in the debtor's insolvency. "Uncommon consideration" in effect refers to something else than money, unless such payment has been agreed on when making the initial agreement. A payment is usually deemed considerable if it exceeds 15% of the assets of the insolvency estate.
Payments that are made in the ordinary course of business or based on long-term practice are generally not voidable. It is considered that 'payment' of indebtedness by conversion of debt into equity cannot be voidable as it does not deplete the company's assets it merely dilutes the existing share ownership.
Granting of security interests may be set aside if the perfection of the security has not taken place without undue delay after the parties had agreed on the security, or if the parties had not agreed on security when the debt was incurred. This risk is usually avoided in restructurings if granting of security is a precondition for the new financing.
||About the author
Juha-Pekka Mutanen is a partner of the firm and heads the firms finance and capital markets practice. He advises banks, insurance companies, financial institutions, investment banks as well as private equity and venture capital houses in various finance and capital market transactions including restructuring issues. He also advises corporations in a range of financial law issues, including general corporate finance, acquisition finance and structured transactions such as securitisation and project finance. He has written and spoken widely on various financial and corporate law topics. Mutanen has degrees from the University of Turku, Åbo Akademi University and the University of Cambridge.
Dittmar & Indrenius
Pohjoisesplanadi 25 A
Tel: +358 9 6817 0112
||About the author
Mika J Lehtimäki is a senior attorney and a member of Dittmar & Indrenius' finance and capital markets practice. His work focuses on corporate finance and capital market transactions, structured finance, corporate recovery procedures and M&A. He is also experienced in cross-border transactions and has written about financial law in Finland and in the UK. Lehtimäki has a degree from the University of Helsinki and two post-graduate degrees from the University of Oxford.
Mika J Lehtimäki
Dittmar & Indrenius
Pohjoisesplanadi 25 A
Tel: +358 9 6817 0152