Three years of acrimonious negotiations needed to
restructure Punch Taverns could have been shortened if the UK
made use of some French insolvency concepts, deal counsel have
The iconic British pub operator’s
Europe’s most complex since Eurotunnel in
2007, finalised last month.
The out-of-court deal followed three rejected
proposals and ended a stalemate between senior creditors,
Punch’s board and its shareholders – many
of which were also junior noteholders.
Once agreed, it took under six months to complete
the agreed debt-for-equity swap, which reduced
Punch’s debt levels from £2.2 billion ($3.45
billion) to £1.6 billion. But the saga preceding that
agreement suggests a need to pause and reflect on how
England’s insolvency framework can be
"We like to think
that the UK restructuring process is one of the best in the
world," said John Houghton, partner at Latham & Watkins,
which advised the senior creditors. "But maybe we could take a
lesson from the French and their mandataire
judiciaire moderator role," he added.
A mandataire judiciaire is an independent arbiter
appointed by the court to facilitate discussions between the
parties. Their aim is to broker a compromise before the company
Much of the
difficulty in Punch’s reorganisation stemmed from
the fact hedge funds that owned shares in the company had also
acquired junior notes in the two securitisation vehicles
through which Punch was funded.
According to some
involved in the deal, this meant that the three reorganisation
proposals put forwarded by Punch between late 2012 and late
2013 were based on the interests of out-of-the-money
shareholders and junior noteholders.
a majority of 75% of each of the 16 creditor classes, and the
senior creditors’ coordination committee (CoCom)
held a blocking stake.
Maybe we could
take a lesson from the French and their mandataire
judiciaire moderator role
This created the
standoff that, if a third party was involved, could have ended
a lot earlier.
"If we had
something [like the mandataire judiciaire],
where someone could have sat in the middle of the parties with
a view to facilitating a restructuring discussion, this deal
could perhaps have been truncated by maybe a year or more,"
The success of UK schemes of arrangement and
pre-packed administrations has cemented its
rivalry with the US as a global restructuring hub. But the
Punch restructuring has revealed room for improvement in out of
- On October 8 Punch Taverns completed a
debt-for-equity swap that reduced its debt from £2.2
billion to £1.6 billion;
- It has been described as Europe’s
most complex restructure since Eurotunnel in
- The agreement came after three years of
acrimonious negotiations between senior creditors, Punch, and
hedge funds which were junior noteholders and
- Deal counsel said the deal could have been
shortened by one year if the UK insolvency regime introduced
a mandataire judiciaire-type role seen in
- The deal was complicated by the pub operator
being financed via a whole business securitisation, meaning
there was no intercreditor, pledges or
A stronger WBS
debt-for-equity swap that saved Punch was proposed by
Rothschild, the CoCom’s financial adviser, shortly
after the senior creditors rejected the company’s
third restructuring proposal.
It involved the exchange of junior notes in
Punch’s two securitisation vehicles for new junior
notes, cash, and shares amounting to 85% of the subsequent
corporate structure. The CoCom continues to hold their senior
The deal involved the redrafting of 18,000 pages of whole
business securitisation (WBS) documentation, including some
unprecedented amends to create a more robust corporate
structure and stronger senior noteholder rights.
2011 Punch's debt levels approach
£3 billion. Senior creditors,
including the Association of British Insurers, discuss
the possibility of a restructure.
Late 2012 Punch and different
stakeholders start discussions on a consensual
February 2013 Senior creditors
reject Punch's first restructuring proposal
June 2013 Senior creditors reject
Punch's second proposal
January 2014 Senior creditors
reject Punch's third proposal
February 2014 Rothschild, senior
bondholders' financial adviser, proposes a
debt-for-equity swap to Punch. They accept a revised
June 2014 Senior creditors approve
September 2014 Shareholders approve
October 2014 Restructuring
As a result, it’s now easier for the
securitisation noteholders to obtain information from the
business. The company is also no longer allowed to buy back
junior notes out of priority.
Perhaps the most notable changes are the securitisation
vehicles’ new pledges over the shares of Punch. If
there is a default and the pledge is exercised, all the
group’s debts are released, which would greatly
ease any enforcement process.
"As far as we know, there is no other whole business
securitisation that has this clause in it," said
Latham’s Mark Nicolaides, who also worked on the
The pledge agreement, and parallel release clauses included
in the security documents, are a WBS market first.
It’s hoped they may be incorporated into future
deals, to facilitate any subsequent restructuring
As in most restructures, the CoCom – as the
in-the-money creditors – prepared an enforcement
strategy to demonstrate to the company and junior noteholders
that it could get hold of the assets if it wanted.
This is usually eased by an intercreditor agreement, which
sets out the waterfall and security trustee’s
ability to release other claims.
However as Punch is structured as a WBS, there was no
cross-collateralisation and no intercreditor, making it
impossible to cramdown the junior noteholders through a court
release clause is standard in leveraged finance, but not in
securitisations," said Nicolaides. "So you
couldn’t leave the out-of-the-money creditors
behind with a classic share pledge enforcement and pre-pack,
which meant we had to go about it in a slightly more
In the absence of the pledge subsequently introduced into
the WBS structure, the CoCom had to work with the security
trustee to demonstrate to Punch and its shareholders that if
the notes defaulted, the CoCom could get access to the
"We had to unpick a series of locks to make sure the junior
noteholders and out-of-the-money shareholders realised that if
there was a default, they would lose everything," said
Nicolaides. "That was the key to getting the deal done."
terms of the restructure are available here.
Slaughter and May, Skadden Arps Slate Meagher
& Flom and Cravath Swaine & Moore
were unable to comment for this
billion restructure of two of Punch Taverns’
securitisation vehicles completed on October 8. A
debt-for-equity swap reduced the company’s debt by
£600 million. The stakeholders agreed on the plan in
June, two-and-a-half years after senior creditors first
discussed the possibility of a restructure.
leaves the junior noteholders in the two Punch securitisation
vehicles holding 85% of the equity in Punch
Latham & Watkins advised the CoCom, Slaughter and May
advised Punch, Freshfields Bruckhaus Deringer advised Deutsche
Bank as security trustee, and Allen & Overy acted for Citi
bank as liquidity provider.
Clifford Chance acted for RBS as
another liquidity provider, Cadwalader Wickersham & Taft
was counsel to MBIA, Linklaters advised mezzanine creditors,
and Ashurst advised the issuer and borrower of
Punch’s securitisation subsidiaries. Skadden Arps
Slate Meagher & Flom and Cravath Swaine & Moore also
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