Using the Chapter 11 toolkit to maximise value in cross-border restructurings
David Turetsky, Will Guerrieri, Aaron Colodny, Livy Mezei and Kathryn Sutherland-Smith of White & Case explain why Chapter 11 is an attractive restructuring tool for international companies and consider how it recently assisted Hertz’s global business
Over the last 18 months, an increasing number of global companies (including companies based outside of the US) have used Chapter 11 to maintain their businesses as going-concerns and maximise value for their stakeholders. The Covid-19 pandemic significantly impacted nearly every segment of the global economy, with many global firms seeing their worldwide revenue dry up overnight. Faced with an unprecedented need to implement a coordinated global reorganisation process, many companies, regardless of their jurisdiction of incorporation or the location of their headquarters, looked to Chapter 11 of the US Bankruptcy Code to implement their restructuring strategies.
This article discusses certain key features of the Bankruptcy Code and recent outcomes that underscore why Chapter 11 is an attractive restructuring tool for international companies, particularly in today’s business environment where operations, creditors, and employees frequently span the globe. Not only does Chapter 11 facilitate de-leveraging a company’s capital structure, including by transitioning ownership from existing equity to pre-insolvency creditors, but the ‘toolkit’ provided by Chapter 11 can also be used to build consensus across competing stakeholder groups and maximise the value of the assets of an distressed company in a manner that cannot be matched by many other insolvency regimes.
This article concludes with a case study of the recent restructuring of Hertz’s global business, which demonstrates how the strategic use of relief available under Chapter 11 can be utilised by international companies to maximise the value of their businesses.
Chapter 11 provides a centralised forum for reorganisation that allows multinational organisations to continue their global business and operations, under the supervision of the bankruptcy court
As an initial matter, Chapter 11 is accessible to virtually any international entity regardless of where it is incorporated or its operations are located (11 U.S.C. §109(a)). To be eligible for relief under Chapter 11, a company need only have assets in the US. Many bankruptcy courts have concluded that this requirement is satisfied by de minimus amounts held in bank accounts or funds deposited in an attorney’s trust account. See e.g., In re Glob. Ocean Carriers Ltd, 251 B.R. 31, 39 (Bankr. D. Del. 2000) (finding that funds in bank account, irrespective of quantum, and undrawn retainer satisfied the eligibility requirements to file for Chapter 11); In re McTague, 198 B.R. 428, 431 (Bankr. W.D.N.Y. 1996) (permitting entity with mainly foreign operations and assets to be a debtor in a Chapter 11 case upon showing of $194 in a US bank account).
A key tenet of Chapter 11 is that the existing board and management continue to run the business while in Chapter 11. The company is also typically able to continue its operations and global cash management systems substantially in the ordinary course, under the supervision of the bankruptcy court upon receiving customary ‘first day’ relief.
A coordinated Chapter 11 case is particularly appealing where the alternative is a series of potentially uncoordinated, value-destructive insolvency processes across multiple different jurisdictions, including those that have insolvency regimes that are significantly more creditor-friendly than Chapter 11, that divest management of control of the company, or that are likely to result in liquidation.
Flexibility and protection
Chapter 11 provides flexibility and increased lender protections for new financing, allowing companies immediate access to the capital necessary to avoid liquidation and to fund a reorganisation process for the benefit of their stakeholders
A Chapter 11 debtor may incur new money financing to fund the operational and administrative costs of the Chapter 11 cases with the bankruptcy court’s approval. This financing is commonly referred to as debtor in possession or ‘DIP’ financing. DIP financing typically has super-priority status and must be repaid before all other administrative claims and preexisting unsecured debt pursuant to a debtor’s Chapter 11 plan, unless the lender accepts alternative treatment. 11 U.S.C. § 364.
Additionally, in almost all cases, the bankruptcy court will also approve the debtor’s grant of new security interests in favour of the DIP lenders, and, can even grant the imposition of security interests that prime existing secured creditors if the debtor can demonstrate (i) that no other, more favourable credit, was available and (ii) that the interests of such secured lenders in their collateral are ‘adequately protected’, for example through a replacement lien, periodic payments or any other protective measure that provides the creditor with the ‘indubitable equivalent’ of its interest in the property (11 U.S.C. § 361). Additionally, and that no other, more favourable credit was available. As a result, existing secured lenders often seek to provide DIP financing to protect their position in the capital structure. A lender can also use a DIP facility to exert influence over the Chapter 11 case by requiring case milestones, intervention rights and other contractual promises.
“Chapter 11 is accessible to virtually any international entity regardless of where it is incorporated or its operations are located”
The spectre of DIP financing can also be used as a negotiating tool to maintain a going concern when ‘super-senior’ sources of financing are prohibited by contract or require unanimous consent. The prospect of third-party DIP financing can also motivate hold out creditors to come to the negotiating table for fear that they will lose their senior status. For instance, in the recent €2 billion (approximately $2.3 billion) comprehensive financial restructuring of Swissport International and its affiliates, Swissport was able to use the leverage of the possibility of a priming DIP loan to negotiate a consensus amongst its many international creditor constituencies.
Swissport is the world’s leading provider of ground and cargo handling services, with operations conducted by 200 legal entities across 47 countries. Due to the complexity arising from the cross-border nature of its business and the fluidity of its negotiations with its creditors, preparations for Swissport’s reorganisation included contingency planning for a Chapter 11 case that would serve as the central forum for Swissport’s restructuring as well as various parallel insolvency proceedings, spanning three other jurisdictions. Swissport was able to advance its restructuring negotiations with its senior secured creditors and junior creditor stakeholders by soliciting and evaluating financing proposals from third parties, including options that would have been implemented through Chapter 11 and utilised DIP financing.
Among other things, Swissport’s preparedness to pursue Chapter 11 as an option helped prompt the senior secured creditors to further engage with junior stakeholders, improve the terms of the company’s financing, and permit an M&A process to ‘market check’ Swissport’s value. Swissport and its stakeholders ultimately reached an agreement on the terms of a comprehensive restructuring, which equitised approximately €1.5 billion of debt, cancelled approximately €500 million of additional debt, and raised €500 million of new liquidity. The reorganisation was ultimately implemented through two separate English schemes of arrangement, two Chapter 15 processes to recognise and grant full force and effect to the English schemes, and a ‘prepacked’ English administration.
Case study: Hertz
Hertz uses Chapter 11 to achieve a global restructuring that provides 100% recovery to creditors and returns more than $1 billion to shareholders
At the time that Hertz filed for Chapter 11 in May 2020, the reduction of air travel and the global economic shutdowns precipitated by the Covid-19 pandemic had reduced Hertz’s revenue worldwide revenue to less than 10% of what they had been in 2019. Additionally, the plunge in used car prices resulted in a dramatic increase in the monthly rent that Hertz was obligated to pay under its asset-backed vehicle financing structure, which threatened to rapidly deplete Hertz’s liquidity.
At the time of Chapter 11 filing, prospective recoveries for Hertz’s creditors were highly uncertain. Using the tools available through Chapter 11, Hertz ultimately restructured its global operations through a plan of reorganisation that reduced the company’s global debt by approximately $5 billion, provided all creditors with payment in full, and provided recoveries to existing shareholders estimated to be in excess of $7. Under the reorganisation plan, Hertz successfully raised approximately $5.9 billion of new equity capital, $2.8 billion of new corporate financing, and $7 billion of asset-backed vehicle financing on favourable terms, in addition to certain debtor in possession and interim financing raised during the Chapter 11 case. Hertz achieved this remarkable result through its strategic use of Chapter 11’s value-maximising provisions.
First, Hertz focused on solving its liquidity issues. Its US entities filed for Chapter 11, triggering the protection of the automatic stay, which as a matter of US law, applies to the worldwide assets of the debtors. While the stay is not automatically recognised in courts outside of the US, it is generally effective against the majority of a debtor’s foreign financial creditors, as most large institutions have assets or businesses located in the US and are accordingly unwilling to violate the Chapter 11 stay and risk sanctions imposed by the US bankruptcy court.
Accordingly, the debtors were able to obtain breathing room from the claims of their domestic US creditors and international financial creditors through filing for Chapter 11. Moreover, Hertz obtained court orders shortly after filing its petition for bankruptcy that allowed it to pay the majority of its prepetition employee entitlements, along with the claims of its critical and foreign vendors, which minimised disruptions to its business and allowed the company to focus on its immediate restructuring efforts and ultimately developing a plan of reorganisation.
Additionally, Hertz took advantage of section 365 of the Bankruptcy Code to negotiate important reductions to its monthly rent payments due under its vehicle leases. Section 365 of the Bankruptcy Code allows the debtor to ‘assume’ and thereby maintain valuable executory contracts and leases, while ‘rejecting’ burdensome ones. Section 365 also effectively suspends a debtor’s obligations to make payments under personal property leases during the first 60 days of the Chapter 11 case, and provides that the debtor is required to fully perform its obligations thereafter unless the court orders otherwise based on the equities of the case.
Hertz did not make payments under its vehicle leases during the first 60 days of the Chapter 11 case and used this breathing room to successfully negotiate with its vehicle lenders. Notably, the prospect that Hertz could reject certain of its vehicle leases or seek modifications of its lease obligations based on the equities of the case, provided Hertz with leverage to negotiate both interim and final deals with its lenders, which significantly reduced its contractual rent payments.
Other international companies’ have also leveraged their ability to reject contracts to further their restructuring efforts. For example, a number of airlines including LATAM Airlines, Avianca, Aeroméxico and Philippine Airlines filed for Chapter 11 and leveraged rejection to negotiate better terms, such as power-by-the-hour arrangements, which are aircraft operating lease contracts pursuant to which the lessor retains ownership of the aircraft and the airline uses the aircraft at a fixed cost based on the number of hours used, or rid themselves of burdensome contractual obligations.
Second, Hertz successfully raised a $1.65 billion DIP financing facility, to fund ongoing operations and the equity contributions to fund its new vehicle purchases. Hertz also raised a $4 billion facility to fund the purchase of new vehicles during the case, which was essential to maintaining a competitive business. The protections provided under the Bankruptcy Code for new money financing were critical to both financing transactions.
Third, Hertz took advantage of its exclusive right to propose a plan of reorganisation under the Bankruptcy Code to develop and pursue a highly competitive plan process. That process was the key to maximising the value of Hertz’s business and recoveries to its stakeholders. The automatic stay exclusivity provided by Chapter 11 allowed Hertz the breathing space and opportunity to orchestrate this competitive process without the risk of foreclosure, compelled asset sales or imposition of trustees. The plan process would not have been possible in many other international jurisdictions which divest debtors of control of their restructuring process.
Initially, Hertz received expressions of interest during the initial phase of its plan process, that it believed undervalued the company and would have left limited recoveries for Hertz unsecured creditors and no recovery for equity. Rather than passively asking the parties to enhance their proposals, Hertz developed its own proposal that laid out the terms of a plan of reorganisation and related financing that would be acceptable to Hertz.
“A key tenet of Chapter 11 is that the existing board and management continue to run the business while in Chapter 11”
In less than a week, one prospective plan sponsor group, led by Knighthead and Certares, responded with terms that dramatically increased unsecured creditors’ recoveries to 70 cents and provided such creditors with the option to participate in the reorganised equity. Thereafter, Hertz filed its initial plan of reorganisation reflecting the framework sponsored by the Knighthead/Certares group.
Around this time, however, Hertz’s unsecured bond started trading above the contemplated 70 cent recovery. To increase competitive tension and pursue a superior outcome, Hertz renewed conversations with another prospective plan sponsor group led by Centerbridge and Warburg Pincus. That group ultimately worked with Hertz’s unsecured bondholders to formulate a competing proposal to the Knighthead/Cetares bid.
Because neither of the competing sponsor groups’ proposals was fully committed, and to further enhance competitive tension, Hertz filed an amended ‘jump ball’ plan of reorganisation which did not specify a plan sponsor group but contained enhanced terms for Hertz’s reorganisation. The disclosure statement accompanying this amended plan further provided that Hertz intended to continue their competitive process to select the plan sponsor group. Thereafter, Hertz terminated the Knighthead/Centares deal in favour of the Centerbridge group’s proposal and filed a further amended plan, under which the bondholders would receive approximately 48% of the new equity of the company or a 75% cash payout, plus the right to purchase additional common equity at plan value.
However, the Knighthead-Certares group remained interest in providing a superior plan. Hertz sought to bring its plan formulation process to a close in a transparent, efficient and valueenhancing manner through a court-approved auction process to select the ultimate sponsor of Hertz’s plan of reorganisation. After multiple rounds of bidding, Hertz selected a group led by Knighthead, Certares, Apollo, and, an ad-hoc group of existing Hertz shareholders as its plan sponsors.
The final plan implied an estimated $6.929 billion in total enterprise value, representing an increase of almost $2.1 billion from the first plan filed by the debtors in March 2021, and provided for payment in full of all secured and unsecured claims and for returns in excess of $1 billion to existing shareholders. The court-approved auction procedures delivered the flexibility and finality needed to bring Hertz’s reorganisation to a successful conclusion.
Hertz’s restructuring process demonstrates the value that can be unlocked for a global company through a well-planned Chapter 11 case, where the flexible, debtor-protective provisions of the Bankruptcy Code can be deployed to the benefit of all stakeholders, maximising the value of the Chapter 11 estates and not just transitioning ownership from one stakeholder group to another.
Any views expressed in this publication are strictly those of the authors and should not be attributed in any way to White & Case LLP.
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David Turetsky is a partner in the financial restructuring and insolvency practice at White & Case. He represents companies and other parties in complex business reorganisations, out-of-court restructurings and workouts, debt restructurings, and insolvency matters.
David has advised on the restructuring of billions of dollars of debt across a variety of industries and jurisdictions. He has played a significant role representing numerous companies in their Chapter 11 and out-of-court restructurings, including: Archstone, Atlas Resource Partners, DS Waters, FiberMark, GenTek, Herbst Gaming, Hertz Global Holdings, Joerns Woundco, PQ Licensing SA (Le Pain Quotidien), Residential Capital, Savient Pharmaceuticals, Spectrum Brands, Sterling Chemicals, Syms and Filene’s Basement, Techniplas, and Winn-Dixie Stores.
David has been recognised by M&A Advisor, Turnaround & Workouts, Lawdragon, BTI Consulting, and selected for inclusion in “Best Lawyers of America” and Euromoney’s Banking, Finance & Transactional Law Expert Guide for 2021.
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Will Guerrieri is a partner in White & Case’s financial restructuring and insolvency practice and is based in the Chicago office. He has considerable experience representing distressed companies in Chapter 11 reorganisations and out-of-court restructurings.
In addition to his experience representing companies in their restructuring efforts, Will’s practice focusses on protecting and advancing the interests of investors, financial sponsors, and corporations with respect to distressed companies, asset acquisitions, and other special situations.
Will is a graduate of University of Notre Dame and holds a JD from University of Chicago Law School.
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Aaron Colodny is an associate in the White & Case’s financial restructuring and insolvency group and is based in the Los Angeles office.
Aaron’s practice focuses primarily on bankruptcy and financial restructuring matters, including representation of debtors, creditors (senior secured and unsecured), purchasers and other interested parties in Chapter 11 bankruptcies, out-of-court workouts, and related transactions.
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Livy (Xingyue) Mezei is an associate in the White & Case’s financial restructuring and insolvency group. Her practice focuses on financial restructuring matters, including representations of debtors, creditors, and other interested parties in Chapter 11 bankruptcies and cross-border proceedings.
Livy is a graduate of Sun Yat-Sen University in China and completed her JD from the University of Illinois. She has finished a bankruptcy LLM programme at St John’s University School of Law and has previously interned for Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware.
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Kathryn Sutherland-Smith is an associate in White & Case’s financial restructuring and insolvency Group in New York. Her practice involves representing debtors and creditors in a variety of corporate restructuring matters, including Chapter 11 cases, cross-border reorganisations and distressed investments.
Prior to joining White & Case New York, Kathryn practiced in Melbourne, Australia for several years. She has a bachelor of laws from Monash University and has completed a LLM from Columbia University.