EuroResource-Deals and Debt
Recent Developments
The UK—On 9 July 2014, the UK government began a period of consultation in relation to proposed changes to the Insolvency Act 1986 (the "Act") intended to ensure the continued supply of essential services to insolvent companies. The existing protections in section 233 of the Act have become outdated and are limited to supplies of gas, electricity, water and communications services. The current provisions do allow suppliers to insist on personal guarantees from insolvency office holders as a condition to continued supply, but they prevent suppliers from demanding payment of accrued charges. If implemented, the new proposals would expand the scope of services to include IT suppliers (e.g., providers of software, hardware and servers, electronic payment systems providers, website hosts and data storage providers) and will mean that suppliers cannot withdraw services due to a client-company's commencement of insolvency proceedings (and suppliers would no longer be able to rely on contractual provisions to this effect). In addition, suppliers would be prevented from imposing preferential terms, such as ransom payments or increased charges, as a condition to continued supply.
Protections for suppliers under the proposal include: (i) the limitation of the scope of the proposal to the key UK business rescue procedures (i.e., administration and voluntary arrangements); (ii) the continued ability to demand a personal guarantee from office holders for ongoing supply obligations; and (iii) a supplier's ability to stop providing goods or services if it remains unpaid for more than 28 days or is authorized to terminate a supply contract by the court or an insolvency practitioner. Obligations under supply contracts with companies in administration in the UK will rank as priority expenses of administration. These protections are similar to provisions in chapter 11 of the US Bankruptcy Code designed to ensure the continuity of these key supplies and to allow a debtor to continue operating pending its implementation of a reorganisation plan.
The consultation closes on 8 October 2014.
Italy—On 7 August 2014, the Italian Parliament converted into law Decree No. 91 of 24 June 2014 (the "Law Decree"), which introduced certain measures aimed at facilitating access to financing by Italian companies. These measures, which have now been confirmed by the Italian Parliament with very few alterations, include: (i) authorisation for Italian securitization vehicles and Italian insurance companies to lend in Italy; (ii) expansion of the assets eligible for investment by undertakings for collective investment to include receivables arising from financings granted out of their assets; (iii) broadening of the segregation regime (or "remoteness") applicable by operation of law to securitization transactions; (iv) extension of certain favorable domestic tax regimes already applicable to loan transactions; and (v) the introduction of withholding tax exemptions. A detailed discussion of the final Law Decree is available here.
Canada, the US and the UK—On 19 August 2014, the Canadian court overseeing the Canadian insolvency proceeding of now-defunct telecommunications company Nortel Networks Corp. ("Nortel") rejected a bid by investors to collect interest on approximately US$4 billion of bonds issued by Nortel. The ruling was handed down after the conclusion of what was originally supposed to be a joint session with a US court. However, US Bankruptcy Judge Kevin Gross, who is presiding over Nortel's chapter 11 case in the US, withdrew on the eve of the hearing after Nortel's US unit announced that it had reached a deal to pay the same bondholders more than US$1 billion in interest. According to the Canadian court, interest on the Nortel bonds stopped accruing when the former telecommunications giant filed for protection from its creditors around the world. Nortel's bonds, like the claims of the company's retirees and employees, are unsecured. The court concluded that allowing bondholders to collect interest while former workers took deep cuts would be unfair and run afoul of the principle of equal treatment under Canadian bankruptcy law. Judge Gross will review the proposed bond interest settlement in the US case in October.
Global—The long-running dispute over the payment of Argentina's sovereign debt has been particularly active in recent months and weeks. On 30 June 2014, Latin America's third-largest economy failed to make a US$539 million payment to bondholders after US District Judge Thomas Griesa ruled that the payment could not be made unless holdout bondholders from previous restructurings were also paid. Argentina has about US$200 billion in foreign-currency debt, including US$30 billion of restructured bonds.
On 28 July 2014, Judge Griesa authorized Argentina to make a one-time payment on restructured bonds issued under Argentine law because those securities cannot be distinguished from Argentine bonds issued to Spanish oil company Repsol SA earlier this year in compensation for the expropriation of its local subsidiary. The Repsol settlement bonds are not part of the long-running dispute between Argentina and holdout bondholders. "The court cannot enjoin payment on the dollar-denominated exchange bonds without also upsetting the Repsol settlement", Judge Griesa wrote in his ruling. However, the judge directed the parties to find a way to distinguish between the Repsol and restructured bonds before the next interest payment.
On 29 July 2014, holders of Argentina's euro-denominated exchange bonds urged Judge Griesa to issue a last-minute stay on his debt ruling that risks toppling the South American country into default. According to the exchange bondholders, "A default would undo much of the work this Court has accomplished over the last ten years and extend litigation here and around the world for years on end". The bondholders also disclosed that they had been in touch with other bondholders who, like them, would be willing to waive the "rights upon future offers" clause that prevents Argentina from settling with holdout investors on terms better than those accepted by the exchange bondholders.
On 30 July 2014, the Republic of Argentina defaulted on its sovereign debt for the second time in approximately 13 years when a 30-day grace period expired following a technical default that occurred on 30 June 2014. Earlier that day, Standard & Poor's Ratings Services downgraded Argentina's foreign-currency credit rating to selective default as the clock ran out on efforts to craft a last-minute deal to avert the country's second default. A "selective default" designation means the country is meeting its obligations on some bonds but not others.
On 31 July 2014, Argentina's government announced that the collapse of negotiations with the holdout bondholders was due to the "malpractice" of the US judiciary and denied that it had defaulted on its sovereign debt. At a news conference in Buenos Aires, Jorge Capitanich, Argentina's chief of the cabinet of ministers, blasted US courts for a lack of impartiality and criticized the performance of court-appointed mediator Daniel A. Pollack for failing to facilitate reasonable deal conditions that could be agreed to by Argentina, as a sovereign nation with legal and constitutional restrictions, and hedge funds holding bonds worth US$1.5 billion.
On 1 August 2014, the International Swaps and Derivatives Association, Inc. ("ISDA") announced that its Americas Credit Derivatives Determinations Committee resolved that a failure to pay credit event occurred with respect to Argentina. ISDA announced on 14 August 2014 that it would organize an auction to settle credit default swaps ("CDS") that reference nearly US$1 billion in Argentine debt on 21 August 2014. However, on 19 August 2014, the 15-member Determinations Committee voted unanimously to postpone the auction until sometime in September 2014. This means that CDS sellers with a net exposure of around US$1 billion must now pay out to investors who hedged against Argentina's sovereign debt default. According to ISDA's Determinations Committee, the auction will cover only CDS related to 11 Argentine debt issues with maturities in 2017, 2033 and 2038. Further information regarding the auction is posted on ISDA's website.
On 1 August 2014, Argentina informed Judge Griesa that the nation had lost faith in the mediator appointed to resolve the dispute, claiming that mediator David A. Pollack's pre-default statement that Argentina was in "imminent default" was "harmful and prejudicial" and asking that Mr. Pollack be replaced. Judge Griesa rejected the request and said talks would have to continue. The judge also upbraided Argentina at the hearing, saying that the country's obligations to pay holdout bondholders must be resolved. According to the judge, Argentina's pronouncements ignoring the facts amount to "half-truths" that are "false and misleading" and "do not comply with the law, which requires disclosure of facts."
On 6 August 2014, Judge Griesa issued an order barring Argentina from making payments on euro-denominated restructured bonds as part of a larger decision that forbade Argentina from paying holders of dollar-denominated debt. Certain holders of euro-denominated bonds, claiming that their debt is not covered by US law and that Judge Griesa exceeded his authority in blocking their payments, appealed the order to the US Court of Appeals for the Second Circuit on 19 August 2014.
On 7 August 2014, Argentina asked the International Court of Justice ("ICJ") in The Hague to hear a lawsuit it wants to commence against the US claiming that decisions by US courts in the dispute over payment of its restructured and nonrestructured debt have violated its sovereignty. However, the US would have to consent to the ICJ's jurisdiction for a lawsuit to move forward. Permission has been granted by the US in only 22 cases since the tribunal began operating in 1946. The US is unlikely to grant the request in the absence of any bilateral treaty that would require the US to accept the ICJ as a venue to resolve disputes with Argentina.
At a hastily convened hearing on 8 August 2014, Judge Griesa again chastised Argentina for publicly denying it defaulted on its debt last week, threatening a contempt order if more "false and misleading" pronouncements follow.
On 11 August 2014, a US magistrate judge granted holdout bondholder NML Capital Ltd.'s request to obtain information from numerous companies that the hedge fund claims are hiding US$65 million embezzled from Argentina's coffers, ruling against 123 Nevada entities the judge described as shell companies. NML together with other holdout bondholders is owed US$1.6 billion by Argentina. The judge directed the companies to provide information concerning their finances, or to provide a deponent, so that NML can attempt to locate funds that were allegedly embezzled by current Argentine President Cristina Fernández de Kirchner, her husband, and her associate Lazaro Baez.
On 19 August 2014, President Fernández de Kirchner announced in a nationwide address that, in an effort to sidestep the US court ruling that blocked payments on restructured debt and caused the nation to default for a second time in 13 years, the government will submit a bill to Congress that lets overseas debt holders swap into new bonds with the same terms but governed by domestic law. Payments will be made into accounts at the central bank instead of through Bank of New York Mellon Corp. ("BNY Mellon"), the current trustee. The offer signals the government's unwillingness to negotiate with holdout bondholders for a deal that would allow Argentina to return to overseas capital markets and bolster foreign reserves. However, a swap may be difficult to execute because any intermediaries assisting Argentina in the process could be sued for contempt of court, while investors who are not permitted to hold local bonds would be forced to divest their holdings.
At a hearing held on 21 August 2014, Judge Griesa sharply criticized the proposal, stating that it violates prior court orders and is therefore illegal. He also said he was "absolutely appalled" that Argentina had not notified its lawyers about the proposal before it was made public. However, the judge denied an emergency request by holdout bondholders to hold Argentina in contempt, emphasizing that imposing such a sanction would not push the parties any closer to a settlement.
Argentina's government on 22 August 2014 accused Judge Griesa of making imperialist comments against the nation. At a press conference in Buenos Aires, Argentine Cabinet Chief Jorge Capitanich stated that the judge's unfortunate and even imperialist statements constitute an undue interference with Argentina's sovereignty.
On 26 August 2014, Argentina's exchange bondholders sued BNY Mellon in London Chancery Court seeking to gain access to interest payments they are owed. Later the same day, Argentina revoked BNY Mellon's permission to operate a local representative office in Argentina after the bank refused to make interest payments owed to participating bondholders in July 2014 due to Judge Griesa's order prohibiting the payments.
Noteworthy
Jones Day advised DAB Bank AG, the direct banking subsidiary of HypoVereinsbank, in connection with the sale of an 81.39 percent stake in the bank to BNP Paribas Group at a price of €4.78 (US$6.42) per share, thereby valuing the stake at €354 million (US$475.4 million). The acquisition will give BNP Paribas Group a strong boost in the development of its digital banking and brokerage business in Europe by nearly doubling the number of its clients in this segment in Germany.
Jones Day is advising Norbert Dentressangle, SA, a leading Lyon, France-based international logistics, transport and air and sea company, in connection with its acquisition of US-based Jacobson Company from Oak Hill Capital Partners for US$750 million. Jacobson Company is a leading contract logistics and transport provider in the US. The transaction immediately positions Norbert Dentressangle as a leading third-party logistics provider in the fast-growing US market and increases the company's annual revenues by 15 percent.
Jones Day advised Project Oliver Topco Ltd. and its subsidiaries, which together trade as OfficeTeam, in connection with the sale of OfficeTeam to Better Capital PCC Ltd. for £80 million (US$135.8 million). OfficeTeam supplies office products and services in the UK.
