On the face of it, Redwood Master Fund has every right to be upset. An English court has forced it and other minority investors to accept a restructuring deal struck between their fellow lenders and a troubled borrower, Dutch cable company United Pan-European Communications (UPC).
The deal would force Redwood and the other funds to lend ?30 million to UPC so it could pay back other creditors. It is a decision that the funds’ lawyer, Tony Horspool of Cadwalader Wickersham&Taft, calls “taking money out of the pockets of one set of lenders and putting it into the pockets of others”.
In fact, a win for the funds would have frozen the syndicated lending market. If the judge had sided with minority investors on this case, any disgruntled creditor could have held its fellow bankers to ransom whenever a loan’s terms needed tweaking. On complicated deals, waivers and consents are negotiated frequently. And, at any time, one or more lenders might wish they could exit a deal.
Renegotiations became necessary for UPC after its parent defaulted on debt repayments. This triggered a credit event on UPC’s loans, to which Redwood and other funds had bought exposure. They had bought about ?65 million of the A tranche of UPC’s debt in the secondary market – a part of the company’s debt facility that had not yet been drawn. Following the cross-default, the company renegotiated all its debt with a group representing the majority of its creditors. But most of these investors held interests in an already-drawn B tranche as well as the undrawn facility.
Far from reducing the funds’ exposure, the deal that was struck required them to lend up to ?30 million to UPC under the A facility, so the company could pay back creditors holding the B tranche. For one investor – Goldentree MF – this meant paying out more than $10 million. Faced with a deal that was, in their lawyers’ words, “manifestly unfair”, Redwood and the other funds sought to challenge the restructuring in court.
Cadwalader Wickersham&Taft drew on case law to argue that majority decisions in such circumstances must take into account the interests of all lenders. The funds pointed to the judgment in British America Nickel v MJ O’Brien that concluded: “The power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only.”
Justice Rimer said their case hinged on two points: whether majority lenders had negotiated with UPC in good faith and whether a reasonable person would consider the deal in the interests of all the lenders as a group.
On the first point, he refused to believe that majority lenders had purposefully discriminated against Redwood and the other funds when negotiating. The restructuring was the result of bargaining that the banks could not wholly control, he said. And the workout included elements that benefited all classes of lenders.
But it was his judgment on the second point that pleased bankers most. Rimer said it was all right for individual lenders to negotiate in their own self-interest even when that conflicted with the wishes of others. “By signing up at the outset, each lender submits to the decision of the majority lenders at important forks in the road,” he said. “The decision of the majority to allow the company to trade would be exactly the type of decision that the [majority voting] clause was directed at enabling the majority lenders to make.”
The judgment affirms the meaning of the majority voting provisions in loan documents that bankers would expect, and shuts the door on minority complaints during workouts. This looks to be bad for smaller investors. But those buying debt should know they will be bound by majority decisions in a restructuring.
John O’Conor, a financial litigation partner at Allen&Overy, who represented the leading majority bank, Toronto Dominion, says: “The decision confirms that the majority voting provisions in loan agreements work as they are supposed to.” Maurice Allen, a banking partner at White&Case, which represented UPC, adds: “Justice Rimer was very clear. He recognized that majority voting provisions exist precisely because there are likely to be conflicts of interest between different lenders.”
The judgment is good for borrowers, too. Companies want to know that renegotiations with creditors will be quick if they become necessary. John Thirlwell, a director at the British Bankers’ Association (BBA), welcomes Rimer’s accordance with international best practice in banking, which he believes is to keep companies solvent. “The judgment appears to concur with Insol’s principles of best practice, which the BBA has supported and endorsed,” he says.
Nevertheless, the funds are considering an appeal, though they will have lost as much as $1.5 million for their troubles so far. Banking litigators say others will try similar tactics, if only to disrupt restructuring negotiations. Nor will they necessarily care whether they win or lose. Redwood could have profited simply by harassing fellow bankers enough to get bought out. For months UK company Colt Telecom has been locked in similar litigation with aggressive bondholders, prompting fears that vulture funds will use the threat of litigation to get what they want in workout talks.
White&Case’s Allen says banks should keep a record of how they account for minority views in restructuring negotiations, to be safe. For now he is happy with an industry victory. “The funds were assuming someone would back down and it wouldn’t be them. But this time the empire struck back,” he says.
Rob Mannix (mannix@iflr.com) is editor of International Financial Law Review
