One of the most challenging issues that parties to a restructuring face is how to best organise and negotiate with the various creditor institutions involved to secure the requisite creditor consent level required to implement a transaction. Almost all large debt restructurings involve a lender syndicate or creditor group made up of different organisations, potentially with conflicting motives. Ensuring smooth and effective communication and discussion between the creditors is key to being able to deliver a deal.
Over the past 10 years, a large majority of multi-creditor restructurings in Europe have involved the appointment of a creditor committee, nominally formed to represent the creditors or groups of different creditors throughout the restructuring process. An ad hoc committee is the term used to describe a small group of selected lenders or bondholders who will typically liaise with a debtor as a temporary forum ahead of the debtor submitting a detailed refinancing or restructuring proposal to the wider group of lenders or bondholders.
This chapter will consider the role and purpose of an ad hoc committee from a creditor perspective, including why and how its role and purpose can change during the course of a restructuring; some of the key issues and disadvantages that creditors (both committee members and non-committee members) should consider; and the potential role of an ad hoc committee post restructuring.
Role and purpose
The traditional view of an ad hoc committee is that it acts as an informal sounding board for the debtor (or, in some cases, the shareholder) to discuss potential restructuring options and, once a proposal has the support of the committee members, to then help secure the requisite creditor consents required for implementation.
From a creditor perspective, however, the existence of an ad hoc committee has four key advantages. It provides for negative control where the members of the committee together hold a blocking minority in the debt (i.e., their consent is required for a deal to be implemented). It creates a framework for the creditors to obtain information from the debtor and establishes an organised process for the restructuring negotiations. Finally, it creates a public voice for the creditors.
Provides for negative control
The existence of an ad hoc committee often provides the creditors with a blocking minority if (by virtue of their combined debt holdings) the support of the committee is needed to implement a restructuring. This can be an important negotiating tool, giving creditors leverage during the discussions. As a result, the views of the committee are more likely to be taken into consideration. Even if committee members collectively do not hold sufficient debt to constitute a blocking minority, the existence of a single creditor group can still prevent a debtor or shareholder from using a ‘divide and conquer’ approach to creditor negotiations.
Having a specific group of creditors that is focused on the deal terms that are being proposed, and with whom the stakeholder must negotiate, can also help stop a debtor or shareholder from pushing through an unfavourable proposal simply because of disorganisation on the part of the creditors.
Regardless as to whether the committee members have a blocking stake, there is no doubt that giving a single voice to a group of creditors will give them an opportunity to exert more pressure on the process. Similarly, non-committee members often get a better result when there is a strong committee, but must always beware of committee members trying to further their own economic interests at the expense of the general body of creditors.
Creates a framework for creditors to obtain information
One of the key roles of an ad hoc committee is to provide a method for creditors to obtain information. Debtors and shareholders will often be reluctant to provide commercially sensitive information to the wider creditor group, as this results in the information becoming public, which could have a negative impact on their business. A common example is when the debtor might not be able to make an interest coupon payment, and public disclosure of this could have a significant impact on its suppliers, trade creditors and employees.
Agreeing a process that allows the disclosure of market and commercially sensitive information to a small number of creditors (i.e., the committee members) on a confidential basis allows the debtor to avoid having to disclose sensitive information to the market until a proposal has been negotiated and is being presented to the wider creditor group.
The creation of a framework that allows this is often considered an important first step for any ad hoc committee. Committee members will be restricted from trading public securities while in receipt of material non-public information (MNPI), which will have a commercial impact on their institutions. Therefore, having an appropriate mechanism that obliges the debtor to ‘cleanse’ the committee by publicly disclosing MNPI provided to the committee members is often an early focus. This is especially important in the context of a bond restructuring (which usually involves publicly listed debt securities), during which ad hoc committee members will only wish to be restricted from trading for a limited period of time.
Having an agreed structure in place will also put pressure on the debtor or shareholder to disclose the material requested by the committee, and can help facilitate the flow of information from an earlier stage. This is very helpful for the restructuring process, especially as there is often an obvious tension between the debtor’s desire not to disclose sensitive information and the need for creditors to obtain this.
Establishes an organised process for negotiations
For the shareholder or debtor, the establishment of an ad hoc committee provides an organised procedure for approaching the creditor discussions, giving them a single point of contact. This is also a real benefit from a creditor perspective for three main reasons.
First, support for a proposal from an ad hoc committee will influence the wider creditor group and make successful implementation of the proposal more likely. Even when the ad hoc committee represents, or the proposal already has the support of, the majority required to allow for its implementation, obtaining the highest creditor consent level possible will decrease implementation risk. Additionally, having a committee that understands why the various economic and commercial points have been negotiated and acts as a contact point for questions, and the committee’s lawyers who can provide guidance on the long-form documentation, will also greatly increase the chances of other creditors supporting a proposed deal. This will help facilitate a quicker and smoother implementation process.
Second, the formation of a committee can help creditors take control of the restructuring process. When the debtor’s financial problems are publicly known, creditors are likely to become anxious about delays in initiating a process to resolve those problems. Setting up a committee and approaching the shareholder in an organised fashion can help the creditors take control of the situation, and sets the scene for a creditor-led negotiation process.
Third, shareholders and debtors often try to justify a reluctance to engage with creditors on a lack of organisation, and not having an identified group of creditors that will lead the discussions. If the creditors take the initiative and form a committee, which can then approach the shareholder and coordinate the negotiations, this will put pressure on it to engage in the process. It is key to start discussions with the shareholder or the debtor (as considered appropriate) at an early stage, ideally as soon as creditors become aware of any potential default, or where there is an upcoming maturity and lack of confidence for a refinancing. Early engagement makes a creditor-led proposal easier, whereas a lack of engagement from creditors often results in the debtor or shareholder forcing through an extension of the debt, which might not be the best outcome for the creditors.
Gives the creditors a public voice
The creation of an ad hoc committee also gives the creditor group a recognised public voice, as views, statements or press releases to the market from an ad hoc committee tend to have more credibility as being informed, unified views of the creditors compared with statements from individual creditors. This can be used to build market confidence, which is extremely helpful, especially when key suppliers, trade creditors, customers or government agencies may be anxious about the financial difficulties and future of the group.
In some cases, key suppliers to a debtor group (for example, the providers of credit card or other corporate banking facilities) may even ask for some form of comfort from the most significant creditors. Having an ad hoc committee that is able to speak to these key providers, and confirm that they are working towards a consensual and solvent restructuring of the group, can have important commercial benefits. This is especially true when there is any form of debt-for-equity swap and the creditors are likely to take control of the business post restructuring.
Additionally, in the same way that publicly confirming their support for a proposal can help with a smooth implementation, publicly announcing or expressing the views of the ad hoc committee to the press during the negotiation process can also put pressure on an unhelpful shareholder or other stakeholder group.
The changing role of an ad hoc committee during a restructuring
The quantum of debt that is represented by members of an ad hoc committee can fluctuate over time. If any committee member sells down its position during the process, a committee that originally held a majority of the debt may later only constitute a minority of the creditors. Clearly this will impact the leverage that the committee has and the positions that its members will take during the process. There have been multiple examples of this occurring in high-profile restructurings.
In this context, especially when one investor (who is not a member of the committee) emerges as the largest debt holder, the role of the committee will change significantly. Generally, the remaining members of the committee (i.e., those who have not sold down their debt positions) will fight to retain their status as an ad hoc committee. This is usually because: (1) the debtor has likely given them fee coverage for their advisers; and (2) they want to remain involved in the negotiations to protect their positions. However, the focus of the committee will shift. Instead of leading the negotiations and putting together the proposed deal structure, the committee will concentrate on protecting the rights of the minority creditors, which are often heightened when there is one investor that controls the majority of the debt.
Key issues for non-committee members to consider
The benefits of an ad hoc committee from the perspective of the non-committee members may appear to be obvious: essentially, that other creditors contribute a huge amount of management time and specialist restructuring and turnaround knowledge to guide the process and ensure that a restructuring is conducted in an efficient and orderly manner, hopefully on the best terms possible for the creditors. In any distressed situation, the result of doing nothing is often insolvency or an extension of maturity with no economic upside. Having another creditor institution do the hard work to prevent this happening is usually viewed as a benefit.
While ad hoc committees cannot bind other creditors to a deal and are not legally ‘acting for’ the wider creditor group, there is a common misconception that a committee is representative of the creditors as a whole. Creditors should always be aware that members of an ad hoc committee may have different motives to others in the wider creditor community, and their duties are only to their own institutions. Therefore, other creditors should expect that individual members of an ad hoc committee will act as self-interested economic entities. If a particular deal seems like the best outcome for a member’s individual institution, it is likely to support and push for that deal, regardless of how it impacts other creditors.
As a result, there are scenarios where the members of an ad hoc committee may drive a deal that benefits themselves, even at the expense of other creditors. Therefore, non-committee members should carefully consider the extent to which their interests would align with the members of the ad hoc committee, and should not automatically assume that their interests are being looked after by the committee. This is especially the case when an ad hoc committee has been specifically formed to protect the interests of a particular subset of creditors.
A good example is when there is additional economic value through the provision of new money. Usually all creditors will be given the opportunity to subscribe for a (normally pro rata) portion; however, there have also been examples of a committee opting to provide all of the new money itself, and therefore denying the other creditors any associated upside. In some cases, other creditors (who do not wish to put up new money) may view this as an advantage; however, when the provision of new money comes with a perceived upside (e.g., a share of additional equity), non-committee members may feel disadvantaged by not being given the opportunity to participate.
Even when the same deal terms are being offered to all creditors, a tactically minded ad hoc committee may take advantage of information asymmetry to put themselves in a better position when compared with the wider creditor community.
Other factors may also lead to differences in approach being taken by individual creditors. Banks and funds could well have different entry prices into the debt (par versus below par); different timescales for realising value; different appetites for holding equity or equity-like instruments; and different exposures to the debtor group (either through other debt or equity instruments or potentially through the writing or buying of credit default swaps). For example, an ad hoc committee comprised mainly of traditional banking institutions may have a primary objective of minimising the write down of debt for balance sheet provisioning purposes, even if the long-term sustainability of those debt levels is sub-optimal. Conversely, secondary fund investors who have bought the debt at a discount tend to drive towards a more sustainable long-term model. As a result, the final outcome of the restructuring is likely to differ depending on the type of institutions that the ad hoc committee is comprised of. Creditors should consider the identity of the committee members, which may give a clue as to their likely motives.
Where the restructuring involves multiple classes of debt, it is common to have a different committee formed for each creditor class. This is important when value breaks in the debt, and, therefore, each different creditor group needs to be separately represented in the negotiations. There have, however, been cases when senior and mezzanine creditors have formed a joint committee, though this is usually only when there are large creditors with significant cross-holdings. Regardless of which debt instruments are held by the members of a committee, individual creditor institutions will always be driven by different commercial factors, and non-committee members should not assume that the views of a committee are in line with their own.
Disadvantages of becoming a member of an ad hoc committee
While an ad hoc committee may create multiple advantages from a creditor perspective, there are some potential drawbacks that should be considered prior to joining any committee. A potential committee member should bear three main points in mind:
- that access to MNPI will restrict trading;
- reputational concerns; and
- time, costs and potential liability.
Access to MNPI will restrict trading
One of the main concerns for committee members is that they will be restricted from trading because of the nature of the information they will receive in that capacity. Even if it is only for a relatively short period, any restriction on trading is often viewed as one of the main disadvantages of joining a committee. All financial institutions are sensitive to ensuring that proper protocols are followed with regard to trading while in possession of MNPI, and while the issue is heightened when publicly listed securities are involved, it is still relevant in the context of private bank debt.
As explained above, one of the key roles of an ad hoc committee is facilitating the disclosure of information that, in the context of a restructuring, is highly likely to include MNPI. As a result, one of the first steps that a committee will take is to agree a contractual cleansing mechanism with the debtor setting out when and how MNPI provided to the committee will be disclosed to the market. Until all MNPI provided to the committee has been made publicly available, the committee members will remain restricted from trading the relevant securities.
Committee members should ensure that the cleansing regime provides for specific cleansing dates (i.e., dates when the MNPI provided to the committee will be made public) so that they are only restricted for a limited period of time. There also needs to be a wide description of what constitutes MNPI; essentially any information that has been provided to any committee member that may restrict them from trading any kind of security in any jurisdiction.
Given the serious commercial impact of any trading restrictions, committee members should also negotiate for the ability to ‘self-cleanse’, i.e., disclose any relevant MNPI to the market themselves. This would be exercised if the debtor fails to make the required disclosures, or when there is any disagreement as to what needs to be disclosed to allow the committee members to trade. This is a sensitive area for shareholders and debtors who will wish to protect commercially sensitive business information, but it is very important for a committee to ensure that an appropriate and robust regime is agreed prior to receiving any MNPI.
There are two main concerns that may arise with respect to reputation.
While, from a legal perspective, being part of a committee does not result in its members formally representing the broader creditor group, some institutions have taken the view that, at least from a reputational perspective, there is some form of implied duty of care to other creditors. Their concern is that if, for any reason, the end result benefits (or appears to benefit) a committee member disproportionately relative to any other creditor, this will reflect badly on the individual institutions involved. Significant creditors may not wish to rule out the possibility of a ‘sweetheart’ deal with the shareholder by virtue of their membership of a creditor committee and, therefore, may not want to form or join a committee for reputational reasons.
When a large investor (or potentially two investors working together) holds a sufficient quantum of the debt to enable it to deliver a deal without the support of other creditors, they may also consider the formation of an official committee as being an unnecessary use of time and work.
The second reputational concern is that an unsuccessful restructuring, where the business does not recover, requires a second restructuring or becomes insolvent shortly afterwards could reflect poorly on committee members.
The identity of the committee members will often be widely known in the market, and each of these institutions will likely devote considerable restructuring knowledge and time to the process. If it ultimately becomes clear that the terms of a restructuring were not sufficient to ensure the ongoing viability of the underlying business, institutions will be sensitive to their perceived role in putting the original deal together. This is especially relevant for funds who pride themselves on their ability to turn around companies or who have other parts of their businesses that focus on investing in private equity.
Time, costs and potential liability
The third main concern for committee members is the time and cost commitment, and whether they may incur any liability as a result of taking on this role. Here, the type of committee and the nature of its formation are likely to be relevant.
A coordinating committee is more likely to receive formal recognition from the debtor. It is common for the debtor to contractually agree to provide a coordinating committee with fee cover for its advisers, an indemnity for any potential liabilities, and to pay members a fee for the work involved in this role.
An ad hoc committee, however, is less likely to receive recognition from the debtor. Therefore, the debtor is less likely to provide fee coverage, any indemnity, or any agreement to pay any work fees, at least at the outset. Ad hoc committee members will fight hard to get these as the process evolves, with their leverage being greatest when the debtor first needs the committee members to take certain actions (e.g., agree to a standstill or waiver request), but there is likely to be a period when committee members are incurring costs (e.g., financial and legal adviser fees) with no agreement for reimbursement from the debtor.
However, even when the debtor provides fee coverage, indemnities and work fees, committee members should be aware of the commitments that they are undertaking. Aside from the financial commitments, it is easy to underestimate the amount of time that is involved. There will be an expectation that all committee members will attend regular calls, communicate with the other creditors, consider the legal and financial advice that is being provided to the committee and attend meetings to negotiate with other counterparties.
The nature of committee means that the agreement of each member is required before action can be taken by the committee or their advisers. Some committees will expressly agree that actions can be taken with the consent of a majority of the members, but even in these circumstances, taking any form of action by way of a committee is not always efficient. Additionally, the levels of experience will differ between the different members, which some may find frustrating.
Sometimes less experienced members will be less focused on exactly what needs to be done, which can cause friction between members, especially as they will be sharing the costs of adviser fees. Even when a debtor has agreed to provide fee coverage, if there is any shortfall, committee members will be obliged to fund the costs of the various advisers that the committee has appointed during the process. This is usually done pro rata to their debt holdings and regardless of which individual committee members have provided the day-to-day instructions to the advisers.
With regard to any potential liability, a well-advised committee will ensure that exculpatory language is included in all legal documentation to try to reduce this risk. In practice, it is actually quite rare for committee members to be sued (in the United Kingdom at least) as a result of their role on the committee, but members should ensure that all appropriate steps are taken to limit this.
The role of an ad hoc committee post restructuring
A recent and interesting evolution in the role of ad hoc committees is its position post restructuring. Traditionally, a creditor committee is disbanded upon completion of a restructuring, however, in a number of recent transactions, creditors have acknowledged the ongoing need to monitor the business post restructuring. This has led to the creation of new committees, usually comprised of the pre-restructuring creditor committee members, to help with the ongoing governance and monitoring of the business.
When the restructuring has involved some form of debt-for-equity swap, there needs to be a shift in the mindset of the creditors – as new owners of the debtor group and investors in the equity, they will need to focus on the long-term growth of the business and develop an appropriate exit strategy. It is not that uncommon for a creditor syndicate to be comprised of 150-plus lenders or bondholders; unless there are one or two significant holders taking on the role of sponsor, a stable investor committee will be needed to help ensure the smooth running of the business.
Depending on the situation, the issue of information and trading becomes relevant again. Investors may need to decide whether they wish to remain public and able to freely trade their debt, or whether they wish to receive MNPI about the business and be able to make decisions in their capacity as equity holders.
The existence of an ongoing committee is also very helpful when creditors consider that a second-round restructuring, or a sale of the asset, may be required in the medium-to-near term.
Having a group of investors that is in regular contact with management and any investor-appointed directors is very helpful for many of the same reasons that a creditor committee is before a restructuring. It gives the management team a point of contact, and a group of investors with whom it can raise and discuss issues as they arise during the life of the business. Any such committee should also help formulate and then implement an exit strategy, ultimately realising value for the wider investor group, and can potentially help the group avoid a repetition of the previous financial issues, which can only be a good thing for all parties concerned.