Selection and Organisation of Members and the Process of Formation
The primary purpose of an ad hoc committee is similar to that of a formal steering committee – to engage in restructuring discussions with the debtor and, where applicable, other stakeholders (e.g., shareholders and other creditors) to enable a plan to be formulated by either (1) the debtor or (2) the ad hoc committee itself, which in each case has the support of a sizeable, and potentially representative, group of the creditor syndicate to which that ad hoc committee belongs, prior to the plan being presented to that wider creditor syndicate for approval or support (as the case may be).
Once formed, the ad hoc committee may function as an informal representative group of the applicable creditor syndicate, whether in a pre-insolvency restructuring process or an insolvency restructuring process (e.g., a Chapter 11), and whether in consensual or non-consensual restructuring negotiations.
Having an ad hoc committee in place could assist the debtor in controlling its restructuring process and sends a signal to the market that this is the official group with which it will deal to formulate a restructuring proposal. It can serve to create certainty for both the debtor and the creditors that an orderly process is being undertaken by the debtor and that there is engagement with a representative group of creditors within that creditor class. Similarly, it may provide comfort to other creditors in the class that there is a representative group of influential creditors in an ad hoc committee that is leading discussions, particularly if members of that ad hoc committee are institutions that have previous experience in participating in, and conducting, restructuring discussions with debtors.
It is, accordingly, key that the committee is either broadly representative of the applicable syndicate of creditors or carries enough weight in terms of debt holdings (and potentially number of creditors) to push through a restructuring, whether consensual or non-consensual.
In consensual restructurings between the creditor group and the debtor, a representative ad hoc committee composition (1) gives the debtor confidence in the committee’s ability to act as a legitimate sounding board and to drag other creditors in that class in agreeing the restructuring plan and (2) provides comfort to the remainder of the syndicate that their views will be taken into account in the discussions regarding the restructuring. In a scenario in which the creditor group and the debtor are not in consensual agreement, the ad hoc committee seeks to speak on behalf of the wider syndicate (without assuming any fiduciary duty to any other creditor or person) in discussions with the debtor or with other stakeholders.
How many committees?
In a capital structure involving multiple external debt tranches, one of the first questions that arises is the number of committees that will be required.
The formation of multiple committees will increase restructuring costs and may entail a longer time frame for restructuring discussions given the need to approach each committee separately. The debtor may, accordingly, push for the consolidation of syndicates into a limited number of committees. However, the number of committees will ultimately reflect what is necessary in the circumstances and be influenced by a number of factors, such as (1) valuation assumptions, (2) the economic convergence or divergence between different creditor groups, (3) the relative rights and obligations of the different creditor groups and (4) the relative strength of the negotiating position of the debtor.
Broadly speaking, creditors will need to be satisfied that they are grouped into a committee with creditors with whom they share equivalent or similar rights, so they can meaningfully consult together, and that there is no apparent conflict of interest. This will likely be straightforward in the case of a syndicated facility agreement governing one class of debt, but it may also be possible for creditors who, for example, share the same security package on a pari passu basis to form one committee (even if their rights are governed by separate credit agreements). It may also be possible for creditors in the same class of debt to form a separate group, for example, where some creditors have a significant cross-holding into a different tranche, while others hold the entirety of their claim in one tranche of debt.
The appetite of creditors to consolidate will also be heavily influenced by the available valuation evidence and which creditors are thought to be ‘out of the money’ – it would be highly unusual for ‘in the money’ creditors to be represented in the same committee as creditors whose debt (based on market assumptions) is unlikely to be able to be repaid by a sale of the business and a distribution of the proceeds of such sale.
Who should join?
The next question that needs to be answered is which creditors should form part of the individual committees. There are typically three considerations: the size of the debt holdings of the individual committee members, as well as the committee as a whole; diversity in the type of members; and the number of members.
There is a natural tension between ensuring the committee represents a meaningful proportion of the syndicate and keeping the number of committee members to something that is relatively manageable and doesn’t impede the efficiency of the process, particularly in circumstances where time is of the essence. The aggregate amount of the committee members’ holdings will need to be reasonable as a proportion of the amount of total debt amount within the class of creditors represented by the ad hoc committee. Whereas you would expect the committee members’ holdings to be significant in a smaller syndicate (by number of institutions), a smaller committee holding may be acceptable where the debt is ‘widely held’, as in the case of a diverse and large bondholder group.
It is usually desirable to have the largest holders of the debt as members of the committee, given those lenders have proportionately more to gain or lose in any restructuring outcome in real terms. Their membership also adds to the committee’s standing and legitimacy in the eyes of the debtor and other creditors in that syndicate. Indeed, it may be necessary to determine a minimum debt holding for members where there is significant appetite on the part of creditors to join the committee.
It could be advantageous for the committee to also be representative of the characteristics of creditors in the syndicate, for example, to include different types of creditors such as banks, funds, par lenders, distressed investors, mark-to-market investors and non-mark-to-market investors. While there is sometimes a natural tension in strategy and desired restructuring outcome (distressed investors may in a particular situation favour a restructuring that cedes control to creditors, whereas par creditors may be satisfied with a solution in which the current shareholder retains control and where the original debt terms are amended in return for an extension of its maturity in order to give the debtor additional time to repay that debt), this is often better tackled head on rather than risking a particular type of creditor that may hold a material amount of debt, but that has been excluded from the committee (and so not had its concerns raised) voting down a fully formed proposal following weeks (or months) of negotiations with the debtor. Further, it may be appropriate that the members of the committee should reflect the jurisdictions in which creditors are based, which, in practice, is likely to be limited to Europe and the United States for many European restructurings.
There is a danger of a committee becoming unworkable if there is a large number of members (thereby defeating its purpose of a manageable working group with which the debtor is able to negotiate and that is able to come to a common view on issues itself). While the exact number depends on the circumstances and composition of each syndicate, three to five members is typically a ‘good’ number in a standard syndicate.
What are the obstacles to joining for individual members?
Actual or perceived conflict of interest
In some cases, a significant holder of debt may be excluded from an ad hoc committee if it is perceived that the holder may be affected by a conflict of interest; for example, if it is affiliated with the debtor or shareholder, or if it holds a significant proportion of debt claims in another part of the capital structure or in another tranche, and different rights and obligations prevail with respect to different tranches that give rise to a more advantageous negotiating position for one tranche relative to another.
Therefore, the inclusion of committee members with cross-holdings across the capital structure can be a sensitive subject given the potential for conflicts of interest between holders of the different tranches of debt or equity.
Such conflicts (actual or perceived) may in certain circumstances be managed by information barriers within the creditor institution (strengthened by the positions in the different tranches being managed in the creditor institution by a different investment team or investment committee), or a limit on cross-holdings that are permitted while being a member of the committee. The potential for conflicts does, however, need to be addressed early and, ideally, there should be an open dialogue among the creditors in the syndicate in this respect.
Increasingly, at least in the early stages of discussions where the debtor’s restructuring options are still being explored, many creditors will be keen to ensure they remain recipients of information that is either public or not considered to be price-sensitive so that they may continue to trade in the debt in the secondary debt market. This relates particularly to the bond market, but it is increasingly also the case in the private loan market.
Naturally, this needs to be balanced against the potential need of the debtor to share private information with the members of the ad hoc committee in order to advance the restructuring discussions and demonstrate the debtor’s liquidity constraints.
Creditors have become more alive to the potential for their trading to be restricted once they join an ad hoc or coordinating committee given the approach taken by the LMA in their transparency guidelines (last updated in 2012) that committee members are likely to be in receipt of debtor confidential information that is not available to the syndicate as a whole (thereby curtailing such committee members’ ability to trade).
Such public/private concerns can be dealt with by instructing the debtor to provide material non-public or price-sensitive information to the advisers in the first instance, who then act as an information barrier and only share public information with the committee.
An alternative method is to agree a cleansing mechanism whereby the committee will agree to receive private information and restrict for a limited period of time, following which the debtor will be obliged to release the private information to the market so that committee members are ‘cleansed’ and are not subject to an indefinite restriction on trading. The obligation to cleanse can be backed up by an ability on the part of the committee members to release the information themselves if the debtor fails to do so. However, such cleansing mechanisms are contentious, with the committee members often unwilling to be restricted for any significant period of time, but the debtor unwilling to release potentially commercially sensitive (and, in the opinion of management teams, value destructive) information to the market before a restructuring has been agreed.
Public/private concerns should be addressed early with the debtor to ensure the debtor understands the issue and will manage the information flow appropriately – committee members need to be comfortable that the debtor will not inadvertently restrict them by providing (unrequested) private information without their prior anticipation.
Sub-participation and elevation
If creditors hold their debt through sub-participation and have not been elevated to the status of lender of record (for example, because the debtor has a consent right and refuses to elevate the creditor, or the creditor is unable for operational reasons to step into the shoes of a fronting bank), this can create additional issues in certain jurisdictions if a sub-participating creditor holds a meaningful stake and wishes to form part of the committee. For example, this could be problematic in France where only the lenders of record are entitled to take part in – or receive information in relation to – confidential proceedings such as conciliation or mandat ad hoc.
The benefit: being in the driving seat
Despite these potential obstacles and the degree of work involved for an institution where a small investment team may be tasked with managing a number of different portfolio investments, membership of an ad hoc committee is still an attractive path for creditors who hold a significant investment and wish to proactively manage that investment and drive the restructuring discussions once it becomes apparent that the debtor is distressed.
When is the right time?
Creditors should be proactive when the need for a restructuring becomes apparent, and organise and approach the debtor early with a view to opening a constructive dialogue and shaping the restructuring discussions. Early action is important, not only because the debtor itself may be under timing constraints – for example, if liquidity is severely constrained or a waiver is needed urgently – but also because it will take some time for the committee itself to organise. This is particularly the case if the committee decides to document its appointment or existence in some way (see further below).
Despite these legitimate timing concerns, the debtor may seek to delay the formation of the ad hoc committee. The reasons for this are likely to be fourfold:
- the debtor may simply want to buy itself time to evaluate its situation and formulate its own restructuring plan (without meaningful creditor input or distraction);
- the debtor may want to manage liquidity demands by avoiding a formalised committee incurring adviser costs that the debtor will ultimately be asked to pay;
- the credit agreements may specify that it is a default to commence negotiations with creditors (thereby requiring the debtor to approach creditors for a waiver); and
- similarly, the announcement of the formation of an ad hoc committee with a view to commencing restructuring discussions may impact commercial contracts (e.g., by triggering termination rights or a renegotiation of contract terms) and lead to customer and supplier attrition.
If the debtor has no need to engage with the creditors at the current point in time because there is no imminent inability to repay its debts as and when they fall due (i.e., no ‘burning platform’), no waivers are required or no event of default is expected (which may become a familiar scenario given the recent trends in credit terms and documentation in the European capital markets and European private debt markets), the creditors will be hard-pressed to force the formation or recognition of an ad hoc committee upon the debtor. In such a situation, creditors may be well advised to remind the debtor of the benefits of a pre-formed sounding board in the event that any negotiations or waivers are likely to be required in the future (e.g., if the group seeks to make an acquisition as a means of improving operating profits) or, indeed, to ensure that the company does not fall into severe distress before restructuring discussions are commenced so that value may be preserved for all stakeholders.
The timing of the committee’s formation will also be impacted by the size of the creditor syndicate – whereas a small loan syndicate can organise relatively quickly, the organisation of a large bondholder syndicate may require a longer time frame.
How is the committee formed?
Although it is not unknown for debtors to proactively communicate with their syndicate and request that creditors form a workable committee to begin discussions, it is not unusual that creditors organise among themselves (unprompted) in the first instance and then approach the debtor with a view to opening discussions.
Given the relatively informal nature of ad hoc committees, the selection and formation process is likely to be similarly informal. The practice over the past few years has been for significant debt holders to coalesce around financial or legal advisers already versed in the capital structure and boasting significant restructuring experience. Alternatively, a small group of significant creditors may come together as a group and then ask a selection of legal and financial advisers to pitch to this initial group.
Once legal and financial advisers have been selected, the initial committee group will discuss with the advisers the committee composition, including whether (1) any significant holders are believed to be missing from the initial group and should be approached, (2) the group is representative of the creditor syndicate as a whole, (3) a de minimis level of debt holding should be required for membership and (4) there should be any restriction on committee members with cross-holdings. Both creditors in the initial group and those wishing to join the committee should expect to disclose their holdings to the advisers, who can keep the individual figures confidential while informing the members of the aggregate holdings of the committee.
Documenting the committee’s formation
As the committee is forming, its members will need to determine (with the assistance of advisers) how far they wish to document their relationship. In the case of more formal coordinating committees, such documentation has in the past consisted of:
- (most commonly) a letter with the company to provide for fee coverage, indemnities and cleansing mechanisms, among other matters;
- (sometimes) a protocol among the members of the committee to govern, for example, decision making, confidentiality, information sharing, cross-holdings and eligibility to remain on the committee; and
- (rarely) a letter with the rest of the creditor syndicate to provide for indemnity coverage and exclusions of liability in favour of the committee.
Such documentation is beneficial to the committee as a means of ensuring that (1) their costs and expenses are covered, (2) they benefit from indemnity protection and exclusions of liability and clarity that they owe no party any duty of care, (3) non-disclosure of confidential information is agreed and (4) cleansing mechanisms are agreed up front to the extent required (and to cater for any inadvertent disclosure of private information by the debtor to the members of the committee).
Despite such benefits, the committee may decline to put formal documentation in place and may instead prefer to rely upon more informal, verbal or ad hoc arrangements (although it could still be advisable to agree fee coverage and perhaps cleansing mechanisms as a minimum). Such an approach may be adopted if, for example, timing or costs are tight and the committee needs to dive straight into the substantive restructuring discussions, or committee members wish to remain at arm’s length as just an informal working group, without risking being seen as recipients of private information, which would restrict their trading in the debt. Without formal documentation, members may join or leave the committee without formal accession or resignation documentation, although some agreement by the other committee members to work with an institution is required for that institution to join the ad hoc committee.
Once the initial ad hoc committee is formed, the committee should confirm its constitution to the debtor, putting the debtor on notice that the committee is in existence, and the amount of debt it represents. The ad hoc committee may also inform the creditor group that it purports to informally represent that it has formed.
The debtor should now have the benefit of a working group representative of its creditor syndicate to smooth the path for any waivers or consents that may be required and to act as an informal proxy through which the applicable creditor class conducts restructuring discussions. On the other hand, the creditors in the applicable creditor class should also have the benefit of a working group towards which it may direct queries, suggestions and feedback with regard to the potential restructuring.