The Role and Purpose of an Ad Hoc Committee from the Perspective of Creditors
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.
A large majority of multi-creditor restructurings in Europe that took place during or since the 2008 financial crisis 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 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 considers 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 ad hoc committee members, to then help solicit the requisite creditor consent 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 ad hoc 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; it establishes an organised process for the restructuring negotiations; and, 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 (because of their combined debt holdings) the support of the ad hoc 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 ad hoc 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 other stakeholders 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.
There is no doubt that giving a single voice to a group of creditors will give them an opportunity to exert more influence on the process, whether or not they hold a blocking stake. As committee members generally hold a significant stake in the debt, there is often an alignment of interests with creditors outside the committee; creditors who are not committee members often get a better result in the ultimate proposal when there is a strong ad hoc committee. In any deal, however, non-committee members will also be watchful that an appropriate balance is struck between the outcome for the ad hoc committee members and the outcome for similarly situated 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. Even in the case of companies with publicly listed debt or equity instruments, which are subject to their own regimes for disclosure of information, there will be a desire to control the flow of information and limit adverse impacts of disclosure.
Agreeing a process that allows the disclosure of market and commercially sensitive information to a small number of creditors (i.e., the ad hoc 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 or inside information (collectively, MNPI), and they may also, for internal compliance reasons, take the same view in respect of the trading of private debt instruments. This will have a commercial impact on their institutions. Therefore, having an appropriate mechanism that obliges the debtor to ‘cleanse’ the ad hoc committee by publicly disclosing MNPI provided to the ad hoc committee members is often an early focus. This is especially important in the context of an issuer of listed bonds or listed equity, where ad hoc committee members will only wish to be restricted from trading for a limited period.
Having an agreed structure and timetable in place for the dissemination of information will also put pressure on the debtor or shareholder to disclose the material requested by the ad hoc committee, and can help facilitate the flow of information from an earlier stage than might otherwise be the case. This is very helpful for the restructuring process, especially as there is often an obvious tension between the debtor’s caution around disclosure of sensitive information and the need for creditors to access such information to be able to form a view on the debtor’s performance and prospects and any restructuring proposal.
Establishes an organised process for negotiations
For the 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 usually decrease implementation risk. Additionally, the chance of gaining the support of other creditors for a proposed deal greatly increases with a committee that understands why the various economic and commercial points have been negotiated, acts as a contact point for questions and has access to legal counsel who can provide guidance on the long-form documentation.
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 debtor or its shareholders in an organised fashion can help the creditors take control of the situation, and sets the scene for a creditor-led negotiation process.
Third, debtors often try to justify a reluctance to engage with creditors on not having an organised, identified group of creditors that will lead the discussions. If the creditors take the initiative, form a committee, approach the debtor and coordinate the negotiations, this will put pressure on debtors to engage in the process. It is key to start discussions with the debtor (or its shareholders) at an early stage, ideally as soon as creditors become aware of any potential default, liquidity crunch or lack of confidence in the debtor’s ability to refinance an upcoming maturity. Early engagement makes a creditor-led proposal more likely, whereas a lack of engagement from creditors often results in the debtor being able to pursue a less favourable outcome for creditors, such as pushing through a maturity extension when a more comprehensive debt-for-equity proposal would be the more appropriate outcome from a creditor perspective.
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 prospects of the group.
In some cases, key suppliers to a debtor group (e.g., the providers of credit card or other corporate banking facilities) may even ask for some form of comfort from other significant stakeholders. Having an ad hoc committee that is able to speak to these key providers, and confirm that they are working towards a restructuring, 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 composition of a committee during a restructuring
The quantum of debt that is represented by members of an ad hoc committee can fluctuate over time. If a committee member sells down its position during the process, a committee that originally held a majority of the debt may consequently only constitute a minority of the creditors. Clearly this will impact the leverage that the ad hoc 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 some examples, there has been a wholesale change in the composition of the ad hoc committee as a result of trading. Thus, a committee that was initially formed from ‘par’ lenders may be reconstituted into a committee of ‘distressed’ lenders, with a much lower entry price. Such a change in composition can have wide-ranging consequences, potentially altering the outcome being sought by the ad hoc committee, the manner of negotiation or the willingness to invest new capital.
In other examples, trading has left the ad hoc committee as originally constituted, but with a reduced holding, while other significant creditors emerge and take a leading role in restructuring negotiations. Where a non-committee creditor emerges as the largest debt holder, the role of the ad hoc committee will change significantly. Generally, those members of the ad hoc committee who continue to be material creditors will fight to retain their status as an ad hoc committee. The ad hoc committee will likely still benefit from fee coverage from the debtor for their advisers and will likely aim to remain involved in the negotiations to protect their positions. Instead of leading the negotiations and putting together the proposed deal structure, the ad hoc committee would likely focus on protecting the rights of the minority creditors, which are often put under pressure when there is one investor that controls the majority of the debt.
Key issues for non-committee members to consider
The key benefit of an ad hoc committee from the perspective of the non-committee members is, essentially, that a group of people who have a similar economic interests are putting in time and resources to negotiate an outcome that should also benefit the non-committee members. The alternative to an ad hoc committee would be either an unworkably large creditor group, a focus on one or two key creditors, or no creditor representation. With respect to the first alternative, an ad hoc committee member will usually contribute a significant amount of management time and, together with their advisers, specialist restructuring and turnaround knowledge to guide the restructuring process. It would generally be inefficient for creditors with smaller positions to invest the same degree of time and resources as larger holders, and a large group of creditors does not benefit from the efficiency and coordination an ad hoc committee brings. Sometimes, a large number of creditors may nominally join a committee to gain access to the committee’s advisers and up-to-date information, but even then the work will generally be led by a smaller ‘steering committee’ of creditors with the requisite expertise and resources to negotiate the deal. The risk in the second alternative is that the views of only one or two key creditors would be taken into account, and it may produce a proposal that would not benefit from widespread creditor support. The third alternative, no creditor representation, would increase the likelihood of a less favourable outcome for creditors, such as insolvency or an extension of maturity with limited economic upside. Having a small group of creditor institutions do the hard work to prevent these outcomes is usually viewed as a benefit.
Non-committee creditors should, however, be aware that, although they may share a similar economic interest with members of the ad hoc committee, there may be differences between ad hoc committee members and members of the broader creditor group that could affect their assessment of the restructuring proposal. Although such differences may not be decisive, they may be informative.
There is a common misconception that an ad hoc committee is representative of the creditors as a whole. Ad hoc committees cannot bind other creditors to a deal and do not ‘act for’ the wider creditor group in any legal or fiduciary sense. That said, there is some natural alignment in commercial interests, as ad hoc committee members usually hold significant stakes of the same debt instruments as the broader creditor group, and a deal that benefits the holders of those debt instruments benefits both ad hoc committee members and the broader creditor group. However, non-committee creditors should always be aware that members of an ad hoc committee may have different motives to others, that their duties are only to their own institutions and that they will act as self-interested economic entities. Non-committee members should carefully consider the extent to which their interests align with the members of the ad hoc committee and also where those interests may diverge.
A good example of a potential source of divergence is where some creditors are able to benefit from additional economic value through the provision of new money. Often, all creditors will be given the opportunity to subscribe for a (normally pro rata) participation in new money; however, there have also been examples where an ad hoc committee alone provides part or all of the new money. There may be valid reasons for the provision of new money on this basis. For example, emergency bridge financing may be needed because the debtor would otherwise not have sufficient funds to survive the duration of a restructuring or the liquidity need is so urgent that a broader offer for all creditors to participate in the financing is not feasible, or both. There may be clear benefit to the broader creditor group in such a scenario. However, creditors who are left out of the new money opportunity may feel disadvantaged by not being given the opportunity to participate.
Other factors may also lead to differences in approach being taken by individual creditors. Creditors could well have different entry prices into the debt (par, sub-par or distressed); different timescales for realising value; different appetites for holding equity or equity-like instruments; or 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 comprising mainly traditional banking institutions or other par holders 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 investors who have bought the debt at a discount tend to drive towards a debt-for-equity swap or more significant write-down of the debt.
Cross-holdings may be another factor that may lead to a divergence in view between creditors. Where a 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 junior creditors have formed a joint committee, though this is usually only when there are large creditors with significant cross-holdings.
Despite the undoubted benefits that ad hoc committees bring to restructuring processes, 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 always 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 a committee. A potential committee member should bear three main points in mind; first, that access to MNPI will restrict trading; second, reputational concerns; and third, time, cost and potential liability.
Access to MNPI will restrict trading
One of the main concerns for ad hoc 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 an ad hoc 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 ad hoc committee will be disclosed to the market. Until all MNPI provided to the ad hoc committee has been made publicly available, the ad hoc committee members will remain restricted from trading the relevant securities.
Committee members should ensure that the cleansing regime provides for specific cleansing dates when the MNPI provided to the ad hoc committee will be made public so that they are only restricted for a limited period. There also needs to be a wide description of what constitutes MNPI; essentially, any information that has been provided to any ad hoc committee member that may restrict them from trading any kind of security in any jurisdiction.
Given the serious commercial impact of any trading restrictions, ad hoc committee members should also negotiate for the ability to ‘self-cleanse’ – a contractual permission by the debtor to 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 ad hoc 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.
Finally, it is worth committee members bearing in mind that in certain circumstances, knowledge of the formation of the ad hoc committee and the ad hoc committee’s intentions may be sufficient to restrict members of the ad hoc committee, even where the debtor has not yet provided the ad hoc committee members with non-public information.
The identity of the ad hoc committee members will often be widely known in the market, whether formally disclosed or leaked on an unapproved basis. Restructuring stories are often picked up by the trade press and sometimes also the national and international press. Therefore, reputational concerns are very relevant for institutions considering being part of an ad hoc committee.
From a legal perspective, being part of a committee generally does not result in its members formally representing the broader creditor group or owing any fiduciary duties to other creditors. However, some institutions may take the view that, at least from a reputational perspective, there is some implication that they should advocate for the interests of other creditors. The concern a potential ad hoc committee member may have would be that if, for any reason, the end result benefits (or appears to benefit) an ad hoc committee member disproportionately relative to any other creditor, this will reflect badly on the individual institutions involved. Significant creditors may therefore wish to pursue their own interests privately and directly with the debtor and may not want to form or join a committee and be perceived to be advocating for anyone’s interests other than their own.
The second reputational concern may be 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. There are obviously limits to what an ad hoc committee can achieve in a restructuring, as they will be working within the boundaries of the given situation, including the relevant credit documents, the strength or weakness of the guarantee and security package, the opportunities and challenges afforded by the relevant jurisdictions and the positions of other key stakeholders. Often, the proposal that is put to the creditors and that an ad hoc committee might support is the best available in the circumstances; it will not necessarily be the best proposal that could possibly have been formulated. Although the ad hoc committee does not bear any responsibility for the go-forward performance of the debtor group, and each creditor makes its own assessment of the risks and merits of a proposal, the reputational concern around being associated with a ‘failed deal’ can be a concern.
The final reputational concern that sometimes arises is that a creditor may not wish to join an ad hoc committee that is dominated by institutions with a significantly different investment strategy or approach to restructurings, or may wish to block such institutions from joining the ad hoc committee. For example, an investor with a reputation for collaborating with shareholders or debtors, or both, to restructure a business may not wish to work with a committee dominated by creditors that generally pursue litigation strategies to achieve restructuring outcomes. Ad hoc committees are generally assumed to work on a consensus basis, so the actions of one member may have a bearing on the perception of another member.
Time, cost 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 and 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 formal 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 needs the ad hoc committee members to take certain actions (like agreeing to a standstill or waiver request), but there is likely to be a period when committee members incur costs with no agreement for cost cover or reimbursement from the debtor.
Even when the debtor provides fee coverage, indemnities and work fees, ad hoc committee members should be aware of the commitment that they are entering into. It is easy to underestimate the amount of time that is involved in negotiating and documenting a restructuring. There will be an expectation that all ad hoc committee members will attend regular calls, communicate with other creditors, consider the legal and financial advice that is being provided to the ad hoc committee, and attend meetings to negotiate with other stakeholders.
The nature of a committee means that the agreement of each member is required before action can be taken by the ad hoc 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. Experience levels will often differ between members of an ad hoc committee, which some members may find frustrating. Some members may be more experienced with restructurings, while others may have more sector experience. The art of the ad hoc committee is to unite this experience and utilise expertise in an efficient manner to achieve the best possible outcome in the circumstances and ensure an even balance of work among committee members.
Adviser cost can be another consideration for potential committee members. Even when a debtor has agreed to provide fee coverage, if there is any shortfall, committee members may be obliged to fund the costs of the various advisers that the ad hoc 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.
As previously mentioned, ad hoc committees generally do not owe any legal or fiduciary duties to other creditors and will often be at pains to disclaim any liability in this regard. A well-advised ad hoc committee will ensure that exculpatory language is included in relevant legal documentation to try to reduce the risk of liability. 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 ad hoc 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 comprising the pre-restructuring creditor committee members, to help with the ongoing governance and monitoring of the business.
If a 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, former creditors 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 comprise 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 helpful in 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.
 Jacqueline Ingram is a partner and Sarah Levin is an associate at Milbank LLP.
 A variety of different types of creditor committees exist, including coordinating committees, steering groups and ad hoc committees. The differences between the various types of committees are not the subject of this chapter, and are largely irrelevant for current purposes, except where noted.
 See Chapter 11 on the insider/outsider conundrum for more on public and private information.