Developments and Trends in Dutch Restructuring

In summary

The Netherlands experienced a red-hot economy in 2021, with a slow restructuring and insolvency market. It also witnessed a turning point in long-term trends. With numerous covid-related liquidity relief schemes still active, 2021 saw the introduction of the Dutch equivalent of Chapter 11 – the Act on Court Confirmation of Extrajudicial Restructuring Plans (WHOA) – as well as a significant shift towards alternative financing (eg, Term Loan B funds) and a heightened focus on environmental, social and governance (ESG) goals and sustainable financing. In this article, we will share important precedents and lessons learned through the application of the WHOA.

Discussion points

• Lessons learned in 12 months of WHOA
• Corporate liquidity relief during the covid-19 pandemic
• Acquisition finance and the role of direct lending (credit funds)
• ESG and sustainable finance

Referenced in this article

• WHOA
• EU Recast Insolvency Regulation
• GO-C facility scheme
• Alternative financing
• Direct lending by credit funds
• Green bonds
• ESG finance and sustainability-linked finance

Introduction

The year 2021 was relatively quiet for the restructuring and insolvency markets. The covid-19 pandemic, which initially led to market turmoil and to many debtors in the Netherlands drawing their overdraft and revolving lines in full, has become more of a normality. Some sectors have continued to be severely hit, such as travel, leisure, hospitality and traditional (offline) retail. At the same time, large-scale economic stimulus efforts by numerous governments, including the Netherlands and the European Union, in combination with an inexplicably large increase in consumer spending, reduced the monthly number of bankruptcies in the Netherlands to an all-time low in the first half of the year. On the back of the same developments, very few businesses have faced financial distress, even in the sectors identified above as being hit hard by the pandemic and the government-imposed restrictions. The wave of covid-related distressed discussions by debtors with their financiers, related waivers and emergency funding lines led to a new reality of – in many cases – just sitting it out.

Nonetheless, there have also been clear winners in the pandemic, and others who have benefited from the new reality. Interest rates close to zero and an abundance of cash in mostly institutional lenders have naturally led to very hot M&A and capital markets, with deal volume and multiples paid at record highs.

At the time of writing, inflation has increased for the third month in a row, mainly due to an increase in gas and energy prices, and supply chain problems. Geopolitical tensions are also mounting. Looking ahead, the capital markets are expected to stay red-hot and the cost of funding will remain very low. Accordingly, the restructuring market is forecast to remain slow until at least the second half of 2022, absent a major event. Whether that event – which could be another serious wave of covid-19 or be related to inflation, rising gas prices or geopolitical trends – will happen cannot be predicted yet, but the market in its current state is unstable and susceptible to change.

On the legal front, the new Dutch restructuring scheme, the Act on Court Confirmation of Extrajudicial Restructuring Plans (WHOA), celebrated its first anniversary on 1 January 2022, and there are quite a few examples of its application in 2021. Although most of these precedents concerned domestic small and medium-sized enterprises (SMEs), the fact that restructuring plans were approved and court orders handed down by a specialised pool of WHOA judges gives valuable insight into what to expect and how the WHOA can be put to use. For an overview of all the features of the WHOA, we refer the reader to last year’s chapter on the Netherlands and a comprehensive overview published by De Brauw around the date of implementation.^[1]

On the new money side, as a wider trend that is not particular to distress or rescue financing but is certainly relevant, 2021 saw the biggest shift to date in the Dutch market away from traditional bank lending in favour of alternative sources of financing, most prominently credit funds and other institutional investors providing US-style Term Loan B (TLB) credit. That change is here to stay and we will touch on why that is relevant for players in the Dutch market.

Finally, another trend worth watching, but not yet omnipresent, is the focus on ESG goals, which translates into the number of companies getting financed using sustainable finance instruments, and the volumes of sustainability-linked credit being extended.

First year of WHOA

On 1 January 2021, the WHOA, also known as the Dutch scheme, came into force. Its entry into force coincided with the covid-19 pandemic, which placed numerous companies under pressure, making it a welcome development.

The WHOA is a state-of-the-art, (cost) effective and efficient regime, combining the flexibility of the UK’s scheme of arrangement with the broad moratorium and deal certainty previously unique to US Chapter 11. It allows for financial restructuring outside of insolvency proceedings. If certain requirements are met, the restructuring plan can subsequently be confirmed by the court, making it binding on all affected parties.

The WHOA allows the debtor, one or more of its creditors or shareholders, or an employees’ representative to offer an extrajudicial restructuring plan of the company’s debt or share capital. The approval of the plan requires a threshold of two-thirds of one ‘in the money’ class appearing in a meeting (as opposed to 75 per cent compared to the UK scheme of arrangement and US Chapter 11, and even Britain’s new Part 26A plan). More extensive than most other European extrajudicial proceedings, under the WHOA, the restructuring plan can include not only a cross-class cramdown and even a ‘cram up’, but also termination of guarantees by the group companies (with a low nexus requirement – see below) and termination of onerous operational contracts.

The WHOA requires only limited court involvement as (i) it is a debtor-in-possession proceeding, (ii) it does not require shareholder consent, and (iii) court involvement can be limited to confirmation of the restructuring plan only, unless the debtor or plan expert approaches the court earlier for relief.

Advantages over similar schemes

The main advantage of the WHOA in the cross-border context is the ability it provides to implement the restructuring of a multinational group of companies in a single proceeding. There are two almost identical versions of the WHOA: a public version and an undisclosed version. The public version is only available to debtors with their centre of main interests (COMI) in the Netherlands, but has the benefit of being automatically recognised as an insolvency proceeding within the European Union under the EU Recast Insolvency Regulation (EIR).

The undisclosed procedure is already much more widely used, as it is exempt from the publication requirements (ie, to a large extent behind closed doors). This version is also open for non-COMI debtors, and requires only a sufficient nexus to the Netherlands of the debtor or the liabilities that are to be restructured, as this version is not automatically recognised as an insolvency proceeding under the EIR. Nevertheless, in many cases the recognition is expected under the UNCITRAL Model Law on Cross-Border Insolvency (including US Chapter 15 and the UK’s Cross-Border Insolvency Regulations 2006) and possibly the Recast Brussels Regulation, the Lugano Convention, international treaties or private international law.

The second major advantage lies in the possibility to combine procedures for group companies. In contrast with the UK and US schemes, the WHOA allows for group companies to pursue the restructuring to combine the EIR version and the non-EIR version for the various debtors in the group.

Key takeaways from judgments

In its first year, the WHOA resulted in 65 published court orders in WHOA proceedings. So far, its use has been limited to Dutch restructurings, mostly of SMEs. The vast majority, more than anticipated, opted for the undisclosed version. The judgments predominantly concerned the appointment of a plan expert, a moratorium, interim measures and plan confirmation.

The first year of WHOA application gives us the following takeaways.

• The appointment of a plan expert to liaise between the creditors (or creditor groups) and the debtor and hold the pen on a restructuring plan should be considered an important (though not mandatory) feature of the WHOA.
• Suitability requirements for the WHOA (most importantly the light insolvency test) and a sufficient nexus to the Netherlands are upheld in court.
• The timelines for the WHOA can be as short as they were intended to be.
• Courts will require a restructuring plan to be proposed for each debtor individually, although the plan presented might be largely the same plan, as long as it identifies the positions and considerations in respect of that debtor and allows the court to determine the merits of the plan for that debtor.
• Courts are focused on the procedural requirements, including, in particular, the provision of complete information to creditors.
• The relatively high frequency of WHOA application shows substantial market adoption and that the courts are getting comfortable with the process, paving the way for more complex and possibly contentious proceedings.

Although the case law so far is of limited relevance for international restructurings, the market adoption means that the Dutch scheme can be (and is) used as a credible alternative to the existing toolkit outside Dutch borders. Most cross-border applications that we have seen to date are where the WHOA serves as a more reliable but potentially more painful back-up strategy (commonly referred to as Plan B or the ‘stick’) to support the creditor buy-in to an implementation mechanism using the better known, more precedented Plan 26A in the United Kingdom. We expect this to change in 2022, once the first large-scale restructurings through the WHOA have been published.

Corporate liquidity relief in the pandemic

Two years of the covid-19 pandemic have brought about numerous emergency measures to address sudden liquidity challenges facing businesses worldwide. The Dutch government implemented a wide range of support measures for businesses, the most important of which are as follows:

• a bridging scheme aimed at job retention pursuant to which businesses that suffered a loss of at least 20 per cent of turnover, compared to 2019, could request and obtain up to 90 per cent of their payroll expenses in the form of a subsidy (proportional to the decrease of the turnover);
• a blanket deferral of payment of tax dues and 0.01 per cent interest rate for the late payment of tax (due to increase to 1 per cent as of July 2022), including the monthly payment of VAT collections on goods sold, which for many businesses meant an immediate liquidity increase of 6 per cent or 21 per cent;
• an extended credit guarantee for SMEs, and agricultural and horticultural companies;
• 3 per cent interest bearing loans for start-ups; and
• bridging loans and loan repayment deferrals for small companies.

Additional liquidity support in the form of loans was provided to thousands of businesses in the Netherlands via a ‘covid extension’ to the government-backed loan scheme for SMEs (with a maximum of €50,000 or €2 million per loan), and in lesser volume to large corporates under the GO-C facility scheme. This scheme supplements the regular government-backed corporate guarantee scheme pursuant to which borrowers may attract financing from participating commercial banks with a state guarantee of up to 80 per cent (large businesses) or 90 per cent (SMEs), thereby allowing them to pass credit applications more easily. Individual GO-C facility loans can be a maximum of €135 million or €150 million. This facility was used predominantly by businesses at the start of pandemic lockdowns, when many businesses saw their working capital surge. The related loans, which come with government-imposed restrictions on value allocation (eg, for mergers and acquisitions, dividends, bonuses to employees), will, in many cases, remain outstanding for a few years.

In addition to servicing the GO-C facility scheme and the government support initiatives for SMEs, the large Dutch commercial banks were also themselves fairly quick to step up and offer a pallet of helpful initiatives to debtors in need, such as deferral of amortisation payments and a waiver of terms.

Acquisition finance and TLB funds

Until 2020, acquisition financing in the Netherlands was still predominantly provided by banks. Moreover, the large Dutch banks held a much higher market share of new money deals compared with the commercial banks in surrounding western European markets. However, 2020 and especially 2021 saw an accelerated shift towards alternative financing, both in the large- and mid-cap markets.

As in other markets, this shift follows a continuous and increasingly strict capital and risk requirement imposed on banks. On the back of significant M&A activity in which non-Dutch sponsors also picked up an increased market share, non-Dutch credit funds and alternative credit providers found their way to Dutch borrowers. Most of those deals took the form of Dutch, English or New York law-governed TLB loans, often with a super senior revolving credit facility (RCF) attached, though private placed notes and syndicated TLB deals also increased in popularity.

As these institutional deals are here to stay, and because they also have a defining impact on the terms provided to borrowers by the more traditional bank lenders and (public) bond markets, some key trends to watch are as follows:

• increase of leverage ratios and decrease of required equity cushion (or leveraging that equity cushion with further layering of structurally subordinated debt);
• ability for borrowers to attract material additional financing outside the incumbent lender group (either using a sidecar secured structure or entirely separate);
• ability for borrowers to move assets and subsidiaries out of the restricted group; and
• ability for borrowers to withhold consent for lender-side transfers, while at the same time increasing their own transferability through ‘portability’ provisions.

Most of these will be familiar to those working with US-style financing documentation, but in the Dutch markets these trends are very different from traditional banking terms and, therefore, accelerate the move towards alternative financiers.

Increased focus on sustainable finance

ESG and, in particular, carbon-neutral operations continue to move higher on the political agenda and the agendas of many businesses, despite covid-19 challenges. ESG, ‘green’ and otherwise sustainable financing alternatives, headed by ‘green bonds’, have been making an appearance in the pitch books of banks and debt advisers for a few years already, but actual deals were limited both in number and in quantum.

With regard to ESG alternatives – both on the investor and lender side and in the boardroom – 2020 and 2021 witnessed the first sincere uptick in the number of deals in both green and sustainability-linked financial arrangements in the Netherlands, following a wider European trend. Most prominent are green loans and bonds used to finance climate and environmental projects, and sustainability-linked finance, where not so much the purpose but the cost of funds is linked to predetermined sustainability objectives.

On the large-cap front, most financing took the form of a green bond framework, a sustainability-linked bond or a sustainable RCF (eg, following the International Capital Market Association’s Sustainability-Linked Bonds Principles). In the SME segment, most of the commercial banks have started a green initiative in the form of a dedicated lender of record or a channel dedicated to green or sustainable financing.

Using green and sustainability-linked finance to help meet targets

Instead of looking at sustainability-linked financing as a discretionary alternative, a number of Dutch and multinational companies are considering it to follow up on their public commitments to ESG objectives. The past year also saw increased accountability, more specific disclosure and reporting requirements (both financial and non-financial information) to improve comparability, and pressure to deliver on these corporate commitments and reduce alleged ‘greenwashing’.

For instance, the 2020 EU Taxonomy Regulation for sustainable activities provides for a classification system to, among other things, prevent greenwashing and help investors make greener choices. This trend will likely accelerate on the back of a much-debated recent judgment by a court in the Netherlands that held, subject to appeals, that Royal Dutch Shell plc should substantially reduce its carbon emissions by 2030.

We expect these events to constitute an additional push towards more sustainable financing for several reasons. First, borrowers have an interest in showing the alignment between their core business and ESG goals and reducing the cost of servicing the debt (margin and fee reduction as well as increased rating), while attracting a larger pool of potential financiers. Second, sponsors seek to burnish their ESG credentials to attract new investors and avoid losing potential buyers in an exit. Finally, banks and other institutional financiers face shareholder demand and regulatory requirements that factor in the ESG objectives as well as an increase in syndication optionality.

We expect ESG financing to be further fuelled by the recent clear position taken by several corporate rating agencies on the topic. We have seen indications that these agencies will not only look at ESG factors in the context of ESG ratings, but will also take these factors into account in general corporate ratings – for instance, due to their potential effect on borrowers’ ability to attract further funding or the risk they pose for ESG litigation.

Sustainability-linked finance: challenges ahead

Despite the increasing number of deals, sustainability-linked financing is still a work in progress and currently lacks standardised documentation.

There is still no consistency in how the ESG targets and key performance indicators are set, which also affects the goals for sustainable financing. The number of targets often varies and the considerations that are factored in may diverge. As a result, there is also no standardisation in the context of reporting on these targets. We expect that the current increase in deal volume will lead to convergence in how companies set their objectives, and monitor and report on them in 2022.

In addition, while the most common consequences of not meeting ESG requirements in financing products are a drawstop, an increase in the pricing or, in the case of bonds, a differentiation in the redemption targets, we may see other consequences arise from the wider trend that companies (not) reaching ESG targets will have fewer options for financing altogether. That will be a very sector-specific, but not likely market-specific, development that we expect to see grow over the next few years.

Looking ahead

The trends set out in this article will continue in 2022 and likely in the years thereafter. US-style alternative financing and ESG financing will accelerate even more and become part of the new normal – hopefully without covid-19 concerns.

However, while the restructuring market in the Netherlands was relatively quiet in 2021, we are likely to see more volatility resulting from inflation, concerns around interest rates, pressures on supply chains, geopolitical uncertainty and input prices of many businesses in 2022 or 2023. Determining when that will be is crystal ball gazing and, in our opinion, it very much depends on an event triggering global uncertainty and tipping the balance in today’s hot capital markets. When that happens, it will lead to higher pricing and tighter terms of borrowing, a slowdown in the markets and increased restructuring activity (and insolvencies). In the meantime, however, we may well experience a bull market for most or all of 2022.

Notes