US bankruptcy fights are heading to London
The use of foreign venues is the new frontier for debt restructurings at American companies
Sujeet Indap
Corporate debt restructuring lawyers are going global to find ways to resolve financial distress © Charlie Bibby/FTLawyers in the corporate debt restructuring game are broadening their horizons, even going global to find novel ways to resolve financial distress.
In the past decade, there has been rising competition between US bankruptcy courts: across Texas, New York, Delaware and New Jersey.
Now London has become part of the fray.
In a recent paper, the Harvard Law School professor Jared Ellias and Narine Lalafaryan of the University of Cambridge write of a new “global law of debt”, defined by a “transnational system shaped more by law firms, investment banks, and investors in New York and London than by national laws or court decisions”.
They add: “In the twenty-first century, ideas, professionals, and capital now move across the Atlantic at unprecedented speed.”
Picking the right judge can tip the balance in a distressed debt fight, making the often tortuous machinations to find the right bankruptcy jurisdiction worth the effort for debtors.
A private equity-backed industrial company called Multi-Color has provided the latest example.
In January, it funded a new bank account in New Jersey with about $1mn.
Sixteen days later it filed for Chapter 11 bankruptcy in a New Jersey federal court, citing debts of $6bn but no assets in New Jersey besides the fresh bank account.
Multi-Color was really Ohio-based.
However, New Jersey bankruptcy courts had in recent years become a friendly location for debtors who wanted quick restructurings, making the risky bank account manoeuvre for Multi-Color a gambit worth trying.
In an objection to the New Jersey venue, dissident creditors called the move a “cynical manipulation”.
The Department of Justice similarly said Multi-Color’s ploy for New Jersey represented “gamesmanship”.
No matter, Multi-Color and its lawyers pulled it off.
The judge overseeing the case ruled that the bankruptcy code was nebulous enough to allow the bank account manoeuvre.
By April, the firm’s preferred restructuring plan had been approved.
The new frontier is now the use of foreign venues for American companies.
Late last year, the Texas-based retailer Fossil used Part 26A of the UK’s 2006 Companies Act to exchange $150mn of bonds facing an approaching debt maturity after deciding a traditional US Chapter 11 process would have been too unwieldy.
And instead of having equity wiped out in a full-fledged American bankruptcy, in the 26A transaction — Fossil’s lawyers are calling it a “stapled exchange”— shareholders have seen the value of their equity in the company rocket from $80mn to $250mn.
Another American company, New Fortress Energy, similarly is using UK restructuring law to complete a quasi bankruptcy.
The restructuring creativity deployed by lawyers is usually going to be opposed by some creditors even if judges, whether in America or abroad, sign off on manoeuvres.
But in the case of Fossil, a traditional out-of-court bond exchange would not have worked.
Its debt had been issued in small increments and with thousands of holders, the requisite participation thresholds were too difficult to reach.
Instead, it did get enough holder consent to change the governing law in its debt contract to switch from New York state law to English law.
Then the provisions in Part 26A allowed Fossil to do a restructuring after gaining the approval of holders of 75 per cent of the dollar value of its $150mn debt issuance.
Achieving that threshold bound the entire class of creditors to the deal.
In the final step, Fossil’s subsidiary that had utilised the 26A option then filed a Chapter 15 petition in a Houston bankruptcy court, where an American judge ruled the foreign proceeding would be valid in the US.
Lawyers at Weil Gotshal & Manges who designed the Fossil stapled exchange told me the transactions are an example of “good forum shopping”.
US, UK and other restructuring systems have different postures towards issues such as revising priority in debt repayments and imposing losses on dissenting creditors.
Now in a mobile regime, debtors almost don’t have to accept many trade-offs.
An American company can be headquartered in Texas, incorporated in Delaware and issue debt under New York state contract law that is separately subject to US federal securities law.
It can then pursue a debt restructuring using UK law which then is validated by a US federal bankruptcy court.
Fossil was a largely cooperative cross-border bankruptcy.
Soon enough though expect other itinerant restructurings to face accusations of gamesmanship and cynical manipulation.
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