Posted on Sep 21, 2021 at 6:04 PM
Rally, Bourbon …. it’s over. As of October 1, banks will no longer have their arm twisted in France in major financial restructuring. The transposition into French law of the European directive on corporate insolvency strengthens the weight of banks in negotiations with their debtors. “It is a new balance which is essential between the forces in presence, welcomes a banker. Investors will have to engage in a real tactical analysis of French procedures ”.
What will count from now on? Possess the debt with the strongest collateral, a so-called senior debt, which is generally held by traditional banks. They will be able to more easily impose their plan, force other creditors to abandon their debts, or even take the keys of the company in the face of unprotected creditors, bonds, such as hedge funds, or a recalcitrant shareholder. So dictate their terms. It is the new device of Anglo-Saxon origin known as “cramdown”.
Until now, even the least protected from creditors, alternative funds that bought back unsecured bonds at a discount on the markets, could with a blocking minority benefit from a veto right. Thus, even if a large proportion of creditors together found common ground with the company, a minority could block them.
Loss of influence
“Unsecured bondholders will lose their influence and the harmful power associated with their veto power. This could save time, ”said Noam Ankri, head of the restructuring department of the Ashurst cabinet and chairman of the Paris Europlace Reversal Commission.
Conversely, the value of the banks’ claim on a company in difficulty will be higher tomorrow, because it will be associated with more rights. If arbitrage funds want to buy them back, they will have to pay more and better compensate the banks.
Another strong point in favor of the banks, they will be able to offer a plan that competes with that of the company in receivership. If the shareholder refuses any concession, the senior banks may then threaten to activate the famous “cramdown”.
Some bankers are even betting on the fact that thanks to the new text, they will be able to escape any concession. “If your debt is 100% secure, you will not need to participate in the debt restructuring plan,” argues one of them.
End of the rally exception
Finally, the last strong point in favor of banks, the famous loophole from which holdings, of the Rallye type, have been removed. Until now, these could claim to make little turnover to prevent creditors from consolidating their interests. This is particularly what Rallye did, although a shareholder of Casino, which generates tens of billions in turnover.
From now on, it is the consolidated value of the turnover of the holding company and its participations which will prevail. In addition, there can no longer be a forced spreading of the debt over ten years for companies above a certain threshold, underlines Noam Ankri.
“It’s a real upheaval. However, the objective is above all dissuasive, nuances the lawyer. It is to avoid in the future the execution of plans that are too unbalanced ”. A leader will know that he will not necessarily have an interest in favoring his shareholder, because his most senior banks will be able to make him bend. “This was the meaning of the amendment, says Macron, which since 2015 has allowed creditors to dispossess a shareholder in receivership, a provision that has never been activated,” he adds.
For French banks, becoming a shareholder remains a red line. Their temptation tomorrow will potentially be to sell their debts to hedge funds capable of paying more. “These new provisions will strengthen the attractiveness of the French secondary debt market, with probably a better valuation of the secured debts which would be ceded by the banks”, estimates Lionel Spizzichino, lawyer at Willkie Farr & Gallagher.