In the current market, investors are increasingly considering their options in relation to the stressed and distressed credits in their portfolios. Whilst mindful of stakeholder relationships, secured lenders may, in some circumstances, wish to consider the "nuclear option": enforcing their share pledge over a holding company of the operating group (ideally, such pledge being over a single company which directly or indirectly holds the entire business - a "single point of enforcement"). Such an enforcement could entail either a pre-planned sale to a third party or the creditors taking ownership of the business themselves ("taking the keys"). This piece outlines some of the key considerations for lenders in pursuing the latter option.
A Viable Single Point of Enforcement
The analysis should begin with assessing whether creditors have a viable single point of enforcement. The terms and governing law of the security are critical as these will determine the enforcement process, including the steps, timing and risk of challenge. The risk may vary widely from jurisdiction to jurisdiction, with England & Wales, Luxembourg and the Netherlands typically viewed as more tried-and-tested and creditor-friendly enforcement regimes than others in Europe. A careful review of the finance documents is also essential, including to establish whether and on what terms the creditors could "credit bid" their debt.
Identifying and Assessing the Default
Prior to enforcement, creditors should be confident that an event of default is continuing, and that the security has become enforceable – both under the terms of the documents and any relevant governing law. Separate to this legal question will be the usual commercial/reputational questions around the rationale for the enforcement.
Valuation and Marketing
The finance and security documents and the governing law will prescribe how the shares subject to the enforcement will be valued. For example, it may be necessary to engage an independent accountancy firm/investment bank to perform a valuation. Commercial and practical considerations, such as timing and the degree of co-operation from the target group, will influence the decision as to whether to go beyond what the documents require, for example, to pursue a full M&A-style marketing process.
The Agent and Security Agent
In most mid-market and large-cap financings, the power to enforce security lies with a security agent/trustee acting on the instructions of a requisite group of creditors. Creditors should bear in mind that it is another institution which will take the enforcement action and bear a share of any associated risk (for which appetites may vary). It will take time and cost money to put these parties in a position where they are ready and willing to act.
Regulatory Approvals
Depending on the target business, there may be antitrust, foreign direct investment or other regulatory approvals required prior to enforcement, which should be factored into the enforcement timeline. Timescales vary depending on the regulator. The public nature of some approval processes may also be a relevant consideration.
Due Diligence
Investors should consider (for example):
- Value leakage: Are there any claims owed by members of the group to the shareholders which cannot be released upon enforcement?
- Claims: Could the group be subject to (historic) claims for which the new owners might be liable?
- Change of control provisions: What are the consequences of the enforcement under the group’s key contracts? Will waivers be required?
- Jurisdiction-specific issues: Given the widely-differing legal regimes across Europe, it may be prudent to obtain advice in each jurisdiction where members of the group are incorporated to reduce the risk of unintended consequences.
In conclusion, there is a host of both legal (in light of the contractual terms of the document suite and as against the legal and regulatory backdrop of the jurisdictions concerned) and commercial (in particular, the impact on the target business and the inclination or otherwise for potentially contentious actions from various stakeholders) considerations to factor in before a creditor considers taking the keys in the event of distress, which all must be carefully considered and calibrated before action (or inaction) is decided upon.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
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