Credit Bids on the rise in Australia

Investors in the Australian market are more sophisticated than ever and – unsurprisingly – so too are the restructuring transactions being promoted by these investors. One such transaction is the credit bid. While not a transaction structure that is formally recognised in Australia, a credit bid is a valuable tool in a financier's playbook that can be implemented to achieve a return where the original financing is unable to be repaid in accordance with its terms.

Credit Bidding

A credit bid is a transaction whereby a creditor makes an offer to acquire property owned by its borrower, using its debt (or a portion of it) as the purchase price. In effect, the creditor offsets (either partially or in full) its existing secured debt as consideration for the acquisition of the assets. In Australia, a credit bid is generally implemented either through a consensual agreement between the borrower and creditor, or within the framework of a formal insolvency regime, such as receivership or voluntary administration.

The recent uptick in the injection of international capital into Australian businesses has brought with it global investors who are familiar with the ins and outs of a credit bid as this practice is regularly implemented in the United States (where credit bidding is codified¹) and the United Kingdom, where credit bidding (while not legislated) is a well-trodden path. In recent years, we have seen an increase in the use and implementation of credit bids in Australia as either:

1. a loan-to-own strategy, where an investor makes a credit bid after acquiring the debt in the company at a discounted rate; or
2. a defensive or "Plan B" strategy in circumstances where a creditor's initial investment is no longer performing or is failing to provide the anticipated returns that were envisaged at the time of investment. In these circumstances, a creditor can protect its investment where an immediate exit would see it suffer a considerable loss.

This article explores the practice of credit bidding in Australia in the context of the receivership and voluntary administration regimes and highlights some key considerations for investors and insolvency practitioners alike.

Key Considerations

As credit bidding is not legislated in Australia, the statutory duties imposed on the relevant insolvency practitioner form the relevant legislative framework in which a credit bid must be considered. As outlined in our article "Statutory Powers of Sale ", both voluntary administrators and receivers have a statutory power of sale in respect of the property over which they are appointed — a power of which is subject to various duties depending on the type of appointment. A spotlight is placed on these duties in the context of a credit bid where the insolvency practitioner's very appointor becomes their counterparty in a sale transaction.

When implementing a credit bid in the context of a formal insolvency regime, considerations including the following become relevant:

1. Sale Process – Any sale process conducted will need to be robust and defensible in order for the credit bid to withstand criticism. In the context of a receivership, a receiver will need to be able to demonstrate that he or she took all reasonable care when selling the relevant assets and that the credit bid "price" represents at least the market value of the assets being sold or, if the assets do not have a market value, the best price reasonably obtainable in all the circumstances.² While administrators are not under the same duty in relation to price, they will need to demonstrate that the credit bid results in a better return for the company's creditors than an immediate winding up of the company.³ In particular, an insolvency practitioner should be mindful to avoid the perception that they have run a "sham" process. For this reason, an insolvency practitioner should either (a) be satisfied at the outset that if a reasonable price can be obtained from the market the secured creditor will be prepared to transact; or (b) determine whether the secured creditor intends to participate in the process, and if so, implement appropriate information flow protocols (discussed further below).
2. Information Flow – Insolvency practitioners must be particularly mindful of confidentiality and the flow of information to their appointor (where an appointment has been made by the secured creditor). In particular, credit bids may offer secured creditors an advantage over the other bidders given any third-party purchaser would be required to pay out the secured creditor's debt position in order to receive the assets free from encumbrance. In addition, a secured creditor is typically in a position to transact quickly given the prior due diligence undertaken when the initial financing was put in place. Accordingly, if it is determined that the appointor intends to participate in the process, appropriate protocols should be implemented to ensure that the secured creditor is not given an unfair advantage over other bidders (i.e., by being provided with information about the pricing or transaction structures being promoted by other bidders). Alternatively, a secured creditor may not participate in an insolvency practitioner run sale process until it has been completed (or at least the initial phase of the sale process completed) and the secured creditor has had an opportunity to consider the level of interest and value being proposed by third party bidders.
3. Financing and Liabilities – While the concept of a credit bid is straightforward (the bidding creditor uses their "debt" as the purchase price such that post-transaction their debt is offset by the value of the bid price), there are a range of transaction costs and liabilities that will need to be satisfied in order to complete the transaction. For example, stamp duty, receivership costs (including priority claims that fall within the ambit of section 433 of the Corporations Act 2001 (Cth)) and other transaction costs are additional amounts for which actual funds may need to be provided.
4. Regulatory Approvals – As with any other acquisition transaction, ownership changes resulting from credit bids may trigger the need for approvals from regulatory bodies such as the Foreign Investment Review Board and the Australian Competition and Consumer Commission. While these approvals were unlikely to have been needed in the financing stage, investors should identify any regulatory hurdles to taking an ownership stake in the relevant business at an early stage.
5. Employees – The success of any acquired business often hinges on the continuity of key personnel. In circumstances where there have been multiple defaults and standstill/forbearance arrangements, the relationship between key personnel and the secured creditor may be strained. In this context, early engagement with staff can be key to ensuring a smooth transaction.

Conclusion

Credit bidding not only allows for the efficient acquisition of distressed assets but also presents a viable alternative for (typically secured) financiers seeking to protect their investment. The strategic implementation of credit bids, especially by those accustomed to the complexities of international markets like the United States and United Kingdom, underscores the adaptability and sophistication of investors navigating our local insolvency framework. Despite the lack of formal recognition within the

Australian legal system, the increasing prevalence of credit bidding emphasises its effectiveness as a successful restructuring tool.

_{1 U.S. Code Title 11. Bankruptcy § 363(k).
2 Section 420A of the Corporations Act 2001 (Cth). See also our article "Statutory Powers of Sale".
3 Section 435A of the Corporations Act 2001 (Cth). See also our article "Statutory Powers of Sale".}

_{White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.}

_{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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