Fitch: Solocal Provides Landmark in EU Restructuring Reform

Thu Jun 12, 2014 11:41am EDT

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(The following statement was released by the rating agency) LONDON, June 12 (Fitch) Solocal's restructuring follows Eurotunnel and Autodistribution as a modern landmark precedent in proactive consensual debt restructurings in France, says Fitch Ratings. The use of the accelerated sauveguarde (SFA) to bind minority holdouts signals the arrival of a legitimate alternative to the UK's Scheme of Arrangement (Scheme) as a pre-insolvency court-sanctioned process. We assigned new ratings to Solocal, the French group that owns the PagesJaunes directories and online digital solutions media brands, after it emerged from accelerated sauveguarde (SFA) and completed its amend-and-extend process for its term loans on 6 June. Solocal's emergence from SFA highlights progress in the evolution of France's legal frameworks towards Chapter 11-style rehabilitation of solvent businesses with awkward capital structures and complex creditor and shareholder masses. The SFA allowed Solocal to implement a plan with current and potential shareholders to raise equity that had to be used to pay down legacy debt at par in exchange for extension of maturities from loan creditors. Over 95% of loan creditors supported the transaction, with the rest forced to accept under the SFA despite loan documentation requiring 100% agreement to a material change such as an extension of maturity. Solocal's use of SFA contrasts with other distressed companies in Continental Europe such as German building materials group Monier, Italian directories publisher SEAT and Spanish retailer Cortefiel. These companies shifted jurisdiction to the UK under European "centre of main interest" directives to access more creditor-friendly court-sanctioned Schemes of Arrangement despite reforms in their own jurisdictions. The creditor-sponsored Schemes and Solocal's debtor-driven SFA experience contrast with the restructuring of gaming group Codere in Spain, where the prospect of a value-destroying "concurso" leaves creditors, management and incumbent shareholders negotiating standstill after standstill to avoid triggering the insolvency process. The difference between the UK Scheme and the SFA relates to the power of creditors and debtors, or the management in Solocal's case, to use their position under the laws to start a restructuring plan. Managements often complain that UK Schemes only buy limited time for distressed companies, as majority creditors bind minorities and cram down junior stakeholders while imposing plans principally aimed at minimising loss to their own debt exposure. Likewise, Solocal's restructuring represents an effective "equity cure", and the lessons may not apply to other French companies in distress where new money from existing shareholders may not be forthcoming and debt-for-equity swaps still require shareholder approval. It may only be a matter of time before debtors demand more Chapter 11 and SFA-style pre-insolvency protections in the UK and other European jurisdictions. Additional reforms to be introduced in France on 1 July will allow creditors to present their own plans in addition to those of a debtor. Despite the current, unclear process with Codere, Spain has introduced new legislation that increases the ability of creditors to force debt-for-equity swaps without shareholder consent. The requirement for consent remains an obstacle to consensual pre-insolvency restructurings in France. Director liability presents similar obstacles in Germany. Successful creditor-sponsored Schemes in the UK and Solocal's debtor-sponsored SFA show that jurisdictional competition and forum shopping can lead to best practice and constructive reforms that will eventually catch up with the transition from European bank lending towards capital markets, especially as the next default cycle is likely to be larger and last longer due to bailout fatigue as well as fiscal and monetary policy exhaustion. Contact: Edward Eyerman Managing Director Corporates +44 20 3530 1539 Fitch Ratings Limited 30 North Colonnade London E14 5GN Cecile Durand-Agbo Senior Director Corporates +44 20 3530 1220 Karsten Frankfurth Senior Director Corporates +49 69 76 80 76 125 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. 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