The recent restructuring of the U.S.-based group syncreon, using an English scheme of arrangement, highlights how the English scheme remains an ever-popular restructuring tool in cross-border restructurings.  

Syncreon is widely considered to be the first case where an English scheme has been used to restructure the liabilities of a U.S.-based company.  It was also the first time that an English scheme has been recognized in Canada.  Given the innovate means by which the jurisdiction of the English court can be established, it is anticipated that more U.S.-based entities could seek to restructure their balance sheets using an English scheme.  In this article we set out what you need to know about the English scheme and discuss its application in the syncreon restructuring.

Like a U.S. Chapter 11 proceeding, an English scheme is a debtor-in-possession proceeding whereby the company proposes the scheme and retains full control of the company during this process.  The terms of the scheme are not prescribed and, therefore, the company has complete flexibility with regard to the terms of the scheme.  A scheme can be used for a variety of purposes ranging from an amend and extend to implementing a debt-for-equity swap.

For the purposes of voting, creditors are divided into classes by reference to there being a sufficient commonality of interest between creditors in the same class.  As a starting point, secured and unsecured creditors will vote in a separate class.  A scheme is approved if a majority of creditors, representing 75% in value of each class, vote in favor of the scheme.  In addition, once the scheme has been approved by the creditors of the company, the scheme must be sanctioned by the court.

The company selects which creditors it intends to scheme.  Typically, only creditors with an economic interest in the company will vote on the scheme (i.e., those creditors who are ‘in-the-money’).  Any “out-of-the-money”’ creditors are usually disenfranchised and will not have an interest in the restructured business going forward. 

In order to restructure in the UK, broadly speaking, a company must either (i) be incorporated in the UK, (ii) have its centre of main interest (COMI) in the UK; or (iii) have a “sufficient connection” to the UK.  In practice, this has meant that those international entities who wish to restructure in the UK without a pre-existing nexus to the UK will either undertake a “COMI shift” to the UK, insert a UK company into the existing group structure – this entity then accedes as a principal borrower to the relevant finance documents and becomes the scheme company; and/or a company can procure a change in the governing law of its finance documents to English law for the purposes of establishing a “sufficient connection” to the UK.  The innovative means by which jurisdiction can be established in the UK for the purposes of proposing an English scheme to implement a balance sheet restructuring means that companies from across the world are regularly restructuring in the UK even though, prior to the commencement of the restructuring, the company had little or no connection to the UK.

In the case of syncreon, Jones Day represented a group of secured term loan and revolver lenders (the “Ad Hoc Group”) in the global restructuring of syncreon Group B.V. (together with its subsidiaries, “syncreon”)—a leading provider of logistics services with over 14,000 employees across 100+ facilities located in 20 countries around the world.  

In the beginning of 2019, prior to the commencement of restructuring negotiations, syncreon had approximately $985 million in funded debt, in the following capital structure:

• $680 million in secured term / revolving loan debt (the “Secured Loans”)
• $80 million in secured ABL debt (the “ABL Debt”)
• $225 million in unsecured notes (the “Notes”).

In early 2019, the Ad Hoc Group formed to assess syncreon’s financial position amid mounting liquidity pressure.  Shortly after organizing, the Ad Hoc Group agreed to provide syncreon with a short-term injection of liquidity, and thereafter began negotiating a comprehensive balance sheet restructuring with syncreon and other key stakeholders.

After months of hard-fought negotiation, the parties agreed upon the following economic deal:

1. Secured loan lenders would receive:

a. 85.5% of the reorganized equity (assuming timely joinder to the Restructuring Support Agreement (“RSA”));

b. $225 million in new second-out term loans; and 

c. the opportunity to participate in a portion of a $125.5 million new-money, secured, first-out term loan (“FOTL”).  

2. Noteholders would receive:

a. 7% of the reorganized equity (assuming timely RSA joinder); and 

b. warrants to acquire 10% of the reorganized equity. ¹   

3. syncreon’s other funded debt (including the $80 million ABL debt) would be consensually refinanced.

With regard to the implementation of the restructuring, syncreon was a U.S.-based entity with obligors across the world.  The borrower of the Secured Loans and issuer of the Notes was a Dutch B.V and the relevant finance documents to be restructured were, at the time, governed by New York law.  There were, therefore, a number of potential jurisdictions to consider from a restructuring perspective including a U.S. Chapter 11 proceeding and an English scheme of arrangement.  Although both processes are similar in that both can be used to implement a balance sheet restructuring, they are not identical.  In this case, the parties ultimately determined that an English scheme was the best approach.

One of the most important considerations in that analysis was the fact that a judgment of the English court approving an English scheme has the benefit of automatic recognition across Europe².  In contrast to a scheme, a U.S. Chapter 11 proceeding would not benefit from any such automatic recognition and, where necessary, recognition of a U.S. Chapter 11 proceeding would need to be sought on a jurisdiction- by-jurisdiction basis thereby potentially adding significant costs and, execution risk to the transaction.  Recognition in Europe was important given that certain entities that both guaranteed syncreon’s funded debt, and generated significant revenue, were organized in various E.U. countries.  

An additional restructuring consideration was syncreon’s need to obtain a release of the guarantors on the Secured Loans and Notes in order to give full effect to the schemes.   Unlike Chapter 11 (where, absent special circumstances, a party benefitting from a release must be a debtor), an English scheme can be used to release guarantees even if the guarantor is not a party to the scheme.  Further, given that an English scheme is not technically an insolvency proceeding (and is available to both solvent and insolvent companies alike), the utilization of the scheme would potentially mitigate some of the negative effects of formal insolvency proceedings (e.g., negative press; the possibility of attempted termination of customer and supplier contracts).

Once it had been determined that the English scheme was the most suitable restructuring tool, jurisdiction in the UK was established by amending the Secured Loan and Notes documentation to change the governing law from New York law to English law.

Ultimately, syncreon’s restructuring was supported by approximately 99% of the Secured Loan lenders and Noteholders.  The schemes were sanctioned by the English court in early September 2019 and were recognized in the U.S. and Canada shortly thereafter.  Recognition in the U.S. and Canada ensured that the terms of the scheme were recognized in both jurisdictions and would be enforced against any dissenting creditors located in either the U.S. or Canada.

Given where we are in the credit cycle, it is anticipated that an increasing number of companies will need to implement a balance sheet restructuring on a cross-border basis.  In these situations, a holistic approach is required to determine the right jurisdiction(s) in which to restructure with experienced advisers who truly understand the international restructuring landscape.  Lenders need to carefully consider the restructuring options available to them whilst at the same time anticipating in advance where the company might seek to restructure its liabilities, potentially to the detriment of certain stakeholders.  Accordingly, whilst the advent of forum shopping has created many new opportunities to maximize recoveries for the benefit of stakeholders, abusive forum shopping is not uncommon and in all situations, lenders need to ensure that they are adequately protected in order to maximize recoveries and minimize the opportunity for down-side risk in these situations.   

Please feel free to contact Brett Barragate at 1.212.326.3446 or bpbarragate@jonesday.com or Kay Morley at kmorley@jonesday.com if you would like to discuss further any cross-border restructuring, bankruptcy or lending issues noted above.  

The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect the views or opinions of the law firm with which the authors are associated.