Webinar panellists: Sally Gilding, Senior Consultant, Ocorian; Alastair Dick, Head of Corporate Financial Restructuring, PwC; Geoff O'Dea, Partner, Baker McKenzie; and Jonathan Proctor, Partner, Stephenson Harwood.
The implications of the COVID-19 pandemic continue to stretch companies to their limits and many may become overleveraged as they battle with revenue loss, rising borrowing costs and dwindling cashflows. For this webinar, we brought together a panel of corporate trust experts specialising in insolvency, restructuring and debt-financing to discuss the current state-of-play.
The experts considered the impact of the pandemic on current debt capital markets transactions and the importance of corporate trustees in restructurings and insolvencies. The discussion also covered the trend for appointing successor trustees in times of volatility as debt deals may become distressed and more complex; the importance of trustee indemnities and the ways in which corporate trustees are adjusting to the new normal of industry-wide remote working and virtual noteholder meetings.
The increasing trend of successor trustees
In times of volatility and market uncertainty, the business-as-usual nature of transactions can often become more complex and require significant involvement of trustees, while they consider potential consents and waivers or exercise discretion in respect of defaults, downgrades or even enforcement scenarios.
"We are definitely seeing a trend of incumbent trustees wanting to exit structures. These days schemes of arrangements are being contested more and more, similarly with enforcements. The trend is to look at successor trustees in that area...stakeholders want trustees to be more commercial and take much more of a view on things"- noted Geoff O'Dea from Baker McKenzie.
With the increase in potential default scenarios that may arise as a result of COVID-19, successor trustees need to have robust take-on processes and strong capabilities to represent the interests of all noteholders. Flags to look out for might be current conflicts, transactions operating in jurisdictions with a high risk-profile, and potential or impending litigation.
Jonathan Proctor from Stephenson Harwood added "trustees should be wary of an increasing trend of activist investors who seek to install a 'compliant' trustee to implement a specific set of objectives, that's where it can get slightly difficult."
Enforcement during a pandemic - to act or to refrain?
Regarding indemnities, Sally Gilding then noted that there are certain sensitivities around enforcement in the current climate, and how it could potentially be damaging for trustees to, for example, enforce security on hospitals or student loans. How much leeway do the trustees have in making those decisions?
Considering that trustees typically don't act unless they are indemnified by noteholders during restructurings, the panel considered the scenario of trustees being instructed to enforce assets belonging to the UK's much revered National Health Service. Trustees would certainly need to ensure that they have received instruction from the correct persons and are able to rely on an appropriate indemnity for any action they take. Under the strict terms of documentation, trustees would have no option but to proceed, however trustees may have to consider any reputational issues associated with carrying out an unpopular enforcement, and determine the extent of financial indemnity which would effectively compensate for any reputational damage.
Trustees permitting virtual noteholder meetings
As trustees and their clients continue to work remotely (and to respect social distancing measures) and without the ability to hold in-person meetings with direction from noteholders and/or their delegates, which options would be available to trustees to ensure that they have been correctly instructed?
Both the panellists and the live audience had interesting viewpoints. One member of the audience stated "Virtual noteholder meetings are already happening. Generally, notes in global form only require one person to be present and voting, and most trust instruments allow the trustee to prescribe additional regulations for a meeting which would allow meetings by phone or video." Another audience member mentioned that they were due to virtually launch a consent solicitation later that afternoon.
While it was agreed that there may be a temptation to wait for things to return to normal, in the interim, written resolutions which have a much lower quorum requirement, may be a viable alternative.
Jonathan Proctor added that in practice, trustees would need to
feel comfortable in the exercise of discretion to allow alternative
meeting forms to take place and assess the consequences of not
holding a meeting in-person. Would it be the lesser of two evils to
allow a virtual meeting to proceed? Trustees would need to have
suitable indemnities and legal counsel opinions in order to get
comfortable with the meeting.
Trustees may also have to consider what sort of technology they use to hold the meeting. Noting the security issues regarding video-conferencing platforms, trustees will need to ensure that any such technology is robust, secure, and appropriately disclosed to all participants through meeting documentation.
How should trustees prepare?
A question from the audience asked what trustees should be doing to prepare themselves for liability management exercises and restructurings down the line? In response, the panel agreed that trustees must ensure that they are adequately indemnified before taking any action. At Ocorian, we are already seeing evidence of trustees convening noteholder meetings in an electronic format, and though embracing the new normal, trustees will need to ensure that their actions are appropriate for the circumstances and that relevant advice has been taken.
The panel concluded that for companies experiencing or anticipating difficulty, the best course of action is to take advice, early and often. Reach out to your lawyers, reach out to your brokers, and reach out to your financial advisers. Get the best of information. We are all learning as we go along and things are moving pretty fast, so it's important to stay on top of what everyone is doing.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.