United States: Extracting Value From Leveraged Businesses: The Case Of Mclaren And Its Bondholders

In recent years, market participants have watched with interest from across the Atlantic as U.S. out-of-court liability management and restructuring transactions moved material assets out of the creditors' collateral pools, to enhance liquidity, to raise additional debt or to extend the maturity of existing debt. Many have wondered when these sort of transactions will reach European shores.

That moment has now arrived.

INTRODUCTION

In the early days of the COVID-19 crisis, the UK-headquartered McLaren Group ("McLaren" or "Group") faced a material liquidity shortfall. Having reportedly failed to obtain UK government funding, it sought to raise additional liquidity by transferring some of its real estate and classic car collection outside of its restricted group ("Proposed Transaction"). These assets previously secured McLaren's obligations under its bonds, and some bondholders strongly contested that the Proposed Transaction breached the terms of the bond indenture. McLaren sought court approval for the Proposed Transaction, but the court never decided whether the Proposed Transaction was permitted. That being said, the issues in dispute are instructive and may foreshadow future differences of view among market participants in these situations.

EXISTING FINANCIAL ARRANGEMENTS

• A fully drawn £130 million multi-borrower revolving credit facility dated 10 July 2017 ("RCF"); and
• £370 million 5% senior secured notes and $350 million 5.75% senior secured notes, each due in 2022 and issued by McLaren Finance plc under an indenture dated 20 July 2017 ("Notes").

The obligations of the RCF borrowers and the Notes issuer were guaranteed by various Group entities and were secured by assets that included McLaren's collection of classic cars ("Heritage Cars") and real estate at the Group's Woking HQ ("Properties") (together, "Security"). The Security was held by U.S. Bank Trustees Limited as security agent for the creditors ("Security Agent") and was subject to an intercreditor agreement dated 20 July 2017 ("Intercreditor Agreement").

THE DISPUTE

McLaren's proposed solutions for its urgent cash requirements were:

The existing creditors objected vociferously to the partial release of the Security by the Security Agent which was required to give effect to the options above. In particular, a group of ad hoc noteholders ("Ad Hoc Noteholders") warned the Security Agent that it was not permitted to release the Security. McLaren, however, believed that the release of the Security was compliant with the covenants under the Notes and the RCF

In an attempt to resolve the issue, McLaren applied to The High Court of Justice of England and Wales ("Court") for declaratory relief against U.S. Bank Trustees Limited (in its capacity as Security Agent and trustee under the Notes). McLaren argued that the Intercreditor Agreement permitted it to enter into the Proposed Transactions and that McLaren alone was responsible for certifying that the conditions to the release of the Security had been met—the most important of which was that McLaren did not dispose of "all or substantially all" of its assets. McLaren argued that the Heritage Cars and the Properties did not reach that threshold given that they amounted only to approximately a fifth of the Group's revenues and a quarter of its assets.

In Court, McLaren stated that the Ad Hoc Noteholders had initially threatened to accelerate maturity of the Notes on the basis that the Proposed Transactions would breach the terms of the Notes. Instead, the Ad Hoc Noteholders proposed an alternative financing that did not involve the release of Security and added that rejecting the Proposed Transaction would lead to a protracted legal battle that the Group could not afford.

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