Beard's 2011 Distressed Investing Conference

Earlier this week, the Beard Group, publisher of Turnarounds & Workouts and the Troubled Company Reporter held the 18th annual Distressed Investing Conference. Distressed Debt Investing contributor Josh Nahas, Principal of Wolf Capital Advisors, a Philadelphia based investment advisory firm focused on distressed debt and corporate restructuring, was in attendance. Over the next week or so, we will be providing notes from the various panels at the conference.

The first set of notes focuses on cross-border insolvency, with a particular focus on Canada. Panelists included:
  • Harold L. Kaplan, Panel Moderator Partner/Leader Corporate Trust and Bondholder Rights Team, FOLEY & LARDNER LLP
  • Allan S. Brilliant, Partner, DECHERT LLP
  • Robert J. Chadwick, Partner/Member Executive Committee, GOODMANS, LLP
  • Nigel D. Meakin, Senior Managing Director, FTI CONSULTING
  • Stuart Swartz, Senior Vice President, COMPUTERSHARE TRUST COMPANY OF CANADA
  • Claudia R. Tobler, Counsel Bankruptcy and Corporate Reorganization Department, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP

Cross Border Insolvency

A multinational distressed company’s ability to maximize its restructuring potential requires careful planning and an understanding of the issues raised by competing and potentially co-equal insolvency regimes.

When to file, and whether a deal can be reached out of court is important. When to pull the plug on negotiations for successful out of court restructuring is influenced by regulatory regime. In Canada, the Canada Business Corporations Act allows for holdouts in an out of court restructuring to be bound by a 2/3 majority vote. Makes out of court deals easier and deals with free rider problem. In US, most consensual deals will not work without 90% of holders or better due to free rider problem.

Where to file is heavily influence by DIP lending capacity. Also, US creditors have aversion to CCAA in Canada because there is no UCC. As a result, both Smurfit and Abitibi/Bowater resulted in both concurrent CCAA and Ch 11 proceedings which increased the cost to the estate dramatically. The alternative is a CCAA action with a corresponding Ch 15 filing in the US.

A CCAA with a corresponding Ch 15 filing would allow for a much lower estate costs as administration fees in Canada are much lower compared to US filings according to the panel. Several panelists noted that if the role of a monitor was better understood there may be less aversion to using CCAA and a Ch 15. The monitor is chosen by the Debtor, which to some in the US gives the appearance of impartiality. However, the monitor is tasked handling many of the matters the UCC would tackle in a restructuring.

Since most of the negotiations between the monitor and the debtor happen behind closed doors, the monitor is wrongly viewed as not being a strong advocate for creditors. However, according to panelist Nigel Meakin of FTI the monitor actually can be a forceful advocate and usually the debtor will come to terms with monitor, because if the monitor appeals to the court, judges will generally defer to the monitor’s decision.

Another difference between US and Canadian insolvency is the role of indenture trustee. The Indenture Trustee does not play the same forceful role or have the same fiduciary obligations as US indenture trustees do. Stuart Swartz, of Computershare the largest indenture trustee in Canada highlighted the top 10 difference between US and Canada indenture trustee.
  1. Indenture Trustees unfortunately still cannot claim diplomatic immunity when acting on cross-border deals.
  2. When working with an indenture trustee on a cross border default, get the counsel and parties collaborating as soon as possible.
  3. In Canada, rating agencies view indenture trustees differently than in the US.
  4. Canadian’s don’t do Committees like in the US.
  5. In Canada, there is no need to act unless funded and provided with an indemnity in advance.
  6. Industry practice in Canada and US shapes discussions as does market size and number of industry players. Trustees are expected to be much more active in the US than in Canada. Other regions vary as well. The use of discretion by the trustee will vary greatly in each region.
  7. Canadian trustees don’t create conflicts due to lending situations (re: Successor Trusteeships are more common in the US due to these conflicts).
  8. Trustees are advocates and not experts. This is why we retain the right to hire and rely upon advisers
  9. Regardless of jurisdiction, it is the overall goal of the indenture trustee to maximize return of investment to the holders when acting in a default situation.
  10. As with this presentation, indenture trustees are never given enough time when first called upon. Please reach out as soon as you can.
The panel then tackled some case studies starting with Qimonda, a German bankruptcy with concurrent Ch 15 proceedings. Debtor sought to invalidate intellectual property licences in order to re-auction them and gain more value to estate. German courts would allow, however, objections in US Ch 15 proceedings court would not allow them to do so based on Section 365(n) of BK Code United States Bankruptcy Court for the Eastern District of Virginia, holding that fundamental U.S. public policies of fostering technological growth and innovation, determined that the protections of section 365(n) apply to licensees of a foreign debtor’s U.S. patents.

The Court held that by a joint reading of sections 1521(a)(7) and 1522 of the Bankruptcy Code, strongly favored the application of section 365(n) with respect to the U.S. patent portfolio of Qimonda, a foreign debtor, and (b) permitting a foreign debtor to use foreign law in a chapter 15 case to non-consensually terminate various U.S. patent licensing agreements would be “manifestly contrary to the public policy of the United States” pursuant to section 1506 of the Bankruptcy Code.

The Vitro case was then discussed. Vitro SAB is a glass manufacturer with US subsidiaries and $1.2bn in US$ denominated unsecured debt. The company filed a “pre-pack” under Mexican statute by creating post default $1.9bn in inter-company loans to dilute bondhodlers and vote in favor of debtor’s plan. Per the indenture, inter-company loans were expressly subordinated to the bonds. However, the court allowed the inter-company claims to be used for the purposes of skipping the preliminary phase of case and filing a pre-pack. The Debtor then proposed a plan that invalidated the bondholders subsidiary guarantees and heavily favored the existing equity holders at the expense of legitimate creditors. A concurrent Ch 15 was also filed in the US.

A Conciliador or Conciliator was appointed by the Court tasked with reaching a settlement between the noteholders and debtor. The settlement proposed by the Consiliador put the bondholders in a worse position than before and was rejected.

Meanwhile litigation in New York was initiated by Wilmington Trust in its capacity as indenture trustee with respect to Vitro’s 2012 and 2017 bonds with a combined $1 billion outstanding. These securities were guaranteed by many of Vitro’s US subsidiaries as well as others and the indenture expressly acknowledged that it was governed by NY law and that “any rights and privileges that such Guarantor might otherwise have under the laws of Mexico shall not be applicable.” Wilmington argues as a result of NY Law governing the indenture that the guarantees cannot be avoided by the holding’s insolvency proceeding in Mexico. A ruling from the court in NY is expected soon. The belief is that the NY court will rule in bondholders favor and thus forcing Vitro back to the bargaining table.



hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.