Attorney Articles September 13, 2019

US-Based Syncreon Chooses English Scheme of Arrangement over Chapter 11 for Financial and Corporate Restructure

Summary

On Tuesday (11th September) the English High Court sanctioned two schemes of arrangement which are integral to the restructure of Syncreon, a US-headquartered global logistics business. This decision, the first where a US-headquartered group has openly favoured an English scheme of arrangement over Chapter 11 proceedings, could lead to more US companies seeking to use the English courts and statutory provisions to restructure their financial liabilities as an alternative to Chapter 11 proceedings.

What is a Scheme of Arrangement?

A Scheme of Arrangement (Scheme) is an English statutory procedure set out in Part 26 of the Companies Act 2006 which enables a company to implement a compromise or arrangement with any of its members or creditors (or any class of the same). It requires a requisite number of affected members or creditors to vote in favour of the Scheme and two court hearings, the second of which is for the Scheme to be approved by the court. Once approved, the Scheme becomes effective and binding on all creditors and members. It is not, strictly speaking, an insolvency proceeding as the process emanates from the Companies Act 2006 (which is not within the UK’s insolvency legislation) but is commonly used by companies to restructure existing liabilities.

The advantages of the English law Scheme are that:

  • It avoids the need to enter into formal insolvency proceedings and in turn avoids the stigma and negative impact that can arise from such proceedings;
  • It is flexible – the objective of the Scheme and the rights affected are not prescribed by the legislation;
  • The time from filing the application to approval of the Scheme is relatively quick;
  • The English judges generally take a commercial view when deliberating over the applications;
  • It can be used to cram down the rights of members or creditors (or a specific class of these) where unanimous consent is not possible (i.e. to remove minority shareholders);
  • It is binding on all creditors and members of the company; and
  • It is likely to be recognized in foreign jurisdictions such as the EU (presently), the US and Canada.

Background to the Scheme Applications

Syncreon, which is majority owned by private equity investors GenNx360 Capital Partners and Centerbridge Partners, was formed in 2007 when Walsh Western International, an Irish company and a leading logistics partner of large technology companies, merged with TDI, one of the world’s biggest suppliers of supply chain services to the automotive industry. With help from private equity funds and debt, the combined business grew its operations through the acquisition of NAL, an American company which served the retail, telecom and healthcare sectors, and Compuspar, a Spanish entity.

Although the group posted revenues of US$1.4bn last year, its financial difficulties began in 2014 when it lost its largest tech customer due to the customer’s own reduced market share and subsequent attempt to right-size its business. This loss was followed by sharp and unexpected adverse foreign currency movements. Under its finance documents the group’s interest payments are paid in US dollars. However, 69% of the group’s revenue is generated in foreign currencies. Therefore, a strengthened US dollar has a negative impact on the group’s financial position.

In addition, a 5-year business plan implemented in 2016 improved the financial results for the group but resulted in higher than anticipated launch costs. Coupled with this, material customers and suppliers have become aware of and concerned about the group’s highly leveraged position which has been exacerbated by reports of defaults under its finance documents.

The Scheme applications were issued by Syncreon Group BV (a Dutch registered company) (Syncreon Group) and Syncreon Automotive (UK) Ltd (an English registered company) (Syncreon UK), (together, the Syncreon Schemes). The companies form part of the Syncreon group, a logistics provider for technology and automotive manufacturers, which is headquartered in Michigan and has operations across North America, in addition to assets and revenues in the UK, the Netherlands, Germany and Canada. However, the most significant jurisdictions in respect of the group’s assets and revenues are the US and Canada. The advantage of the Schemes for this group is that they are expected to be recognized in the US and Canada.

One condition for the implementation of the Syncreon Schemes is that recognition of the Schemes is obtained in the US (via a Chapter 15 application in respect of Syncreon UK) and Canada.

Choice of English Scheme

The reasons given by the companies for the choice of an English law Schemes are:

  • The anticipated higher costs expected to be incurred using Chapter 11 proceedings;
  • The fact that the Schemes are not an insolvency proceeding and therefore are likely to avoid any negative effect of formal insolvency proceedings on the group (including the possibility of termination of customer and supplier contracts); and
  • Potential issues regarding recognition of proceedings in other jurisdictions in which Syncreon Group and the guarantors of the PCF and the Notes (both defined below) are incorporated.

The Syncreon Schemes

The Syncreon Schemes only concern the following:

  1. A Parent Credit Facility (PCF) where Syncreon Group is the principal borrower and which is guaranteed by other members of the group including Syncreon UK. This is secured and the principal outstanding is US$680m; and
  2. A Notes Indenture (Notes) issued by Syncreon Group pursuant to which US$225m Notes have been issued. These are also guaranteed by other members of the group including Syncreon UK. However, these are unsecured.

The proposed outcome of the Syncreon Schemes is that:

  • The PCF debt would be released in exchange for restated debt of US$225m owed by Syncreon Group and 80% equity (subject to dilution*) in a new Dutch parent company (Newco); and
  • The Notes would be cancelled in exchange for a 4.5% interest (subject to dilution*) in the Newco together with warrants to acquire 10% of such equity (subject to dilution*).

*Dilution of equity in Newco is likely to occur as a result of equity being granted to the lenders and backstop lenders under the RSA.

It is understood that other existing debts of the group will be restructured consensually and simultaneously with the implementation of the Syncreon Schemes. A Restructuring Support Agreement (RSA) entered into in May provides for certain liquidity facilities to be restructured and new money to be provided. In return the lenders will receive equity in Newco. The RSA requires that the Syncreon Schemes and the proposed restructuring are all inter-conditional.

In addition, the PCF lenders and holders of Notes who signed up to the RSA before 22 July qualify for “lock-up” payments (which take the form of 5.5% equity in Newco for the PCF lenders and 2.5% equity for the holders of the Notes) in the event that the Syncreon Schemes are implemented.

In summary, the Syncreon Schemes and proposed restructure will provide additional liquidity to the group and will reduce the group’s overall debt liability. Unsecured trade creditors will not be affected by the Syncreon Schemes or corporate restructure. The existing majority equity holders will lose their interest in the Syncreon Group.

The Process for Approval of the Syncreon Schemes

The first Syncreon Scheme hearing was held on 25 July 2019. This was a convening hearing where Mrs Justice Falk considered the proposed classes of creditors and whether these were fair.

Mrs Justice Falk also considered whether there was any major “roadblock” to the Syncreon Schemes being approved and in doing so considered the jurisdiction of the English court in respect of the Syncreon Group Scheme application (due to the fact that Syncreon Group is a Dutch registered company). It was noted that in July the governing law and jurisdiction of the PCF and the Notes was changed from New York law to English law. This was done with the express intention of improving the ability of the companies to apply for a Scheme in England. Such changes were made with the requisite majority consent and knowledge of the creditors. In addition, Syncreon Group has a bank account with KBC in England.

At the hearing Mrs Justice Falk relied on Re Vietnam Shipbuilding Industry Groups [2013] to find that the change of the governing law of the PCF and the Notes to English law and the fact that the parties submitted to the jurisdiction of the English courts does provide Syncreon Group with a sufficient connection with the English jurisdiction. The change to the governing law is expressly contemplated by Article 3(2) of the Rome I Regulation (593/2008) and, following Mauritius Commercial Bank Ltd v Hestia Holdings Ltd [2013] EWHC 1328 (Comm), there is no objection in principle to this under English law. As such, there was found to be no major roadblock to the Syncreon Scheme applications.

Furthermore, after consideration of the composition of the classes affected by the proposed Syncreon Schemes, Mrs Justice Falk ordered the summoning of meetings of the proposed classes of creditors to vote on the Syncreon Schemes.

The meetings of the classes of creditors affected by the Syncreon Schemes was held on 3 September. The legislation requires the consent of 75% of creditors by value and 50% by number in each class in order for the vote to be passed by each class. The affected creditors at the convening meetings voted overwhelmingly in favour of the Syncreon Schemes.

The second Syncreon Schemes hearing was held on 10 September 2019. At this hearing Mrs Justice Falk considered issues such as fairness and jurisdiction in order to determine whether the Syncreon Schemes should be approved. The court’s approval is required in order to ensure that the Schemes proposals are fair, reasonable and represent a genuine attempt to reach agreement between a company and its creditors.

In order for a Scheme to be approved it must compensate the affected creditors for the Scheme’s alteration of their rights. The Syncreon Schemes provide equity in Newco to the PCF and Notes creditors as compensation for the reduction in their claims. This compensation is speculative as its value is dependent on the turnaround and viability of the Syncreon group. However, Mrs Justice Falk took into account the likely dividend to the classes of creditors in the event that the Syncreon Schemes and restructure were not implemented and the likely dividend to the creditors of the group in the event of either enforcement and an accelerated sale or a piece-meal wind down of the group. She found that the creditors of the group whose interests are affected by the Syncreon Schemes would be materially better off if the Schemes were implemented rather than not.

With Syncreon Group being a foreign registered company, Mrs Justice Falk was satisfied, after reviewing evidence from legal experts, that the Schemes would be recognized in the relevant foreign jurisdictions.

Recognition of the Syncreon Schemes

On 8 August at an initial hearing the Canadian court granted relief to the group’s foreign representative and recognized the Syncreon Scheme proceedings as foreign non-main proceedings. The substantive recognition hearing in Canada is listed on 19 September. The US court has, following the English court sanction of the Syncreon Schemes, granted an order pursuant to Chapter 15 recognising the Syncreon UK Scheme in the US.

It is considered likely that the Syncreon Schemes will be recognised in the Netherlands, Ireland and Germany as a result of Regulation (EU) No 1215/2012 of the European Parliament and the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast).

Popularity of Schemes with Foreign Registered Companies

This raises the question of the jurisdiction of the English courts to hear Scheme applications brought by foreign registered companies. This is not the first time that foreign registered companies have chosen to use an English law Scheme to restructure liabilities. In the Syncreon Scheme applications the court found that a change of the governing law of the debt documents to English law was a significant factor in determining sufficient connection to England. Another recent example of the English court finding that a change of the governing law of finance documents to English law was sufficient to confer jurisdiction on the English courts for a Scheme for a Dutch company was Re NN2 Newco Ltd [2019] ewhc 1917 (Ch).

Other examples of foreign groups using the English court recently include Avocet Mining Plc’s West African miner subsidiary, Societe des Mines de Belahouro SA and Pennsylvania coal miner Atlantic Carbon Group. However, it is the first time that a US group has openly favoured a Scheme over Chapter 11 proceedings.

The Future Popularity of English Schemes

This could be the start of a new trend and a further advancement of the attractiveness of English restructuring proceedings to foreign stakeholders. Given the current Brexit headwinds it is important to recognize the significance of the approval of the Schemes for foreign registered companies by the English court. Brexit was one of the cited reasons for the Indonesian arm of Asia Pulp & Paper choosing Ireland over the UK to implement a financial restructure using an Irish Scheme. As the nature and timing for Britain’s exit from the EU is still uncertain, there is no certainty that courts of EU member states will continue to recognize the English court proceedings in the manner in which they do now. This may impact the English court’s continued ability to approve Schemes for companies registered in the EU (as, among other requirements, the English court must be satisfied that the Scheme will be effective in all relevant jurisdictions). As in the Syncreon Schemes, which required applications in the US and Canada for recognition, it may well be that following Brexit applications for individual recognitions from relevant EU jurisdictions can be obtained and that English Schemes shall continue to remain a favoured restructuring tool for international groups.

A version of this article was published by the Global Restructuring Review on 12 September 2019