What banks should pay attention to when granting consortium financing or considering restructuring of consortium debt.
Nearly a year and a half has passed since entry into force of Poland’s Restructuring Law. The practice over recent months has shown that debtors prefer restructuring proceedings, and the number of bankruptcy cases has steadily fallen.
The introduction of new solutions and their popularity will impact the legal situation of creditors. Particularly interesting issues arise in the case of consortium financing, i.e. when several lenders, typically banks, create a consortium to provide joint financing to a debtor or capital group. Here we will focus on a few key issues for consortium members and security agents which they should consider at the stage of providing consortium financing or when considering restructuring of consortium debt, in the context of the new regulations governing the restructuring of borrowers who are insolvent or at risk of insolvency.
Consortium lending is typically a comprehensive form of financing a borrower or even its entire group. Typically the borrower has little or no other financing, as the consortium ensures the debtor access to both revolving and term credit.
The comprehensive nature of the financing carries over to the package of security instruments the creditors expect. Usually the collateral will include all of the group’s essential assets as well as the shares in the main companies in the group.
To simplify the security structure and unify the rules for enforcement, a security agent is appointed, holding the common security instruments of the consortium members. This typically is tied to the function of administrator of pledges and mortgages. Leaving aside the disputes in the legal literature on whether a pledge or mortgage belongs to the administrator’s property or the property of the individual creditors, it should be recognised that the sole entity authorised to enforce the security instruments established in favour of the administrator is the administrator.
In the context of recovery proceedings (postępowanie sanacyjne), or more broadly restructuring proceedings, the security agent should be mindful of the consequences of the function it fulfils.
Taking over shares
One of the main forms of collateral the consortium will expect to receive is the shares of the main companies in the group. This security allows the lenders to take quick control over the group and sell it to an interested investor to pay off their secured claims.
If the security agent receives instructions from the creditors to take over the shares of an entity which may file, or has already filed, an application to open recovery proceedings, the agent should consider Art. 116(2) of the Restructuring Law, which provides, “In cases involving an arrangement, if the debtor is a commercial company, … a creditor which is a company, or the persons authorised to represent it, do not have a right to vote if the company is a controlling or controlled company in relation to the debtor.”
In light of this section of the law, if restructuring proceedings are opened with respect to the debtor, once a controlling stake in the shares has been taken over by the security agent, as a creditor, the security agent will be deprived of influence over any arrangement that might potentially be reached with the debtor. Its influence over the supervisor (Restructuring Law Art. 38) or the administrator (Art. 28), and the composition of the creditors’ council (Art. 121 and 123), will be greatly limited. The other members of the consortium should also consider whether loss of voting rights by the security agent as a creditor will affect the position of the entire consortium, e.g. by reducing its voting strength in the council or meeting of creditors.
Security agent for bondholders
Apart from bank lending, more complex financing may also include bond financing. In that case, if the bondholders are secured, typically the same entity acts as security agent for the consortium lenders and for the bondholders. A security agent for bondholders who is also the administrator of the mortgages established for the bondholders should note that the Restructuring Law vests it with specific rights and duties, even if it does not serve as the bank representative. Under Art. 363(2) of the Restructuring Law, “If a mortgage has been established against the issuer’s assets to secure the rights under bonds, the rights and duties of the bondholders secured by the mortgage in restructuring proceedings shall be exercised by the mortgage administrator….” It follows from this provision that the only entity authorised to act for the bondholders is the agent, and the agent will file any objection to the manner in which the claims are recognised or not recognised in the list of claims, vote for the bondholders on the arrangement, and so on. In this situation the security agent should pay particular attention to how its rights and obligations are framed with respect to the bondholders and other creditors in contracts, especially in terms of any potential conflict of interest between the various groups of creditors.
Appointment of the creditors’ council and voting at the creditors’ meeting
Another consequence of the rules in the Restructuring Law is the possibility of the security agent for credit and bonds appearing in differing roles. On one hand the agent will act as a creditor, and on the other hand it is the legal representative of the bondholders. Thus it is possible to have a situation where the agent is appointed to the creditors’ council as a creditor and also as the bondholders’ representative. The situation is similar in the case of the meeting of creditors. In that situation, it becomes important to consider the agent’s obligations with respect to the consortium, the bondholders, and its own interests.
On other hand, both the agent and the other members of the consortium should keep in mind that the Restructuring Law does not differentiate between groups of creditors in voting rights or influence over the restructuring proceeding based on the priority of their security instruments or contractual subordination. Each of the creditors will hold the voting strength based on the amount of its claims and the scope of any security it holds. Thus if senior creditors wish to maintain control over the arrangement and the course of the proceeding, they should ensure such solutions by contract.
The new Restructuring Law has introduced for debtors a number of attractive methods of restructuring their obligations. These regulations greatly impact the legal position of creditors, in particular the position of the security agent. The limited scope of this article allows for only selected issues to be signalled, but the impact of restructuring proceedings on the situation of the consortium can be much more significant. Nonetheless, it should be stressed that the new regulations are universally binding and cannot be modified by the intent of the parties. In such situation, creditors, and in particular the security agent, should consider a contractual method for regulating their position within the consortium so that the intention of effective functioning of the consortium can be achieved, while limiting the agent’s liability as much as possible, and on the other hand not falling into conflict with the regulations, resulting in the invalidity of the contracts signed by the parties.
Artur Bednarski, Łukasz Szegda, Banking & Project Finance practice, Wardyński & Partners