A restructuring plan completed earlier this year by Smile Telecoms notches up a number of firsts.
By James Chesterman and Tom Davies
African telecommunications provider Smile Telecoms Holding Limited, incorporated in Mauritius, successfully completed a restructuring plan (the Plan) under Part 26A of the UK Companies Act 2006 at the end of March 2021.
The Plan features a number of novel actions, including:
- The first time a non-European company has used the Part 26A restructuring plan since its introduction in June 2020
- The first time any company has layered in new money on a super-senior basis by way of a cross-class cram-down, a feature of the Part 26A restructuring plan not available under schemes of arrangement
- The first time that sanction of a restructuring plan had to be adjourned due to the fact that a closing condition, which was subject to the discretion of a third party (namely a development finance institution acting through its representative, the Public Investment Corporation (PIC) of South Africa) rather than the court, remained unsatisfied at the initial time of sanction, which went to the core of the Plan’s effectiveness
This blog post takes a closer look at the implementation of the Plan.
Super-Senior New Money
Smile Telecoms’ group operates in Nigeria, Uganda, Tanzania, and the Democratic Republic of the Congo. To address a number of macroeconomic and operational challenges and funding constraints, Smile Telecoms formulated a strategy to support its Nigerian business and to pursue a controlled asset disposal process in respect of the remainder of the group. To implement this strategy, the group required a substantial new money injection, which its senior lenders indicated they were not prepared to provide.
Accordingly, the holding company for the group launched the Plan to facilitate the provision of approximately US$63 million of super-senior new money from a newly incorporated Luxembourg company (Luxco) owned by members of a Saudi Arabian merchant family, including some of the shareholders of Smile Telecoms’ majority shareholder, Cayman-based Al Nahla Technology Co. The provision of the super-senior new money required a number of consents under the group’s existing senior facilities and preference share documentation, which Smile Telecoms was not certain it would be able to obtain in time. However, if one of the creditor classes approved the Plan, then those consents could be secured from the other classes by reason of the cross-class cram-down.
Although the holding company launching the Plan was incorporated in Mauritius, the English court was satisfied that there was a sufficient connection to its jurisdiction on the basis that the rights of creditors subject to, and which would be varied by, the Plan were almost all governed by English law and contained in agreements in respect of which the English court had exclusive jurisdiction. The position was bolstered in the court’s view by the fact that the company launching the Plan had, from June 2020, taken steps to complete a shift of its centre of main interests (COMI) from Mauritius to England and Wales.
The Plan creditors, i.e., the creditors affected by the Plan and entitled to vote on it, were divided into three classes, with each class voting on the Plan at its own separate meeting held virtually on 12 March 2021. The three classes of creditors were as follows:
- Certain super-senior lenders (including Luxco) in respect of super-senior money previously lent to Smile Telecoms’ group
- Four African development finance institutions and two Nigerian commercial banks in their capacities as senior lenders
- The Industrial Development Corporation of South Africa in its capacity as subordinated creditor under a subscription agreement in respect of Smile Telecoms’ preference shares
In this case, certain entities owned and controlled by members of the Saudi Arabian merchant family referred to above, including Luxco, had already lent new money on a super-senior basis prior to the launch of the Plan (and it was that which constituted them as a separate class for the purpose of the Plan). Nevertheless, the precedent that this case establishes would allow any class of creditor to use the cram-down to force consents onto the other classes in order to facilitate super-senior lending. For example, if a class of subordinated creditors offered new super-senior money to the company in a situation in which the senior lenders were reluctant to do so, the company could launch a restructuring plan to cram the new money in with super-senior status over the heads of the senior lenders.
The new Part 26A restructuring plan procedure removes the numerosity requirement present in the scheme of arrangement legislation (i.e. the need to obtain the consent of a majority in number of members of the relevant class) and also introduces the concept of the cross-class cram-down whereby the court can exercise its discretion to sanction a restructuring plan and therefore bind all classes subject to it even if one or more classes have voted against the plan. The court can exercise such discretion provided that both of the following conditions are met:
- At least one approving class would receive payment or have a genuine economic interest in the company in the event of the ‘relevant alternative’, being whatever the court considers would most likely occur if the restructuring plan were not sanctioned
- If the plan were sanctioned, none of the members of any dissenting class would be any worse off than they would be in the event of the relevant alternative
In the Smile Telecoms case, two out of three creditor classes (the super-senior lenders and the subordinated creditor) voted unanimously in favour of the Plan, but the third creditor class (the senior lenders) fell just short of the 75% value threshold required due to one of the senior lenders voting against. The court nevertheless exercised its discretion to sanction the Plan.
Smile Telecoms successfully demonstrated that the super-senior lenders, which had approved the Plan, would receive a payment in the relevant alternative (which was considered to be the insolvency of the holding company and its group). Smile Telecoms also demonstrated that if the Plan were to be sanctioned, none of the members of the dissenting senior lender class would be any worse off than they would be in the event of the relevant alternative, as recoveries for the senior lenders under the Plan would be substantially in excess of their estimated recovery in an insolvency scenario.
Having satisfied himself that the conditions above were met, and in considering whether the court should exercise its discretion to sanction the Plan, Mr Justice Trower stated that one factor in particular was of ‘real significance’:
“The vote against the plan came from a single creditor who has not asserted that there is any specific aspect of the plan which treated it unfairly. In particular, it was not said that the plan itself provides for a difference in treatment of creditors inter se which is unjustified. There is no suggestion that the benefits of the restructuring are not fairly distributed between those classes who agreed the restructuring plan and those who have not. A conventional application of the principle of horizontal comparison would not lead to the conclusion that the differential treatment of the classes was unfair or in any way inappropriate; it simply reflected in a proper manner the difference in ranking between the super senior, senior and subordinated creditors.”
Funding Conditions and Adjournment
Although Mr Justice Trower was satisfied that a cross-class cram-down would be appropriate in the circumstances, he was reluctant to sanction the Plan where there remained an unfulfilled condition to funding the new money, which was outside the control of the court and in respect of the satisfaction of which there remained real uncertainty:
“Does the conditionality to the effectiveness of the plan…mean that the court ought in the exercise of its discretion to refuse to sanction it? This requires consideration of a number of principles, the first of which is that the court will not act in vain. But it also raises questions as to whether it is appropriate for one member of one class (or indeed a third party), rather than the court, to have vested in it what amounts to a discretion to determine whether or not the plan should come into effect.”
Mr Justice Trower noted that, as far as he was aware, there was no law that dealt with this point in the context of a Part 26A restructuring plan, although relevant principles had been considered in the context of schemes of arrangement.
The unfulfilled funding condition in this case was that a development finance institution holding shares in Smile Telecoms (but also one of the senior lenders subject to the Plan), acting through its representative PIC, agree to a year-long extension of a put option by which it was entitled to require shares to be purchased by other parties, including Al Nahla Technology Co. (the majority shareholder). PIC had made clear that it would not agree to such an extension, while the providers of the super-senior money had made clear that they would not advance the new money unless the put option was extended, without which the objectives of the restructuring would not be fulfilled. As Mr Justice Trower put it:
“The overall effect is that, if both parties maintain their positions, the [condition] will not be satisfied and the plan, even if sanctioned, will never come into effect…If the satisfaction of a condition to the effectiveness of the [plan] as a whole is left to the ultimate discretion of a third party [i.e. PIC], it is capable of cutting across the requirements of creditor approval, court sanction (in which the court not any other person is required to exercise a discretion) and registration, which are the three steps for plan effectiveness…
The important question…is whether in substance the court is abrogating its responsibility to exercise its discretion in determining whether or not to sanction the plan, by leaving its effectiveness to the discretion of a third party. In my judgment that would be the effect of the making of a sanction order at this stage prior to the satisfaction of the [condition].”
Mr Justice Trower stated that, on the basis that the development finance institution retained an ‘unfettered discretion’ to decide whether or not the condition could be satisfied so as to enable the Plan to become effective, he considered that the court was not yet in a position to exercise its discretion to sanction the Plan. He therefore adjourned the hearing for a short period to 30 March 2021, enabling the relevant parties to address the issues in the interim; he also indicated that he would be inclined to sanction the Plan if the parties could come to a consensus on the unfulfilled funding condition.
The uncertainty around the sanctioning of the Plan created significant additional pressure on Smile Telecoms at a time when funding was non-existent, threatening the loss of several of the group’s licenses due to unpaid license fees in Tanzania, Nigeria, and Uganda. Accordingly, the providers of the super-senior new money agreed to waive the funding condition.
Upon confirmation at the adjourned hearing on 30 March 2021 that the funding condition had been waived, Mr Justice Trower sanctioned the Plan using the court’s discretion to effect the cross-class cram-down to bind the dissenting senior lender class, as well as the super-senior lenders and the subordinated creditor classes, which had voted in favour, to its terms.
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