LONDON (LPC) – UK government could face heavy losses on loans to struggling businesses during the Covid-19 pandemic due to its new insolvency law which may force lenders to agree to terms unfavorable during a process of debt restructuring.
The new “restructuring plan,” which is part of the government’s insolvency and corporate governance bill debated in parliament this week, allows a class of creditors to force a debt restructuring plan on a company. another class of creditors, in what is called an interclass tightening.
It therefore gives a majority of creditors the power to impose debt restructuring on a single class of creditors who do not agree with it.
This could force the government to accept debt cancellations on Coronavirus Business Interruption Loans (CBIL) and Large Business Business Interruption Loans (CLBIL), which are 80% government guaranteed.
“We expect to see restructurings in the second half of the year that include these (government guaranteed) bank loans,” said a restructuring lawyer. “Under the new laws, you can now reduce only one class – it would be ironic if that class would fit these loans. “
The new law requires that 75% of lenders, based on value across all categories, approve a debt restructuring. This is a much weaker hurdle to overcome than the current UK scheme of arrangement system, which requires 75% by value and 50% of creditors in each category to approve the scheme before it goes to court. courts. The new law has the capacity to suppress a dissident class unlike the old system.
Some £ 8.9bn from CBIL was approved at the end of May, providing small and medium-sized businesses with loans of up to £ 5m each. The vast majority of loans are unsecured and lie lower in the capital structure, making them vulnerable to the will of senior lenders.
“There is no exception in the invoice for CBIL loans, and so yes, they could be written off as part of a restructuring. The bank that granted the CBIL loan could count on the government for a shortfall of up to 80% of the loan, ”said a second lawyer.
The loans could be written off altogether or they could end up as part of a debt-for-equity plan, with the government retaining stakes in the companies.
“I think a lot of CBIL will be converted into shares – the government could become the UK’s largest minority shareholder,” said a second lawyer.
The CLBILs, which offer loans to large companies of up to £ 200million, will be primarily guaranteed. As they will rank on a par with existing senior secured lenders, debt is less likely to be piled up.
However, the situation is complicated by the fact that existing senior lenders have to accept a dilution of their security when a company takes out a CLBIL. Restructuring advisers believe this is why the use of these loans has been so low, with only 154 deals to date.
It could also create a more complicated restructuring process where senior secured lenders clash with each other.
“Normally secured lenders would form one class in a restructuring, but there is a possibility of gerrymandering where some secured lenders form a different class and try to replace another,” said a third restructuring lawyer.
Under the new bill, there are safeguards against this, as a court must be satisfied that none of the dissenting classes would be worse off under the plan than they would be in the case of an alternative process such as liquidation.
However, final approval of the plan rests with the judge.
“It’s a bit blunt instrument like that. It will depend on the competence of a judge to understand what is fair and what are the motivations of the different categories of creditors, ”said a fourth restructuring lawyer.
Editing by Claire Ruckin and Christopher Mangham