LONDON, May 28 (LPC) - A new insolvency law fast tracked by the UK government as a response to the impact of the Covid-19 pandemic on businesses has prompted confusion and disappointment among restructuring advisers.
The main gripe among advisers centres around the new rules governing declaring a debt moratorium - essentially a repayment holiday - which they say are unworkable for larger companies holding more complex debt structures that include high-yield bonds and bank debt.
“The moratorium is an opportunity missed. It is more or less useless for bigger deals,” said Andrew Wilkinson, a partner in the restructuring practice at law firm Weil. “There is no stay on bank debt and if you also have high-yield bonds you just can’t use the moratorium at all. It doesn’t work as it is.”
The moratorium is one of the main components of the UK government’s Corporate Insolvency & Governance Bill, which is set to be debated in parliament on June 3.
Under the terms of the new bill, which the government wants make law as quickly as possible to help companies struggling from the impact of Covid-19, businesses gain breathing space from debt repayments while they enter into negotiations with creditors to secure a rescue plan.
However, under these rules, bank loans have to be repaid pre- and during the moratorium period. And for companies with high yield-bonds, the moratorium cannot be used at all. The moratorium, which initially lasts for 20 businesses days, mainly benefits SMEs and will provide relief from rent arrears and supplier payments. For larger companies struggling with big bank groups and layers of bank debt the moratorium is largely unworkable as they are provided with no relief from repayments.
“It is quite useful for an SME perhaps who has a single lender who is on side; it gives them breathing space from current rent arrears and supplier payments,” said Jennifer Marshall, a partner in the insolvency and restructuring practice at Allen & Overy. “For larger companies with large complex debtor groups and a liquidity issue who do not have their lenders on side, it is a non-starter.”
Marshall, who has been involved with The Insolvency Service’s work on the bill over recent weeks, said the bill is unlikely to be amended to include bank debt as it goes through parliament.
“I think the Treasury was concerned it would have a detrimental impact on the cost of borrowing in the UK if borrowers could get a potentially extensive repayment holiday from servicing their debt,” she said.
For the moratorium to work, companies with substantial bank debt will have to agree a repayment standstill with their lenders in advance of entering the moratorium. However, that in turn makes the need for a moratorium redundant, as the borrowers would already have a holiday on a large chunk of their debt.
“If the rule stands, then almost every company will have to be able to repay its banks or reach an agreement with the banks prior to - or at least during - the moratorium,” said Roger Elford, a partner in the corporate restructuring & insolvency practice at Charles Russell Speechlys.
On top of this, there is no provision for the use of debtor-in-possession financing commonly used in US Chapter 11 processes, which would provide a struggling business with the additional liquidity to fund itself while rescue talks are ongoing.
DIP financing sits super-senior to all other debt and enables shareholders, creditors or sponsors to put more cash into a business with less risk of losing it if a rescue does not work out.
“A company will need access to funding to be able to discharge its moratorium debts,” said Olga Galazoula, restructuring and special situations partner at Ashurst. “If you are a larger company, it does feel like the moratorium will be difficult to be fully effective on its own.”
However, the bill could be amended to include DIP financing. “The door is still open on this - the government is thinking about it,” Galazoula said. (Editing by Christopher Mangham)