Spanish gaming company Codere proposed an English scheme of arrangement to restructure over €800 million in existing note debt. As a part of the scheme, Codere agreed to pay fees and provide benefits to an ad hoc sub-committee of noteholders that were not available to all noteholders. The High Court held that those fees and benefits were not so material as to fracture the single voting class of noteholders. Re Codere Finance 2 (UK) Limited)  EWHC 2441 (Ch) and  EWHC 2683 (Ch).
The court also considered Codere’s incorporation of a new English subsidiary and the assumption by that subsidiary of the note debt in order to obtain jurisdiction for the purpose of proposing the scheme, finding that such “forum shopping” in this context is permissible. The scheme was sanctioned on 6 October 2020.
Key points to note
- It is well established that where the benefits offered to a sub-set of creditors are so material as to make it impossible for them to consult together with other creditors in the proposed class with a view to their combined common interest, then that proposed class will “fracture” and the sub-set of creditors should be treated as a separate class.
- Fees and other benefits that are independent of the scheme (such as advisor fees) are not relevant to class composition. Fees and other benefits that are dependent on the implementation of the scheme may fracture a class, but this is unlikely to be the case where the benefits are provided in exchange for additional services (such as underwriting fees or work fees) at a commercial rate and where the cumulative benefit is immaterial to the decision as to whether to support the scheme.
- The court will accept jurisdiction to sanction a scheme that would compromise foreign debts of a foreign debtor in circumstances where an English company has been incorporated and become a co-issuer with the express purpose of proposing the scheme. Such action may be described as “forum shopping”, but not of the type that would prevent the court from sanctioning the scheme.
Codere is an international gaming operator with operations in Spain, Italy and Latin America. The group’s financial position deteriorated as a result of the COVID-19 pandemic and the group was facing liquidation if a scheme was not implemented.
The group’s financial liabilities were nearly €1 billion and included €85 million of interim emergency notes (issued less than 2 months before the launch of the scheme) (the Interim Notes) and two series of notes with face values of €500 million and $300 million maturing on 1 November 2021 (the Existing Notes). The scheme proposed to extend the term of the Existing Notes by 2 years and increase the interest payable. It also provided for the issue of €165 million of new senior notes (offered to all existing noteholders) that would rank above the Exiting Notes and would be used for working capital purposes and repayment of existing senior debt. The relevant scheme creditors were the holders of the Existing Notes.
As is common in restructuring transactions involving widely held notes, an ad hoc committee of noteholders (the AHC) was formed which negotiated the terms of the scheme with the company.
The restructuring proposal provided for the following fees and benefits:
- an initial issue discount of 3% on the Interim Notes issued to four of the five AHC members;
- a coupon on Interim Notes which is 2% higher than the coupon on the proposed new notes;
- a “backstop” fee of 2.5% of the entire €250 million of new notes (including the Interim Notes);
- a “work fee” payable to AHC members of 1% of the principal amount of the Existing Notes (totalling around €7.6 million);
- the payment by Codere of the AHC’s financial and legal advisers’ fees (anticipated to amount to approximately €6.75 million); and
- consent fees, comprising a pro rata share of 0.5% of the principal amount of the Existing Notes to be paid to noteholders who acceded to the lock-up early (an “early bird” fee) and a further 0.5% of the principal amount of the existing notes to be paid to noteholders who acceded by a later date.
A dissenting noteholder (Kyma) challenged Codere’s proposed composition of a single class of Existing Note creditors, arguing that the scheme creditors should vote in separate classes with AHC members voting in their own class. Kyma argued that the AHC had negotiated benefits in return for its agreement to the scheme that were not available to other creditors.
On the issue of class composition, the court found as follows:
- The benefits provided in connection with the Interim Notes are not within the rights to be considered for class composition purposes; the notes were issued for new money on commercial terms without any element of “bounty” that would constitute a form of disguised consideration for the release or variation of rights under the scheme.
- The backstop fee was payable for a commercial service (being the underwriting of the new notes). Further, the fee was payable at a commercial rate (although that is not, of itself, definitive).
- The payment of the AHCs advisors’ fees was independent of the scheme and did not fall to be taken into account for class composition.
- The consent fees were available to all Existing Note holders and were not deemed sufficiently material to cause issues with class composition.
- The work fee offered to the AHC caused the court more difficulty. The fee did not obviously relate to any level of “work” done, and was close to the kind of disguised consideration that could fracture a class.
However, when considering: (a) the cumulative effect of the fees and other benefits; (b) the value provided in return for those benefits; and (c) the likely alternative of liquidation, the court held that the differences in rights were not so material as to make it impossible for the AHC and the other Existing Note creditors to consult together with a view to their common interest, and as such the single class was not fractured.
On the issue of jurisdiction, the court did not hesitate to find that it had jurisdiction to sanction the scheme on the basis that the applicant was an English company. The fact that the company became a co-obligor under a consent solicitation process with the express purpose of being in a position to propose the scheme did not undermine the court’s jurisdiction. Expert evidence was adduced that the accession of the company to the Existing Note indenture was effective as a matter of its governing law.
Notwithstanding the sanction of the scheme, the difficulty the court had in reaching its decision should provide a warning to stakeholders to take care as to the structure and value of benefits provided to any ad hoc or coordinating committee or other sub-set of creditors.
Thank you to Caitlin Jenkins, a Trainee Solicitor in the firm’s London office, for her contributions to this article.