UK restructuring plan: Cramming up a super-senior creditor class in a unitranche structure

In this article we consider how the UK’s Part 26A restructuring plan has opened up opportunities for “cram up” in unitranche structures—a type of hybrid structure that brings together senior and subordinated debt under one loan.

Given the current headwinds facing leveraged businesses, there is some nervousness on the part of super senior creditors in unitranche structures that their debts may be modified by a UK restructuring plan imposed by a debtor and a more junior class of creditors. This is particularly the case where an intercreditor agreement between voting classes prevents the super senior creditor from taking enforcement action while a restructuring plan is being implemented.

While cram up of the super senior class is technically possible in a restructuring plan, certain tests need to be met before such a plan can be implemented. In the case of a (super senior) revolving credit facility (RCF), for example, particular issues need to be considered where the debtor seeks to re-open and access any undrawn element of the facility.

Background

Arrangements and reconstructions

In the UK, a company may agree an arrangement with a majority of its creditors, or any class of them, binding dissenting creditors to a modification of their debts. A scheme of arrangement under Part 26 of the Companies Act 2006 (the Act) requires the support of 75% in value and 50% in number of creditors in each affected class in order to bind dissenting creditors within that class to the arrangement.

The restructuring plan mechanism under Part 26A of the Act, implemented in June 2020, builds on the UK’s extensive scheme of arrangement jurisprudence with the addition of a new “cross class cram down” feature, which provides for the imposition of an arrangement on a dissenting class, provided that the following two-part test is met:

1. members of the dissenting class would be no worse off than under the relevant alternative, which is the most likely outcome if the plan is not sanctioned – often a terminal administration or liquidation; and 
2. the arrangement has been agreed by a number representing 75% in value of a class that would receive a payment or have a genuine economic interest in the company in the event of the relevant alternative.

Unitranche structures

The supply-side dominance of the UK leveraged finance market by private credit has sat alongside the popularity of the unitranche financing structure, both in new acquisition financings and debt refinancing transactions. A typical unitranche financing will see a super senior working capital facility (usually an RCF) provided alongside a senior term loan facility (i.e. the unitranche facility) with both facilities benefitting from a common security package and the super senior facility being paid in advance of the senior facility in enforcement or insolvency proceedings.

In March 2020, the Loan Market Association (LMA) released its form of super senior/ senior intercreditor agreement with this structure at its core. While each transaction will have its own specific terms reflecting the commercial agreement between the parties, the unitranche finance market has very much been built up around the principles set out in this form.

In short, it will usually be the senior term loan lenders that will initially constitute the instructing group (or the majority of it) capable of giving instructions to the security agent to enforce security or remedies in a default situation.

In the typical scenario, super senior lenders will be restricted from taking enforcement action they would otherwise be entitled to take, including entering into an arrangement with the debtor, unless (among other circumstances) a super senior step-in event or an insolvency event has occurred. A super senior step-in event is commonly preceded by a standstill period and failure by the senior lenders to enforce or realise security. These standstill periods will vary depending on the nature of the event of default that has given rise to the creditors’ enforcement rights. Often the standstill period will be at least 90 days, which should be sufficient time for consummation of a UK restructuring plan. This structure may therefore give the debtor and senior lenders the ability to modify the debts of the super senior lenders by way of cross class cram up—assuming the relevant tests are met—before the super senior lenders are in a position to take enforcement action and disrupt the plan.

Intercreditor agreements may include provisions for relevant creditors to exercise their voting rights in a certain way in restructuring proceedings (an optional term in the LMA form). If this provision requires the super senior lenders to vote as instructed by the instructing group, then the statutory cross-class cram up mechanic may not even be required to implement the plan, because the super senior lenders will actually be contractually bound to support the cram up plan.

Cross class cram up and the “no worse off” test

The principles governing the operation of the cross-class cram down in circumstances where the debtor is using the support of a senior class to cram a junior class are now quite well established and so we do not propose to cover them in this article. In any event, in a typical (LMA-based) unitranche structure, the expectation is that the super senior standstill will restrict the ability of super senior lenders to enter into a restructuring plan with the debtor, without the consent of senior lenders, and, even if the super senior lenders are not so restricted, the expectation is that the senior lenders would take enforcement action on notice of the commencement of proceedings (assuming they are entitled to do so) derailing the restructuring plan.

The courts have had to consider the cram down of a senior secured class by more senior administration expense and preferential creditors, as well as junior secured and unsecured creditors in Re Amicus Finance plc (in administration) [2021] EWHC 3036 (Ch)—a so-called “cram-sandwich”—but in that case the senior secured creditors were subject to an administration moratorium so could not take enforcement action and, further, were expected to get a nil recovery in the relevant alternative (a liquidation) and so the plan needed only to ensure they would receive something more than nothing.

In contrast, the courts have not yet had to consider a cross class cram up where the (super) senior class would be paid out in full in the relevant alternative and how the “no worse off” test may be satisfied in these circumstances. As per Lord Justice Snowden in Re Virgin Active Holdings Ltd, Virgin Active Ltd and Virgin Active Health Clubs Ltd [2021] EWHC 1246 (Ch):

"the “no worse off” test can be approached, first, by identifying what would be most likely to occur in relation to the plan companies if the plans were not sanctioned; second, determining what would be the outcome or consequences of that for the members of the dissenting classes (primarily, but not exclusively in terms of their anticipated returns on their claims); and third, comparing that outcome and those consequences with the outcome and consequences for the members of the dissenting classes if the plans are sanctioned."

Applying this formulation in a procedure where the relevant alternative is a terminal administration or liquidation, the outcome or consequences for the super senior creditors would ordinarily be the payment in full of their debt (assuming the value broke below, i.e. in the senior debt), plus interest, costs and other amounts payable, within a specified period of time. The outcome and consequences for the super senior lenders if the plan were to be sanctioned would need to be compared against that outcome.

Super senior lenders will need to be offered appropriate economic uplifts or other benefits to ensure their anticipated returns are no worse than they would be in the relevant alternative. Where the maturity of the super senior facility is to be extended, the present value of expected cash flows should be taken into account, as should the opportunity cost of redeploying the funds that would be paid out in the relevant alternative: e.g. where the recoveries in the relevant alternative would be received earlier, and attract a more favourable return in the market, than under the plan. These arguments are supported by the ruling in Re Fitness First Clubs Ltd [2023] EWHC 1699 (Ch) where it was held that returns from third parties in the relevant alternative could be taken into account for the “no worse off” test.

While focused primarily on the anticipated returns on their claims, the court will also consider other consequences of the plan that could put the super senior lender in a worse position. In addition to the cram up of the super senior class by the senior class, there is also the possibility of a cram up of the senior classes by more junior, sponsor-controlled subordinated classes (e.g. intra-group liabilities or parent liabilities) in a restructuring plan.

While this is a technical possibility, assuming those junior subordinated classes were in the money, as with a cram down of the senior class by the super senior class, it would be normal to have restricted the right of those junior classes to take such action under the intercreditor agreement and for the senior classes to be entitled to take enforcement action to scupper the plan.

The debtor could also seek to counter any dissenting creditor enforcement rights by appointing an administrator who could run a “light touch” administration through to plan effectiveness with the benefit of a statutory moratorium on enforcement action. This course of action would, however, be subject to the right of any qualifying floating charge holder to appoint their nominated administrator ahead of the debtor’s nominee, and it would come with the downsides of administration for the debtor.

We would not expect the standalone moratorium available under Part A1 of the Insolvency Act 1986 to be effective in these circumstances on account of, among other things, the exclusion of financial creditors.

Of course, the super senior creditors may not agree with the company on the likely success of the cram up plan, and, if that is the case, then it will be for the super senior creditors to challenge the plan with appropriate supporting evidence. Ultimately, even if the two-stage test is satisfied, the court’s sanction is required for the plan to become effective. The court has a wide discretion in this regard and will consider matters of procedural and substantive fairness.

Treatment of an undrawn revolving credit facility (RCF)

The super senior class in a unitranche structure often includes an RCF, which permits the borrower to draw down and repay the facility at will, up to an agreed commitment limit, subject to there being no draw-stop event. The commencement of a restructuring plan proceeding normally constitutes an event of default and draw-stop event under an RCF, entitling the RCF lenders to cancel any outstanding commitments and take any acceleration or other enforcement action permitted by the finance documents. However, such action will be subject to any standstill moratorium in favour of the senior lenders discussed above that would restrict certain enforcement action until the occurrence of a super senior step-in event.

It may be that the borrower has drawn the facility in full in advance of the commencement of the plan (a likely scenario, if permitted), but to the extent there remains undrawn commitments, then the RCF lenders may want to consider the cancellation of those commitments to the extent permitted by the finance documents.

The LMA super senior / senior intercreditor agreement does not expressly include the cancellation of commitments in the restriction on enforcement action, so such cancellation may not fall foul of any standstill. RCF lenders, however, may want to consider explicit provisions for such cancellation in new deals in order to be crystal clear.

While it has been held in Re Yunneng Wind Power Co., Ltd (In the Matter of the Companies Act 2006) [2023] EWHC 2111 (Ch) that a restructuring plan is capable of waiving a draw-stop on an undrawn facility in an intra class cram down, (note that this position has not been tested in a cross-class cram down/cram up scenario), a restructuring plan cannot impose new and extensive obligations on dissenting creditors—see the Re APCOA Parking Holdings GmbH [2014] EWHC 3849 (Ch) and Re Noble Group Limited [2018] EWHC 2911 (Ch) schemes of arrangement whose authority would apply to restructuring plans – and so it would be open for the RCF lenders to argue that they are no longer contingent creditors in respect of the cancelled commitment and any attempt to re-open a cancelled commitment would constitute the imposition of a new obligation. This argument would not assist with any drawn portion of the RCF which could be restructured (e.g. termed out and extended) as a part of the plan.

Conclusion

Unitranche deals written prior to June 2020 will not have had the restructuring plan in contemplation. Therefore, we may not need to wait long for the first attempt to cram up a super senior class.

It remains open to parties to negotiate restrictions in the intercreditor agreement that would prevent the company and senior lenders from cramming up the super senior lenders. Without those restrictions, cram up remains an option (or a risk, depending on the party concerned) under a UK restructuring plan, subject to the issues discussed in this article. Individual voting thresholds and dynamics will impact any scenario, but it is important for parties to have a cram up (or down) in contemplation at the inception of the deal when negotiating the intercreditor agreement and/or when restructuring negotiations loom.