Fancy tackling a job that involves 144 swap deals and culminates in a 700-page agreement? Here is a lawyer’s-eye view of one of the most complex securitisation restructurings ever.
In April 2013 Barclays Bank instructed the London office of Weil Gotshal & Manges on the restructuring of approximately £2bn of debt tied to 36 hospitals owned by the General Healthcare Group (GHG), trading as BMI Healthcare.
Barclays was an original lender under a £1.65bn facility agreement used to fund the buyout of the GHG property assets in 2006 by South African healthcare group Netcare, private equity house Apax Partners and property firm London & Regional.
The debt was widely syndicated and secured against the hospitals, each owned by a separate borrower.
Part of the debt under the facility agreement – the senior ranking tranche, there also being two classes of junior debt – was partially securitised in 2007 via two commercial mortgage-backed securities transactions, Theatre Hospitals No1 and Theatre Hospitals No2, with four classes of notes issued by each issuer, ranking in priority from Class A to D, used to fund the issuers’ acquisition of its portion of the senior facility debt.
The loans advanced under the facility agreement were due for repayment in October 2013 . However, as early as 2012 it became clear the debt was unlikely to be repaid or refinanced by that deadline. This made it necessary for stakeholders to commence negotiations to consider the terms of a possible restructuring of the debt, including a possible extension of the loans, to avoid a default and potential insolvency. The parties involved got round the table from late 2012 and began talking about how to fix the problem.
Company: Barclays Bank plc
Role: Senior noteholder and counterparty to certain swap transactions with the borrower group
Represented by: Weil Gotshal & Manges, London
Company: Capita Asset Services (London) Ltd
Role: Servicer (To perform the obligations and to exercise discretions of senior lenders under the finance documents)
Represented by: Paul Hastings (Europe), London
Junior lender co-ordinating committee, comprised of various banks and funds
Role: to co-ordinate junior creditor negotiations
Represented by: Milbank Tweed Hadley & McCloy
Not for nothing did Debtwire call this deal ‘arguably the most complex European securitisation restructuring ever’.
“You don’t see such highly leveraged structures any more,” says Weil structured finance and derivatives associate Andrew Wilkinson. “The securitisation was documented in May 2007 when the market was at its peak, and at that time no-one was really thinking about what would happen if things went wrong.”
“This was a complex structure,” agrees business finance and restructuring associate Tom McKay. “As you will often find with deals of that size some bits are put together quite hastily, and some of the documentation wasn’t entirely clear. When you are looking at it and trying to ascertain your client’s rights, that’s not helpful because you can’t always give definitive answers.
“That in itself was a driver of negotiations – there wasn’t always clarity in the documents. No party at the table had absolute confidence about how things would work out, which made everyone more hesitant about taking an aggressive position.”
“It all depended on the word ‘outstanding’. If the notes were outstanding Barclays could vote” – Andrew Wilkinson
One of the key early issues for the Weil team was to pin down precisely the rights every party held. The loan servicer, Capita Asset Services London Ltd (which was responsible for undertaking certain obligations and exercising certain discretions of the senior lenders with respect to the loans), raised a query as to whether, on the interpretation of the trust deed constituting the notes issued by Theatre Hospitals No1 and No2, Barclays had the right to vote its notes, which in turn carried significant implications for if and how the loans under the facility agreement could be extended or otherwise amended without its consent as a noteholder. Therefore the note trustee asked the High Court to determine the correct interpretation of the trust deed.
“This was important,” says Adam Plainer, head of Weil’s London restructuring practice. “If Barclays didn’t have the right to vote it meant they were a silent party, even though our client had the biggest economic interest in the deal and, therefore, the most to lose.”
The servicer raised the query due to ambiguous phrasing in the original note documents.
“One sentence was ambiguous and it all turned on that,” explains Wilkinson. “It all depended on the word ‘outstanding’. If the notes were outstanding they could vote.”
The High Court’s determination was crucial to Barclays’ ability to influence the restructuring. Although Barclays had other positions in the capital structure – for example, as swap counterparty to certain interest rate swap transactions with the borrowers – if its notes carried no voting rights it would be severely disadvantaged.
In August 2013 the team went to court knowing that the loan matured in October.
“Knowing which parties had to say yes to extending the loans was critical,” says McKay. “It was a real high-pressure timeline– the courts pretty much shut down in August so it was not easy to find QCs and a judge! ”
“Mr Justice Peter Smith found in our client’s favour,” says Plainer. “It would have been perverse for Barclays to have largest economic exposure and not be able to vote.”
The swaps: a technical challenge
“The swaps restructuring was quite intricate and technical,” says Wilkinson. “The swap was entered into in 2007 and because interest rates moved so dramatically it began to threaten the restructuring because any new money injected into the new structure would be consumed by the swap liability.”
The team needed to deleverage the swap to make it more of a manageable exposure, and used a swap term loan – a fairly new concept in this type of deal – to do so. It required new money, provided by Commerzbank, to be injected into the transaction and this would also allow some of the existing swap counterparties, of which there were four, to exit the deal.
“This new money helped deleverage the transaction but the swap was still running and the documents were still in place,” says Wilkinson. “We knew that if interest rates stayed the same the restructuring would remain under threat, so we amended the swap.”
The first step was to novate the swaps held by the four original counterparties to Barclays by assigning the contractual rights and obligations those counterparties held under the swaps. The arrangements were then amended and Barclays transferred 45 per cent of the swap exposure to Lloyds Bank.
The original swap counterparties were Bank of Scotland, Barclays, Commerzbank and Japanese bank Mizuho, but after the conclusion of the transaction Barclays and Bank of Scotland (acting through Lloyds) were the only ones that remained.
Another bone of contention was which valuation of the assets was to be used to determine covenant compliance and certain rights of the lenders under the facility agreement and related intercreditor documentation.
The valuation of the property assets was also significant in indicating which creditors would recover their money in full upon an insolvency of the borrower group and, conversely, which would not.
Theatre Hospitals No1 and No2 between them held the majority of the senior debt. Barclays had an interest in the Class A notes issued by Theatre Hospitals No1 and No2, which would be paid first from proceeds applied to the senior lenders. Under all the debt sat the equity, owned by Netcare, Apax and London & Regional. Unusually, the sponsors were not materially involved in negotiations during the restructuring.
“We can only assume they looked at where the value broke in the structure and decided it wasn’t worth putting more money in,” says McKay.
“For a long time one of the biggest issues in the deal was where the money to pay out the swap was going to come from” – Tom McKay
With the equity holders out of the picture, the creditors and the servicer moved forward with negotiations, which carried on for over a year in an attempt to agree the parameters of the restructuring. The proposal on which the restructuring would eventually be based was put forward by certain junior creditors, who had formed a negotiation committee – a ‘co-ordinating committee’ – to streamline the negotiation process on behalf of the junior lenders.
The proposal would see certain junior lenders pay in £175m of ‘new money’ so the proceeds would partially repay – and thereby deleverage – the senior debt. In terms of priority the new money would rank as a new debt tranche, sitting above the junior debt and below the senior debt.
The juniors’ contribution was key to the senior lenders – via the servicer – agreeing to an extension of the loan for four years.
An additional feature of the deal was that the equity in the borrowers would be transferred from the existing shareholders to a new group structure owned by certain junior lenders.
The swaps factor
The facility agreement debt was hedged by certain interest rate swaps, entered into by a number of swap counterparties.
Interest rate swaps are commonly used to protect against fluctuations in interest rates but as rates rise or fall one party will end up being ‘out of the money’ and the interest rate liability or the costs to ‘break’ the swap shoot up. In this case, as a result of interest rates steadily falling after 2007, the swaps were substantially out of the money.
“Because the swaps sat super-senior on the payment of priorities waterfall they were always going to be paid out first,” explains Wilkinson. “Because of this any new money you put in was going to be swallowed up by the swap exposure. This doesn’t help when you’re moving towards a viable restructuring”.
The swap was eventually partially terminated, with the amount falling due to the swap counterparties paid from the proceeds of a new super-senior loan advanced to the borrowers.
“For a long time one of the biggest issues in the deal was where the money to pay out the swap was going to come from,” comments McKay. “After much discussion one of the banks indicated they might be willing to fund the close-out amount from the proceeds of a new loan to the borrowers, allowing discussions to move forward.”
Another issue with the swap was that it was essentially a series of mini-swaps as it was attached to the properties. The four swap counterparties each had an agreement with each property-owing borrower.
“Once you start to extrapolate that out you see that we had 144 swaps in place,” says structured finance and derivatives associate Delyth Hughes. “All of these swaps were documented on the same terms but getting to a stage where everyone was happy with all of the terms was incredibly difficult.
The negotiations around the swap ran concurrently with the main restructuring.
“We had 144 swaps in place” – Delyth Hughes
“Some of the discussions around the intercreditor agreements lasted months and months,” says Plainer. “There was always an idea that we’d be further along in the process than we actually were.”
A major reason for this delay was that the parties making up the junior creditor group kept changing, with different funds buying and selling chunks of the debt.
“You think you’ve got deal A and you end up with deal B, then deal C,” comments Plainer. “The second half of 2014 saw impatience from all parties.”
Although all parties were keen to get the deal done the changing nature of the creditors and the difficulty in agreeing the parameters of the restructuring meant a lock-up agreement was needed.
“There was always a danger someone would sell out their position and the deal you’d agreed would vanish,” says McKay. “The way the lock-up worked was that you had a base agreement attaching various term sheets, each setting out the key agreed terms of a particular aspect of the restructuring, and the various parties committed to those terms by signing the lock-up agreement. Consequently, the only basis on which a party could sell its position while the lock-up was in force was if the buyer agreed to the conditions of the restructuring set out in the term sheets. So you got some certainty.”
Ten days before Christmas 2014 the lock-up agreement – the ‘Global Restructuring Agreement’ – was signed and therefore became effective under its terms. Totalling a mammoth near-700 pages, this was a huge undertaking. But there were still six months to go until the deal would close.
“We had to manage expectations because, in terms of putting all the legal documentation together and finalising closing arrangements, there was still a lot to do,” says McKay. “It was always heavy going but in those last few months there were a lot of late nights.”
The Weil team, together with the numerous other law firms and other advisers working on the deal, finalised documentation from December to May, ironing out last minute wrinkles and inconsistencies, many of which needed to be agreed by a large number of parties and interlinked with other documents.
Thursday 28 May was chosen as closing day, but closing actually occurred over three days, mainly to mitigate potential tax risks.
“Tax often permeates restructuring deals and it was a big part of this deal,” explains Plainer. “And a three-day closing, with certain actions needing to be completed on certain days, is very rare.”
“We all worked really hard to get it done – we almost felt in need of hospital beds ourselves” – Adam Plainer
On 27 May the shares in one of the obligors was transferred to the new junior lender-owned structure. The debt restructuring occurred on 28 May, with the transfer of the borrower equity and certain other steps taking place the following day.
On the last day of May the team could finally relax.
“We did the final signing at the offices of Paul Hastings,” says Wilkinson. “Once it was done we couldn’t quite believe it. We didn’t know what to do with ourselves.”
“I’ve never seen a team work so hard in my life,” concludes Plainer. “They did an amazing job. That includes [associates] from Paul Hastings and Milbank in particular – credit to them. We almost felt in need of hospital beds ourselves: it was one of the only deals where we could actually have used the facilities by the end of it.”
Sponsor’s comment: trainee involvement
Weil is regularly involved in large, complex, international and time-consuming cases and transactions. Transactions are often over after an intense 2-3 month period and involve a team of partners, associates and trainees.
The restructuring of the General Healthcare Group (GHG) had all these features, but in extremis.
The instruction from Barclays landed on the desks of Adam Plainer, head of Weil’s London restructuring practice, and Jacky Kelly, head of Weil’s London structured finance & derivatives practice, in April 2013. It took more than two years and literally thousands of hours of work from a team assembled from across the firm’s restructuring, structured finance and disputes teams.
A new joiner at Weil in March 2013 could have completed their training contract during the time it took to negotiate and close the GHG deal, and have worked on nothing else. As a result, no single trainee was involved from start to finish. Chris Evans, who is now a restructuring associate at the firm, was one of a number of trainees who were involved at various stages of the transaction while completing six-month seats in other practice groups.
Chris and other restructuring trainees assisted with the initial review of the credit documentation and the production of a report for the client to understand its options entering into the restructuring; dispute resolution trainees undertook legal research and quickly helped assemble the papers for an urgent application to court in August 2013; while structured finance trainees were crucial to the smooth closing of the highly complex swaps restructuring in May 2015.
As the transaction neared completion in 2015 trainees in the restructuring and structured finance departments assisted in the review and drafting of certain ancillary documents required for closing.
Jonathan Wood, graduate recruitment partner, Weil Gotshal & Manges