Once again, liquidity and restructuring solutions were driven by
investor protectionism. Some key trends we saw from our work
during 2023 included:
2023 TRENDS
Liquidity
Start-ups and early growth companies, in particular, have struggled with unlocking new liquidity. On a recent matter, Howard Morris notes, “We had to navigate the increased tension between investor unwillingness to be diluted and reluctance to fund additional series rounds or allow secured creditors to enter the capital structure”. Investors are requiring greater visibility and assurances to part with funding, taking founders weaned on free-flowing capital by surprise.
See our U.S. team’s client alert on “Liquidity Crises and Fiduciary Duties of Directors of Early-Stage Companies”.
2024 Outlook
Since the 2008 financial crisis ebbed, markets have been more resilient, absorbing shocks and changing risk profiles. The current higher interest rate environment will make this harder.
European Uptier Transactions: Six Things to Look Out For
rESOURCES
As always, we have been busy producing blog posts, client alerts and articles to keep our clients informed about important legal updates and trends. Some highlights in 2023 included:
GROWTH
This year we have welcomed a number of talented lawyers across our offices. In London, the new additions have included:
co-leads the European and London Technology & Commercial practices, and her experience spans artificial intelligence, Internet of Things, and cybersecurity to outsourcing, cloud computing, and e-commerce.
Charlotte Walker-Osborn
a commercial litigator with over 20 years’ experience, including in contentious insolvency and litigation matters. He is ranked in both Chambers UK and The Legal 500.
Ben Summerfield
This year we have seen UK restructuring processes being used alongside newer European ones. In Vroon, we saw the Dutch WHOA being used in parallel with a UK restructuring plan. In the case of Pronovias, where we acted for the second lien lenders, we saw a consensual restructuring in England being used alongside the new Spanish restructuring plan to obtain protection for the new money injected. In 2024, we expect to see more parallel processes, not least because of the prevalence of English law debt documents, the rule in Gibbs and, following Brexit, the lack of recognition for UK processes. In the U.S., Part 26A restructuring plans plus Chapter 15 recognition are increasingly being considered as a quicker and cheaper way to achieve a financial restructuring than Chapter 11.
Parallel Processes
Challenges and vulnerability of crypto persist. When the Euler Finance protocol was attacked and nearly US$200 million of assets stolen, a team of MoFo lawyers began a round-the-clock investigation as well as negotiations with the attacker for the return of the assets. Amrit Khosa in London provided strategic regulatory and insolvency advice to the client. Existing legislative frameworks are ill equipped to deal with crypto assets, particularly when in distressed situations. Chloe Kearns addresses some of the regulatory issues in her co-authored chapter for The Law Society’s third edition of Blockchain: Legal & Regulatory Guidance.
See MoFo News Item, “Morrison Foerster Assists Euler in Recovery of $200 Million in Assets” and “Regulation of Cryptoassets – Section 3: Blockchain: Legal & Regulatory Guidance.”
Crypto
We have seen high profile sovereign debt defaults in Zambia, Sri Lanka, and Ghana, with others such as Pakistan and Egypt having approached the IMF for assistance. The rising level of sovereign debt distress is playing out in a changed restructuring landscape compared to even 10 years ago, with protracted processes and China having become a significant player. James Newton and Andrew Kissner, who both have first-hand experience in sovereign debt restructurings, together with Amrit Khosa have produced a practice note on “Sovereign Debt Restructuring: Overview” for Thomson Reuters Practical Law,
de-mystifying the sovereign debt restructuring practice.
Sovereign Debt
Real Estate
Office developers and owners have already been feeling the squeeze following the shift to greater remote working practices with rising costs of finance and ESG regulation likely to add to this. Declining valuations will prompt discounted sales, which may be an opportunity for strategic buyers, whilst investors gravitate to more resilient sectors such as living, industrial and logistics.
With substantial debt maturing in 2024 and 2025, some rating agencies are predicting default rates of 4% on leveraged loans and high yield bonds in 2024. Slowing economic growth, high leverage and interest rates will challenge leveraged borrowers. Expect to see a range of deleveraging tactics from the common “amend and extend”, asset sales, debt buybacks and exchanges, to formal restructurings including more restructuring plans.
Maturity Wall
As the cost-of-living crisis continues, consumer-reliant businesses especially in the retail and hospitality sectors are likely to face difficulties. Businesses will need to re-examine operational as well as financial structures to shore up valuations, with a view to possible M&A activity.
Cost of Living
One of the main battlegrounds for restructuring plans proposed to date has centred around fairness and namely on the allocation of the benefits created by the restructuring – often called the “restructuring surplus”. How the surplus is distributed between those classes that have agreed to the restructuring and those that have not, particularly absent the absolute priority rule, is likely to be the subject of further challenges in 2024.
Fairness
Rescue Culture: Playing the Devil’s Advocate
High Court Confirms the Viability of Creditor-Led Restructuring Plans
Crypto Exchange Bankruptcies and DeFi Lending: An English Law Response to the Question of Avoidable Preferences
High Court Rules That ISDA Bankruptcy-Related Events of Default Can Be Cured in Lehman Case
