Friday, February 20, 2009

Cross-border complexities hamper debt restructuring

By Anousha Sakoui Published: February 20 2009 02:00 | Last updated: February 20 2009 02:00 When European investors bought the bonds of a Dutch chemicals company in 2005, little did they realise that the fate of their holdings would end up dependent upon the restructuring of Lyondell, a US company acquired two years later. What happens to these European investors in what were then bonds issued by Basell is of deep interest across the debt markets because it is a story that is likely to be played out repeatedly in the months ahead. The past decade has seen an explosion in the complexity and globalisation of debt finance, creating global companies with assets and creditors in multiple jurisdictions, which are subject to multiple legal frameworks. Bankruptcy laws vary widely and many are relatively new and untested. It is far from clear how global companies struggling in a recession can restructure their finances. "Most of the cross-border issues to be gone through [in coming restructurings] are probably 75 per cent untested," says Charles Roberts, partner at Paul Hastings, the law firm. Kon Asimacopoulos, partner at Kirkland & Ellis, says there is now a steady stream of companies that have acquired businesses in various countries and now are facing financial difficulties. "The different cross-border recognition regimes work most effectively when you have the luxury of time to plan," he says. "However, when multinational companies are running short of liquidity, the insolvency related duties of directors differ across jurisdictions, increasing the risk that local directors will file for insolvency before a restructuring can be effected." The case of the chemicals giant that became LyondellBasell and its attempts to restructure some $26bn debt is highlighting the myriad difficulties that face cross- border restructurings. It also lays bare the fundamentally different approaches towards restructuring in US and Europe in spite of legislative efforts to bridge the divide. Lyondell Chemical, the US unit of LyondellBasell, entered Chapter 11 protection from creditors in January after failing to restructure its debt. Lyondell Chemical, as the debtor, leads the Chapter 11 process. In contrast, European restructurings are generally led by the creditors and the process is usually kept out of court. Most of the group's European operations were kept out of the US bankruptcy filing, although one German subsidiary was made part of the process. This was done so that the "debtor-in-possession" (DIP) financing could be used to service the European debt while the restructuring took place. The US company secured a temporary injunction against a group of European creditors to prevent them from enforcing their debt claims, as it feared this could push the European businesses into insolvency. The injunction was awarded even though the Chapter 11 filing is an event of default under the terms of the bonds in question, which were issued by a Luxembourg company. The company told the court that the "potential loss of control to a foreign liquidator would be disastrous to the debtors' reorganisation efforts". If the Luxembourg business was pushed into insolvency, then the DIP financing - vital to the success of the Chapter 11 - would then be in default. However, the problem for the European bondholders is that they are excluded from the US process as they are not creditors to the entity that is in Chapter 11. One restructuring lawyer advising a bondholder in the case, who declined to be named because of the ongoing procedure, expressed concern about the aggressive use of Chapter 11 proceedings to influence European restructurings. He says that there are very clear rules set out in the European Insolvency Regulation, which was created by the European Commission in 2002, that are designed to determine which insolvency laws apply to European companies. "One of the main reasons for regulating this area was so that creditors could plan for insolvency with greater certainty about the laws that would apply," he says. "If companies and their advisers try to stretch the reach of Chapter 11 to European companies, many investors over here may think, 'Hang on, this isn't what I thought I was signing up for'." This, he warns, could have serious consequences for how people invest in Europe. Regulators and legislators have been trying to prepare for this kind of eventuality. In addition to the European Insolvency Regulation, the United Nations Commission on International Trade Law also designed its Model Law for Cross-Border Insolvency. European creditors can still appeal to European courts, which are not strictly bound to recognise the decisions of a US court, for example. However, if those creditors have assets or interests in the US, they risk being held in contempt by the US courts. A US judge is expected to decide on Monday whether to make the temporary injunction awarded against European creditors more long lasting. A spokesman for LyondellBasell said that the company will decide how to proceed once the judge's decision is made. The creditors, too, are unable to do much more than wait, for now

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