Lupatech restructuring confirms debt-for-equity swaps key for Brazil
Wednesday, 18 June 2014 (1 hour ago) by Rachel Hall
Brazilian firms Felsberg Advogados and Machado, Meyer, Sendacz e Opice Advogados, and Shearman & Sterling LLP in New York and São Paulo have helped oil and gas services provider Lupatech obtain court approval for Brazil’s first ever extrajudicial restructuring solely involving bonds issued abroad.
Lupatech filed the prepack plan aimed at restructuring some US$300 million worth of debt before the bankruptcy court in February, and obtained final court approval on 4 June. A parallel proceeding for the recognition and enforcement of the plan in the US, under chapter 15 of the bankruptcy code, began in May and remains ongoing.
The deal formed part of an out-of-court reorganisation process, known as recuperação extrajudicial in Brazil, which is voluntary, and represents the step before judicial reorganisation. The process typically involves extensive negotiations between debtor and creditors, resulting in a prepack plan which is rubber-stamped by a court order in a bid to avoid more protracted bankruptcy proceedings.
The bondholders received counsel from Pinheiro Guimarães – Advogados in Brazil and Bingham McCutchen LLP in New York. Brazil’s Lobo & Ibeas and Jones Day in Cleveland and São Paulo advised legal administration services provider the Garden City Group, while Tauil & Chequer Advogados in association with Mayer Brown counselled the Bank of New York Mellon in its role as trustee.
In Lupatech’s case, the confirmed plan provides for both the issuance of new notes to all bondholders worth 15 per cent of the outstanding sum, as well as a debt-for-equity conversion which will see the company issue shares at an issuance price representing the remaining 85 per cent of the bonds.
According to Pinheiro Guimarães partner Eduardo Mattar, Lupatech and its creditors spent some time debating which capital structure would be best for the company going forward before deciding upon the restructuring plan. “I think it’s one of the few cases in Brazil that has started on the right foot, by negotiating with creditors, which is what makes most sense in restructuring,” he says.
Lupatech opted for the debt-for-equity structure to give it the flexibility to continue its business in a way that would be financially viable, while also giving creditors the potential future upside to keep them on board. Shearman & Sterling partner Rob Ellison notes that this met with strong approval from the creditors, with 85 per cent accepting the plan, and many of the remaining 14 per cent were thought to have not been able to or not finding the time to reply, rather than because of objections.
The case bears some similarity to the more high-profile OGX restructuring, which took place shortly after Lupatech and also saw a restructuring plan based around a debt-for-equity swap – thought of as an unusual structure in the Brazilian market. “I wouldn’t say OGX copied Lupatech, but it was an inspiration,” says Mattar. He attributes the appearance of two cases arriving at the same time to the fact that in both the controlling shareholder was willing to give up a big enough stake to satisfy the creditors and to ensure that there would be a palpable change in the running of the company.
Both cases also share a similar debt profile, mostly comprised of international bondholders. “A big part of the debt is held by international bondholders who are very used to debt to equity, as opposed to local banks and suppliers who are usually reluctant about taking the equity of the company, and just want payment rescheduling,” explains Mattar.
Lobo e Ibeas Advogados partner Luiz Eugênio Müller reserves particular praise for the judge which approved the plan, who he says took into account the added layer of complexity that having credits issued abroad entails. “He really did understand how the mechanism of communication with the creditors works,” he says. “He understood you can’t identify the creditors name by name, that those bonds are circulated in the markets and you don’t have full control over them.”
Although there are differences in their businesses, OGX and Lupatech operate in the same sector, which has been undergoing considerable financial difficulties of late after expectations raised by the 2007 announcement of large offshore discoveries near Rio de Janeiro have failed to be met. Both companies have good assets, and ensuring they would be able to remain operational during the recovery period was key in developing their restructuring plans. “If you have equity then you have the possibility to take the benefit of future profitability in the company, but in the meantime it takes away the requirement to supply cash until the company can comfortably do so,” explains Ellison. “It’s basically designed as a win-win.”
Felsberg partner Tomas Felsberg believes that debt-for-equity may represent a new trend in Brazil, as well as the next stage in the development of the country’s relatively recent bankruptcy law, which was enacted in 2005, with both OGX and Lupatech forming important precedents. “I think it’s a natural evolution in Brazil, it’s quite common elsewhere in the US and other countries to capitalise debt to correct the imbalances of a company,” he says. “It has not been used in Brazil before for different reasons, including cultural ones.”
More generally, Felsberg believes that the series of high profile successful restructurings – such as those of Celpa, the Rede group and Mabe – which have taken place in recent years prove that Brazil’s bankruptcy law has come of age. “So what you’re seeing now is a number of examples where the law revealed itself as an efficient instrument to overcome these crisis situations,” he says. “We’ve seen the law requires some tinkering with, and that you have to adjust certain aspects which are not working well, so it’s time to rethink some provisions and improve them.”
One of these aspects is the fact that Brazil has not adopted UNCITRAL’s model law for cross-border insolvencies. This would have helped in the Lupatech case as it enables the main insolvency proceedings to be automatically recognised in all other countries which have adopted the law, including Colombia, where Lupatech has subsidiaries. “If you don’t have this protection you have to deal individually with whatever instrument there is in the other countries to protect the company while it is undergoing insolvency,” explains Felsberg.
Counsel to Lupatech
Partners Thomas Benes Felsberg and Paulo Fernando Campana Filho, and associates Clara Moreira Azzoni, Eduardo Luiz Kawakami, Ligia Espolaor Veronese and Tatiana Brenand Bauer in São Paulo
Partner Eliana Helena de Gregório Ambrósio Chimenti and Alessandra de Souza Pinto, and associate Karina Cardozo de Oliveira.
Partners Robert Ellison and Douglas Bartner, and associates Robert Britton and Zach Shub-Essig in New York, and associate Jennifer Lau in São Paulo
Counsel to Garden City Group
Partner Luiz Eugênio Araújo Müller Filho in São Paulo
Partner Sanjiv Kapur in Cleveland and São Paulo, and associate Virginia Tomotani Uelze in São Paulo
Counsel to the Bank of New York Mellon
Partners Leonardo Morato and Adriana Dias in São Paulo
Counsel to the bondholders
Bingham McCutchen LLP
Partner Timothy DeSieno in New York
Partner Eduardo Augusto Mattar and associates Laura Meyer and Renata Schiffer in São Paulo