What is a Restructuring Support Agreement?
A restructuring support agreement (RSA) is a collaborative approach that aims to facilitate agreements between a debtor and its creditors prior to formal restructuring proceedings. The RSA outlines the terms that the signatories commit to supporting, thereby aligning the interests of the debtor and creditors through a binding arrangement. Such agreements provide financial and other incentives to a debtor , encouraging creditors to cooperate and support the debtor’s reorganization strategy. While the specific terms and conditions vary from agreement to agreement, the primary goals of an RSA are to preserve the value of the company and expedite a consensual plan of arrangement.
Components of a RSA
While the terms of restructure support agreements are not static and can be negotiated on a case by case basis, restructuring support agreements (RSAs) typically include the following terms. Equity Commitment. Equity commitment is the putative "glue" that holds an RSA together. Equity commitment in an RSA typically binds a group of investors (in an opaquely defined "Support Group") to invest new money in a yet-to-be-determined amount, in a yet-to-be-determined type of new securities, and at a yet-to-be-determined time. An investor in the Support Group is therefore bound to fund a yet-to-be-determined amount, at a yet-to-be-determined time, yet to be determined "if" there is an exit. The only real certainty for the investor is the existence of deal protection benefits (i.e., plan support agreement protective covenants; notice-activated RSAs, etc.) to keep the investor "in" until the investor is "out." Plan Support Agreement. Plan support agreements are usually a key component of an RSA. These agreements, like the equity commitment discussed above, are generic binding commitments that "we will file a Plan." The equity commitment discussed above is an uncertain plan support agreement that does not commit anyone to a date certain or specific terms of a plan. Because the parties to a restructure support agreement usually want to present the appearance of having a plan of reorganization more than 6 months before the actual Plan is approved by the Court with a crystalized effective date, a plan support agreement typically attempts to bind Support Group members to file a plan in the future even if the actual plan has not yet been agreed upon. These agreements usually follow the form: "upon court approval or six months after the petition filing, whichever occurs first, we agree to file a plan." As an alternative to the plan support agreement discussed above, an RSA may be structured as a plan support agreement that is triggered if a certain inconsistent plan is filed. And finally, the plan support agreement may be incorporated or made subject to the "consensual Interim Order." Termination Events. Termination events usually fall into the categories of general conditions and Pre-Effective Date conditions. Each termination event moves the restructuring support agreement closer to its death. Deadlines are usually added to major termination events after the date of signing; theoretically to give the parties time to cure the triggering event. And provisions are also added that allow the parties to mutually waive the termination date requirements. As a practical matter, this makes perfect sense. Restructuring support agreements routinely provide for extensions for terms that initially seem too short. It is procedural "whack-a-mole" to construct a structure that would preempt arguments about failed conditions by making a term too short or the timing of a condition too logical. If an RSA included a deadline of three days and the proposed sale hearing was scheduled for four days after the signing of the RSA, a party could argue the triggered event had occurred. Unintended deadlocks are sometimes mitigated (or created) by including mechanisms that extend the relevant periods. In this instance, it would be logical to include an automatic 3 day extension date as well as allowing parties to agree to waive the 3 day default deadline. It is important to keep in mind that the foregoing material only addresses the common terms of an RSA and does not reflect the unique facts or negotiating strength of the parties involved in any particular restructuring.
Advantages of RSAs
RSAs contain a number of benefits for the debtor, including:
a) the discipline of having to meet milestones set out in the RSA and to obtain milestones fees, which incentivizes the company to complete a restructuring in a timely and efficient manner;
b) relief from paying third party fees and expenses incurred by key constituents in connection with the restructuring processes, thus minimizing the amount of cash the debtor will need to expend on its restructuring through a plan of arrangement or scheme of arrangement; in addition, the arrangement can bind those non-supporting creditors who are insolvent or will be without a restructuring process;
c) a short period of exclusivity will be granted to give the debtor breathing space to work out an acceptable restructuring process and resolve issues with the creditors;
d) the ability of the debtor to amend the terms of the plan of arrangement after it is approved, without going back to obtain approvals from all supporting creditors (saving valuable time and cost); and
e) to the extent the terms of the restructuring support agreement become binding upon non-supporting creditors, it may expedite the process of seeking a pre-packaged or "golive" plan sanction order so as to implement the restructuring process through a Canadian court as opposed to having to separately seek approval from the High Court.
The RSA also has numerous benefits for creditors. For secured lenders in particular, holders of debt are incentivized to support a restructuring process given the certainty of receiving cash repayments under a plan of arrangement or scheme of arrangement, or receiving the full amount of their debt in exchange for equity securities in the case where the value of the distressed entity becomes severely impaired. It also sets out the parameters for a successful restructuring process, including the obtaining of creditor approvals and court sanction prior to implementation of the restructuring process.
Risks and Concerns Associated with Using RSAs
While Restructuring Support Agreements (RSAs) can provide an economic incentive for participation in a restructuring process, they are not without pitfalls. While RSAs are typically high-level documents not particularly detailed or prescriptive, their lack of structure may create legal uncertainty as to their interpretation and enforcement. This lack of precision may be unavoidable given that RSAs are often entered into at a time when distressed companies, creditors and their professional advisors are working around the clock to achieve agreement at breakneck speed. In addition to the lack of precision inherent in RSAs, there remains a real risk that RSA negotiations may disproportionately force dissenting stakeholders to lower their rights that would otherwise be protected by their governing contractual and priority arrangements. Finally, there may be a tension between the need to "bind" a group to the RSA and the concern that the RSA, once publicly disclosed, may act as a negotiation ceiling rather than a minimum, acceptable substance that has served its purpose in "binding" stakeholders together. These dynamics may be particularly acute in restructurings involving small groups of parties sufficient to control the requisite class estimates despite the applicable restrictions on cramdowns of dissenting classes.
Uncertainty as to what constitutes a breach of the RSA may be difficult to resolve quickly in an environment where rapid-fire agreements are necessary. Unless very clear do’s and don’ts exist — and almost by definition, they do not — a party may lack certainty as to whether particular conduct is permitted or, on the other hand, does bring that party within the ambit of potential breach of contract. The RSA should, therefore, seek explicitly to set out the types of conduct that may breach the RSA. Although careful drafting cannot always avoid such uncertainty, it can at least reduce the risk of this potential pitfall. Such drafting will often rely on providing the requisite specificity as to what such conduct should include, but also how that conduct should be assessed.
In addition to the interpretive uncertainty inherent in RSAs, enforceability and binding effect can be problematic when hierarchical authority is unclear and parties may not be adequately protected by the agreed terms. Parties that are not Company Parties may be difficult to bind to the terms of an RSA or other agreement among a subset of company creditors where they have not explicitly consented to being bound thereby. In some circumstances, informal or oral agreements that are not built into the RSA or other relevant agreement may bind these parties or the parties may nevertheless be deemed "equitable assignees" of the rights of the parties with a higher level of authority under the RSA or other relevant agreement. However, parties seeking to enforce RSAs may find it difficult to pursue claims against other parties that have failed to respect the terms embodied in such RSAs where those parties are not parties themselves to the RSA. Similarly, the fact that a party has committed to the terms of an RSA but has not signed a supplemental document that embodies the terms of the RSA does not give rise to an enforceable agreement in the absence of other acts — such as an express waiver of certain rights or privileges.
RSAs may also create tension between the need to "bind" a pool of groups with a common interest and the fact that once RSAs are publicly disclosed, they may serve as a ceiling rather than a floor to subsequent negotiations. The lack of enforceable sanction against parties that have "agreed" to an RSA in principle is exacerbated by the fact that many of these parties may not be bound by such RSAs in any event. The need to publicly disclose RSAs further raises the risk that such RSAs will serve as a ceiling rather than a floor to negotiations. This risk in particular creates a tension between disclosing the existence of the RSA to third parties and the desire of the parties to avoid entering into a deal that is above the market. In certain circumstances, parties may even seek to negotiate and sign RSAs in principle or handshake agreements that are not intended to be legally binding and are otherwise protected from public disclosure or are made subject to confidentiality provisions prior to their execution solely to ensure that the terms of the deal are not leaked to the press or the market prior to when the parties mutually deem it appropriate.
Legal Aspects of RSAs
The legal framework governing the drafting and execution of restructuring support agreements (RSAs) is complex and varies across jurisdictions. While RSAs are commonly used in the United States, in Europe they have been given short shrift. However, with a series of recent distressed restructurings in Europe as well as worldwide in the energy and resources sector, we expect to see more use of RSAs in 2016 and beyond.
Notwithstanding the fact that there is no recognised definition under English law of a restructuring support agreement, such agreements are expressly permitted under the new English Insolvency rules, given effect from April 2017.
The US legal position on RSAs is a robust one. RSAs are most commonly implemented as a means for the debtor to cause its creditors or other key stakeholders to agree to negotiate exclusively with them for an ad hoc time period, and to solicit support from those parties for a restructuring that the debtor believes will increase the probability of a successful restructuring. RSAs in the US are usually established between a debtor and a small group of its major stakeholders, such as its lenders or significant bondholders.
In the United States, the parties wish to arrive at a restructuring plan that is based on a "consent solicitation" process. This involves the debtor forming a restructuring committee made up of a limited number of the key stakeholders. Those creditors finance the syndication of the plan to all stakeholders and then solicit their consent to it.
In Europe, RSAs have also been adopted in non-US jurisdictions in an opportunistic manner. In some cases, distressed companies have adopted the concept of what can be described as a "pre-packaged amendment and extension". This involves the equity holders effectively deciding what the new capital structure will look like before entering the restructuring process .
The timing and duration of RSAs is often an important factor given the multi-jurisdictional features of many modern restructurings. This is because, the longer it takes to negotiate an RSA, the greater the risk that it will be challenged by other stakeholders (such as unsecured creditors or equity holders) who have not consented to the agreement.
RSAs are often drafted in such a way that virtually guarantees that creditors will vote in favour of a proposed restructuring plan. With this in mind, the parties to these agreements often implement pre-agreed plans to restructure the company’s debt and ownership. By using RSAs in this way, the parties eliminate any real threat of competitive bidding (and thus vastly increasing the likelihood of a successful restructuring).
For corporate or distressed companies, an RSA is often a quick and effective means of restructuring during or out of court if a negotiated, consensual result can be achieved. If the agreement is drafted well, the middle ground can be found in a complex restructuring.
RSAs in English law are not court-approved documents, and therefore not binding on all creditors. These agreements are usually implemented at the back end, and therefore the treatment of the minority creditors must be the one that is prescribed by law under English law.
Having said that, despite the tentative approach to RSAs outside the US, it is possible that, what could be described as the UK hybrid of an RSA, might be more common in the future due to the greater acceptance of pre-packaged sales as a restructuring tool, and the acceptance of the key commercial terms by the stakeholders prior to the company entering the formal insolvency process.
RSAs are compelling tools for distressed companies, and it appears their usage is likely to continue to rise in the near future.
Examples of Successful RSA Case Studies
A diverse array of businesses across various industries have successfully utilized Restructuring Support Agreements (RSAs) as part of their restructuring strategy. The following case studies provide notable examples of companies that have effectively leveraged RSAs in their Chapter 11 proceedings.
In In re Millennium Lab Holdings, LLC, the debtors filed voluntary petitions for relief under Chapter 11 in 2015. Shortly thereafter, the debtors and the lenders holding 64% of the post-petition debt signed a RSA outlining a restructuring plan, a key component of which was the cases’ pending sales. The debtors sought to sell their assets in two separate sales transactions to two different buyers (one for cash and one for stock) at auctions conducted by the Court. After receiving Court approval for the auction procedures and results and entry of a sale order, the debtors sought confirmation of the Chapter 11 plan premised on the 11-2 sales. A committee of unsecured creditors objected to the debtors’ Chapter 11 plan, but the Court confirmed the plan over the opposition and with the consent of all stakeholders. The Court approved a final decree closing the debtors’ cases in March 2016.
In In re Sabine Oil & Gas Corp., et al., the Court confirmed the debtor’s pre-packaged Chapter 11 plan of reorganization premised on a RSA between the debtor, the holder of senior secured claims, and certain other stakeholders. The debtors entered into the RSA with key stakeholders to address the dispute over the plan treatment of the equity interests of the debtors’ existing equityholders. In connection with the negotiation of the RSA, the debtors, the secured lenders, and some of the debtors’ equityholders agreed on a plan of reorganization that divided the equity interests of the debtors’ existing equityholders: 15% of the original equity interest of the debtors was entitled to vote to accept or reject the plan, with holders of such equity interest being unimpaired; unsecured claims were paid in full; and holders of equity interests who voted to reject the plan received warrants to purchase equity in the emerged debtors. The equityholders who voted to accept the plan received no distribution under the plan because they were deemed to have accepted the plan in exchange for the satisfaction of their existing claims. The Court confirmed the plan in March 2016 with the support of the debtor, the DIP lenders, the credit agreement lenders, and the unsecured creditor committee.
In In re MPM Silicones, LLC, the debtor filed a petition for relief under Chapter 11 in early 2015. The day after the Chapter 11 petition date, the debtor filed a motion to approve the bid procedures and the break-up fee for a proposed out-of-court 363 sale. The proposed buyer held the debtors’ first lien indebtedness, 100% of the debtors’ second lien indebtedness, and all of the debtors’ third lien indebtedness in addition to being the debtors’ debtor-in-possession lender. It also gained approval of the break-up fee of $4.3 million as part of its loan extension. A US Trustee and certain unsecured creditors objected to the debtor’s use of cash collateral and entry into the DIP credit agreement, the allowance of the break-up fee, and the approval of the sale. At the hearing on the debtor’s motion for approval of the bid procedures, the Court continued its objection to the confirmation of the plan.
The Bankruptcy Court ultimately sustained an objection to confirm the debtors’ plan but entered a confirmation order confirming the plan after the debtors substantially amended the plan. The Court expressed that it did not wish to delay the debtors getting back on their feet, but hoped that the restructuring would be refined.
Negotiating an Effective Restructuring Support Agreement
When negotiating complex, multi-party transactions, lawyers and commercial advisors regularly hear their clients tell them that they have already been advised by the "other side" that it is "do or die" and the counter-party will not bend for anyone. The truth of the matter is that on most occasions, the counter-party and their counsel have been working with you (your client’s counsel) on deal points, timing, reasonability, etc. for months before ever being presented with a term sheet or proposed draft agreement. Both sides are negotiating through counsel, and the counter-party’s counsel is not lying to their client when they say the deal will not work with your client’s proposal. Counter-parties are successfully negotiating out of points they don’t like or that are unreasonable, or uncomfortable, or simply are not possible despite what their counsel has been told by your client. Alternatively, if they don’t negotiate out those points, the deal will collapse, but they have not given up yet. And so, the "other side" tells your client they can’t or won’t give up on this point because it really matters to them and the deal. The buck then stops with your client, and your client holds their lawyer and the other side’s lawyers to blame for not bending. Lawyers who have practiced insolvency law for decades will tell you that "all same deal" now meant "near same deal" then and that it is rarer than many people think that caution in amortizing risk thought the drafting process changes a deal.
Drafting and negotiating an effective restructuring support agreement (an "RSA") requires counsel to think very critically about the reasons behind the structure of the agreement and how to get the parties to the signing and execution date as efficiently , and effectively, as possible. Given that the risks associated with any particular term of an agreement may not be fully known or quantifiable early in the negotiation, concepts of relative risk, deal risk, and timing all need to be addressed directly if success is to be assumed.
Everyone wants "post signing milestones" to be met, and the wording of those milestones become an artform worthy of an artist, but the reality is that a restructuring will not complete until one of many events occur: (i) a sale, (ii) a Canadian restructuring, (iii) an alternative transaction, (iv) a dissolved entity, or (v) going public. So, it is important that parties understand the risks of assuming that timing will take care of itself and that they manage their collective expectations around that concept. That also means understanding what circumstances could surround the potential realisation around those milestones, how excitable the party would be if this milestone were identified as having been achieved, and how that translates into reasonability. Once looked at through that lens, other solutions become possible, provided that the underlying wants and desires of each party are known. Restructuring should always be managed with an eye on the probability of achieving a milestone, the associated timing, and the ability to successfully extract value at that time.