27 September 2017

Deal Wrap: The Arrium Restructuring

The Arrium administration was one of the largest and most complex in Australian history, involving $4 billion of debt, 6,000 employees, thousands of contractors, thousands of suppliers, 30,000 customers, and more than 50 banks, funds and bondholders.

The Arrium deed of company arrangement was unprecedented in the Australian market. It represents a new frontier in Australia’s restructuring market in dealing with complex corporate groups to be reorganised and positioned for sale.

A combined team from our restructuring and insolvency and banking and finance teams advised the financiers with a circa $2.9 billion exposure to the Arrium Group.

Find out more about the Arrium administration with Tim Klineberg and Ken Astridge in the video below where they discuss:

  • Whether Australia’s new safe harbour reforms would have helped Arrium’s restructuring strategy
  • The significant impact that Arrium will have on Australia’s administration and deed of company arrangement procedures
  • Arrium’s pre-appointment financing structure
  • The importance of the US$120m GSO facility refinancing on the MolyCop sale outcome
  • How the financing structure changed during the administration.

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What did the appointment of administrators mean for the business and the lenders?

Tim Klineberg: The appointment of the administrators came after a long period of pre-appointment attempts to restructure. Administration is a change of control so that you have got administrators stepping in, instead of the directors in charge of everything. In Arrium you had that happen twice. So you had the administrators come in - originally Grant Thornton, who were then replaced by KordaMentha - so you had two big changes of control.

What it really meant for everybody was, I think ultimately now because we’re at the end, we know that it enabled the businesses to be packaged up into their optimal way to be sold and sold off with the funds being transferred to the creditors. I think what you would see is, with Arrium, it wouldn't have really been possible for that to happen - that’s my personal view - in a pre-appointment scenario. I don’t think the directors had the same freedom to sell, that the administrators and the deed administrators have had in the administration procedure.

Would Australia’s new safe harbour reforms have helped Arrium’s restructuring strategy?

Tim Klineberg: I’m sure the Arrium directors would have loved to have had the safe harbour reforms in effect. It would have given them the comfort that they felt they were pursuing the right outcome for creditors and they were taking steps that would have led to a better outcome for creditors. They would have genuinely believed that as they were taking those steps.

Again though, I think in hindsight, we’d probably say that the plan they were adopting prior to the appointment, certainly from the lender’s side who we acted for, we would have said that plan was not the right plan and we didn’t think it would have ended in a better return for creditors. In fact, we may well say that the outcome, compared to the pre-appointment offer, was superior out of administration than it was for the pre-appointment proposal that was put. So it may well be, perversely, that the safe harbour wasn’t available to the directors, but we’ll never know the answer to that because the reforms are not in effect yet.

Why is Arrium a significant development in Australia’s administration and deed of company arrangement procedures?

Tim Klineberg: The deed of company arrangement put in place for Arrium is unprecedented in the Australian market, it’s a completely new frontier in Australian restructuring. It’s a very, very significant development and we were proud to have had a hand in it, but we also credit Arnold Bloch Leibler, and Leon Zwier in particular, for coming up to the structure.

The aggregation structure and the way that a complex corporate group was able to be reorganised and positioned then for sale created huge benefits for the creditors and for all stakeholders. I think the innovative way in which the deed of company arrangement was put to the court and the change in disclosure, it was just a completely new paradigm. It’s hard to overstate how important that was for the Australian market and I think we’ll see that structure again on big deals. It’s a structure certainly worth considering.

Can you outline Arrium’s pre-appointment financing structure for us?

Ken Astridge: At a high level: three large syndicated facility agreements, and then an assortment of bilateral facilities, receivables purchase facilities and hedging transactions - interestingly, broadly on the same terms and conditions, and what you would expect to see in the context of a large listed investment-grade borrower. The difficulty I think for the banks was that Arrium was rapidly ceasing to be investment-grade.

How important was the US$120m refinancing of the GSO facility to the MolyCop sale outcome?

Ken Astridge: So the importance of the refinance of the GSO facility was critical. Arrium had gone into administration, the administrators were desperate to create stability and then on the side you had GSO who had taken security over the most valuable asset in the Arrium Group, threatening to bring the whole thing down through their own insolvency proceedings.

So the courage of the banks to fund into that and to repay GSO US$120m is important because we got rid of GSO and it’s also important from a bank’s perspective because they agreed to fund in circumstances where they were not guaranteed that GSO would release all of their securities. There was still a debate on that point, but they thought it was so important that they moved ahead, funded it out, and ultimately were victorious against GSO.

How was the financing structure changed during the administration and what benefits did this provide to creditors?

Ken Astridge: The financing structure changed post-administration primarily due to the work that the restructuring team did and quite cleverly were able to create a document which they called the Override Deed which effectively overrode all of the rights of lenders and combined them into one voting group. That streamlined decisions, it also streamlined the ability to put propositions to a very, very large lender group, and also assisted, I think, in maintaining confidentiality in relation to certain information bites in a world where lenders want to trade their debt - you can’t trade your debt if you have confidential information so the Override Deed cleverly dealt with those issues.

Our national restructuring and insolvency team has deep expertise in leading these types of complex assignments, including restructuring and distressed investment, insolvency procedures and insolvency litigation.

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