Debt Capital Markets Masterclass Series

Session 5: Distressed debt and liability management

Sherry Cui
Hanwen Yu
Taiki Ki

14 October 2022

 This webinar will start at 2:30 pm (HKT/SGT).

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Housekeeping

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CPD eligibility: 1.5 CPD points have been applied for with the Law Society of Hong Kong. For
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Post session feedback.

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What we will cover

1 Liability management options

2 Structuring considerations

3 Terms of the liability management

4 Disclosure and due diligence

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Liability management options

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Liability management options

Exchange Offer +
Exchange Offers Consent Solicitation exit consent

Request consent from the Exchange offer where

Exchanging existing notes requisite threshold of holders to exchanging holders are
for new notes amend the terms and conditions deemed to consent to
of the notes amendments to terms and
conditions of the notes

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Structuring considerations

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Structuring considerations
Offshore Public Bond
Offshore Private Debt
Offshore Loans
Onshore Debt
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Outstanding Amount
Bonds Issue Date Maturity Date Next Coupon Date Defaulted Listing Governing Law
(mm)
A 22 October 2017 22 October 2026 22 October 2022 800 Y HKEx English law
B 25 November 2017 25 November 2023 25 November 2022 450 Y HKEx English law
C 9 December 2019 9 December 2023 9 December 2022 700 N HKEx English law
D 17 February 2019 17 February 2025 17 February 2023 670 N HKEx English law
E 6 July 2020 6 July 2027 6 January 2023 525 N HKEx English law
F 17 February 2020 17 February 2028 17 February 2023 400 N HKEx New York law
G 11 November 2021 8 November 2022 8 November 2022 900 N HKEx New York law

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XX, YYYY
Offshore Private Debt
Offshore Public Bond

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Offshore Loans
Onshore Debt

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Q&A

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Interconditionality between different series of notes – whose benefit is interconditionality for?

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Considering the overall offshore creditor pool – what other creditors need to be considered?

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Priorities and preserving hierarchy – does the “before” and “after” make sense?

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Structuring considerations
What are the implications from an NDRC perspective?

Upcoming coupons and interaction with the proposed liability management exercise

Upcoming maturities and interaction with the proposed liability management exercise

Is there an existing default? Will there be additional defaults?

Listing venue – why does it matter?

Outstanding Amount
Bonds Issue Date Maturity Date Next Coupon Date Defaulted Listing
(mm)
A 22 October 2017 22 October 2026 22 October 2022 800 Y HKEx
B 25 November 2017 25 November 2023 25 November 2022 450 Y HKEx
C 9 December 2019 9 December 2023 9 December 2022 700 N HKEx
D 17 February 2019 17 February 2025 17 February 2023 670 N HKEx
E 6 July 2020 6 July 2027 6 January 2023 525 N HKEx
F 17 February 2020 17 February 2028 17 February 2023 400 N HKEx
G 11 November 2021 8 November 2022 8 November 2022 900 N HKEx

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Structuring considerations

Exchange
Consent offer
process/ process/
timetable English Law English Law
timetable
> Physical meeting (21 days notice) > Only subject to clearing system
or electronic consent requirements

New York Law New York Law

> No bondholder meeting provisions > Only subject to clearing system
so process largely governed by requirements
clearing systems requirements

Exit
Consent consents Governing Law
Thresholds and
English Law English law
oppression English law
> Meetings must be (i) quorate and of minority “Redwood principles” which prevents
(ii) specified % voting in favour. the exercise of voting rights where a English law
> If electronic consent only one proposed action would be abusive or
amount to a “fraud on the minority” English law
threshold applies (usually higher)
English law
New York Law New York law
> “Money terms” amendments English law
Case law generally does not read a
typically require 100% of duty of fairness to minority creditors
outstanding principal (vs other New York law
into the contract
amendments are >50%) New York law

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Structuring considerations

Ad Hoc
Groups

What is an Ad Hoc Group?

How does it affect structuring considerations?

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Terms of the liability management

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Terms of the liability management

> US$800mm 7% Senior Notes due 2022 (“2022 Notes”).
Target Notes
> US$700mm 8% Senior Notes due 2024 (“2024 Notes” and together, the “New Notes”).

Terms of New Notes

Issuer [ ] (the “Company”)

Maturity > 2025

Interest > 2025: xx% per annum, payable semi-annually in arrear (Company may elect to PIK).

Denominations > US$150,000 / US$1

Amortisation > xx% of principal payable on amortising dates.

> Upon residual cash flows from Specified Assets exceeding US$xx, the Company is required to apply such amounts towards
Specified Asset repurchase and/or redemption of the New Notes on a pro rata basis.
> Specified Assets = [ ].

Security > Pledge over bank account relating to Specified Assets upon repayment of existing project loans.

> Anytime call prior to maturity date – [redemption at par]/[redemption on a sliding scale with redemption at discount for early
Other
redemption].

> Cross default provisions of the New Notes will carve out any Event of Default in connection to the Target Notes [and specified
Cross-default Carve-out
private indebtedness].

Restructuring Support > Each Consenting Creditor hereby confirms that it shall use its beneficial interest in the Target Notes to approve and fully
Agreement support the Restructuring and the Scheme on the terms and subject to the conditions set out in this Agreement.

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Terms of the liability management – Maturity / Interest

Maturity > 2025

Interest > 2025: xx% per annum, payable semi-annually in arrear (Company may elect to PIK).

Denominations > US$150,000 / US$1

Amortisation > xx% of principal payable on amortising dates.

What is the proposed maturity extension and amortisation schedule?

Will interest be cash pay or PIK and how does compounding work?

Any special considerations for PIK interest?

What are the considerations for denominations?

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Terms of the liability management – Redemption / Security / Covenants

> Upon residual cash flows from Specified Assets exceeding US$xx, the Company is required to apply such
Specified Asset amounts towards repurchase and/or redemption of the New Notes on a pro rata basis.
> Specified Assets = [ ].

Security > Pledge over bank account relating to Specified Assets upon repayment of existing project loans.

> Anytime call prior to maturity date – [redemption at par]/[redemption on a sliding scale with redemption at
Other
discount for early redemption].

What offshore assets can be utilised to offer credit enhancement?

Can security be granted? What about a mandatory redemption trigger?

Mandatory redemption vs amortisation – What are the linkages?

How do we otherwise incentivise early redemption?

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Terms of the liability management – Events of Default

> Cross default provisions of the New Notes will carve out any Event of Default in connection to the Target
Cross-default Carve-out
Notes [and specified private indebtedness].

Holdouts and how do we isolate holdouts related issues?

What other carve out to EODs needed?

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Terms of the liability management – Restructuring Support Agreement

> Each Consenting Creditor hereby confirms that it shall use its beneficial interest in the Target Notes to approve
Restructuring Support
and fully support the Restructuring and the Scheme on the terms and subject to the conditions set out in this
Agreement
Agreement.

What is a Scheme and how is it different to a consent solicitation?

What is an RSA and how does this tie in with a Scheme?

Threshold of passing a Scheme?

How does the process work?

Rational for conducting standalone vs bundling with a liability management exercise?

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Scheme of Arrangement* – Indicative Timeline

1 2 3 4 5
Entry into restructuring Negotiation of long form Following agreement of Practice statement letter 14 days after the practice
support agreement with finance documents, scheme commercial terms, sent to scheme creditors statement letter is shared, the
relevant creditor groups documents and implementation usually takes scheme documents are filed
(including term sheets implementation agreement 8-12 weeks after launch with the court
and implementation
steps plan)

6 7 8 9
Convening hearing takes Approximately one month Sanction hearing held as Filing of scheme of This is an indicative timeline –
place. Notice of meeting after the convening hearing, soon as possible after arrangement at the court availability and creditor
to creditors must include meetings take place for the voting meetings, subject to registrar of companies, at challenges can significantly
scheme documents, purposes of scheme creditor court availability which point it becomes alter the timetable
including a detailed voting effective
explanatory statement

*Vanes depending on nature of Scheme and relevant jurisdiction 17

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Post-launch

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Post-launch

Amendments

> How significant are the amendments?

> Revocation rights?

> What are clearing system limitations?

> Is there a bondholder meeting involved?

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Disclosure / Due diligence

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Disclosure / Due diligence

Disclosure and Due Diligence for Exchange Offers versus Consent Solicitations
Exchange Offers typically treated similarly to new issuances with usual due diligence process and
business disclosure in the exchange offer memorandum

On the other hand, consent solicitations are typically disclosure and due diligence light as the
common view is that bondholders are not being asked to make a new investment decision

Should that always be the case? In distressed situations with complex liability management
solutions:

> Exchange offers and consent solicitation may be difficult to distinguish in terms of bondholder decision making (in both
cases holders are often being asked to accept a significantly amended instrument).
> Difference between exchange offers and consent solicitation may purely be a matter of English law vs NY law
considerations where commercial objectives are identical.
> Market practice continues to evolve.

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Disclosure / Due diligence

Consider:

Full disclosure, no/“light touch” disclosure or halfway house? No/“light touch” disclosure
> Deemed investor reps and prominent disclaimers
> Disclosure only on structure of liability management and
consequent risks
> Marketed on the basis that bondholders must do their
Full disclosure own homework
> Usual approach for a new issuance
with full disclosure on business
and structure
Halfway house
> Deemed investor reps and prominent disclaimers
> Some business disclosure in addition to disclosure on
structure, but certain information (eg financial
information) may be abbreviated

What are the pros and cons?

How should financial statements be disclosed? For eg if unreviewed,

qualitative disclosure only?

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Disclosure / Due diligence

Other disclosure and DD issues

> Establish at the start of the LM transaction whether auditors will be involved

> Non-contravention opinions – unlikely that a law firm will issue non-contravention opinions (whether US or

HK) if there are existing defaults

> What is the role of the banks – dealer managers, financial coordinator – does the title matter?

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Questions?

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Your speakers today

Taiki Ki
Sherry Cui Hanwen Yu Partner (Linklaters LLP, England &
Partner, Hong Kong SAR Partner, Hong Kong SAR Wales), Registered Foreign Lawyer
Tel: +852 2842 4134 Tel: +852 2901 5439 (England & Wales), Hong Kong SAR
sherry.cui@linklaters.com hanwen.yu@linklaters.com Tel: +852 2901 5442
taiki.ki@linklaters.com

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Linklaters LLP

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Chater Road
Hong Kong SAR
China
Telephone: +852 2842 4888
Facsimile: +852 2810 8133/2810 1695

www.linklaters.com

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