European Restructuring Newsletter

UK Court Upholds Use of European Insolvency Regulation in Respect of Nasdaq Listed Company

In a recent case, the UK courts have upheld the use of UK Administration procedures over a Delaware company listed on Nasdaq. This marks the first time that the European Insolvency Regulation has been used as an alternative to Chapter 11 for a US company.

German Issuers Increasingly Turn to PPNs as Alternative to Banking Facilities

In a recent article, Private Placement Letter notes that German corporates are increasingly tapping the US PPN market over the traditional bank or public bond markets. Market participants believe the trend begun by Porsche and Volkswagen, among others, will continue as German issuers seek to diversify their base of investors and find that they can issue on favourable terms.

2003: Record Year for Private Placement Issuance

In its annual review of private placement issuance activity, Private Placement Letter reports that issuance volume increased 56% over 2002, itself a record. International supply was once again a main driver of the market in 2003.

UK Court Upholds Use of European Insolvency Regulation in respect of Nasdaq Listed Company

Many of you will be aware of the impact that the European Insolvency Regulation (the “Regulation”) has had on restructurings of European companies since the Regulation's effective date in May 2002. However a recent case in the UK illustrates that the Regulation can also be a useful tool for creditors (in preference to Chapter 11) when applied to US companies having significant operations in Europe.

Although the US Bankruptcy Code has theoretically provided a legal umbrella for dealing with assets worldwide, practical issues in enforcing US law overseas have made the use of the US Bankruptcy Code problematic. Furthermore Chapter 11, as a debtor-friendly legal framework, allows management the primary role in pursuing financial restructurings.

Creditors can now consider using the Regulation as an alternative to the US Bankruptcy Code when dealing with companies (including those incorporated in the US) having substantial operations in Europe. By combining the provisions of the Regulation with a creditor-friendly bankruptcy process such as UK administration, creditors can control effectively the enforcement of creditors' rights throughout the EU.

Under the Regulation, creditors can initiate insolvency proceedings under the laws of any EU member where the debtor has its Centre of Main Interest ("COMI"). The factors determining the location of a company's COMI are complex and can lead to non-obvious results.

Ci4Net was a Delaware registered company which held investments in a large number of high-tech companies around the world. Quoted on NASDAQ, Ci4Net's value once reached as high as $1 billion in the dot com boom of 1999. After a number of years of underperformance, its bankers finally petitioned for Administration in the UK in Spring 2004 on the grounds that the company's COMI was in the UK.

The petition was challenged by the company, which claimed that its COMI was in the US since the company was registered in Delaware and its sole director worked out of New York. The UK judge rejected this claim, citing the fact (among others) that the company's dealings with its creditors were conducted primarily from the company's London office. The judge thus upheld the application of UK insolvency law to the US company.

This case illustrates well that the creditor friendly insolvency laws of the UK can sometimes be used by creditors even for companies which are incorporated outside the UK and which have significant nexus to the US or countries other than the UK.

German Issuers Increasingly Turn to PPNs as Alternative to Banking Facilities

Until 2003, German issuers had largely been absent from the US private placement market. They relied on traditional banking facilities or the Eurobond market. But numerous changes in German banking regulations and an increasing desire to access US capital markets have led to a significant evolution in the funding practices of a number of well known German corporates.

In a recent article, Private Placement Letter reports that in the first of 2004, German issuers have already raised $3.9 billion in privately placed senior note deals, nearly five times the $805 million raised in all of 2003. In 2002, issuance totalled less than $400 million.

The reasons for the increased interest by German issuers in the US private placement market are numerous. PPL indicates that the increased funding cost of landesbanken (state-owned regional banks) and sparkassen (local savings banks) caused by the expiration of German state guarantees next year will mean that German corporates will no longer be ably to rely on low-cost funding from such banks and are being forced to look to alternative financing sources. Maturity constraints in the German private placement market, known as the schuldschein market, are also pushing German issuers towards the more flexible US market.

Although the best known deal is probably this year's $625 million senior note issue by Porsche, many smaller credits cited in the article have also come to market over the past couple of years. PPL notes that a number of the larger transactions were done without financial covenants (although investors have been given Most Favored Lender status), enabling issuers to capture the usual benefits of privately placed issues while retaining the lack of covenants associated with the Eurobond market.

PPL concludes that by saying that market participants believe the trend for further issuance by German issuers will continue, as will the pressure for weaker or no financial covenants, at least by the stronger credits.

2003: Record Year for Private Placement Issuance

In its annual survey of the US Private Placement market, PPL reports that 2003 issuance volume increased 56% over 2002, itself a record, to a total of $48 billion. International supply was once again a main driver of the market in 2003, with investments in Western Europe increasing to almost $12 billion:

Investments in Western Europe

Source: Private Placement Letter

According to PPL's Survey, investors believe that total 2004 volumes will fall somewhat to approximately $35 billion, with issuance of from non-US corporates remaining a key driver of the market.

Not surprisingly, investments in the UK topped the list:

Geographic Distribution

Source: Private Placement Letter