Refinancing through restructuring

Introduction

The effects of the mining downturn continue to be felt across Australia’s energy and resources sector, including (among others) accommodation and personnel providers.

In this context, it may be beneficial for a company to consider refinancing through a restructure of the company. This sort of refinancing can occur by implementing a scheme of arrangement.

Scheme of arrangement: general principles

A scheme of arrangement is a mechanism by which a company may enter into a compromise or arrangement with its members or creditors.

In order for a scheme of arrangement to be valid and enforceable, it must feature a ‘compromise’ or ‘arrangement’. Examples of valid ‘compromises’ or ‘arrangements’ of a company’s debt in respect of a creditors’ scheme of arrangement include:

  • a restructure of the company’s debt through the assignment of debt to a third party;[1] and
  • a capitalisation of the company’s debts through the issuing of shares to current creditors.[2]

One benefit of a creditors’ scheme of arrangement is that the relevant company may address and restructure its liabilities without the need for external administration. This may be particularly important in circumstances where ipso facto clauses in the company’s service contracts do not contemplate a scheme of arrangement.

Schemes of arrangement are a product of the Corporations Act 2001 (Cth) and are regulated by (among others) the Federal Court of Australia and the Australian Securities and Investments Commission (ASIC).[3]

In order for a scheme of arrangement to be valid and enforceable, the scheme company must comply with strict threshold and procedural requirements. These include:

  • drafting the necessary scheme booklet, which contains the terms of the proposed scheme of arrangement;
  • drafting an explanatory statement, which is designed to assist creditors or members (whichever the case may be) in reviewing the terms of the proposed scheme;
  • liaising with ASIC so that ASIC may review the terms of the proposed scheme of arrangement and provide its response to the proposed scheme;
  • attending two Court hearings in order to (respectively) approve the convening of the proposed scheme meeting, and approve the implementation of the proposed scheme; and

convening and holding the scheme meeting so that the company’s creditors or members (whichever the case may be) may vote in respect of the proposed scheme of arrangement.

Case study: Atlas Iron Limited

Atlas Iron Limited (Atlas) is an Australian iron ore mining company, which listed on the Australian Stock Exchange in December 2004.

In December 2012, Atlas obtained secured finance from a syndicate of 71 lenders (Lenders), which included various Australian and American corporations. At that time, its share price was approximately AUD$1.55.

In March 2016, Atlas’ share price had dropped to AUD$0.03. At the same time, Atlas owed its Lenders approximately US$267M, which was due to mature in December 2017.  

On 23 March 2016, Atlas proposed a creditors’ scheme of arrangement (Atlas Scheme) in order to (among other things):

  • release Atlas from its obligation to pay approximately US$121.1M to the Lenders;[4]
  • issue such number of shares to the Lenders that they would hold 70% of the total ordinary shares held in Atlas;[5]
  • extend the deadline for payment to the Lenders to April 2021;[6]
  • release the directors, officers and employees from any claim relating to events between December 2012 and the date of the Atlas Scheme;[7] and
  • offer ‘the best means for Atlas to restructure its liabilities to the Lenders with transactional certainty’.[8]

Fundamentally, the proposed Atlas Scheme provided the company with a partial debt for equity swap, which would result in the Lenders recovering the debt released through an increase in the value of their shares and options. However, in order for the Lenders to obtain these new shares and options in Atlas, they were required to (among other things) release Atlas from its obligations to pay a portion of the debt owed to them (in the sum of approximately US$121.1M), and obtain shares which would rank subordinate to the claims of all creditors including unsecured creditors if Atlas went into liquidation.

In the explanatory statement, Atlas outlined a number of alternatives to the proposed Atlas Scheme, which included:

  • a consensual restructuring, ie that the Lenders collectively agree to a restructuring of the company’s debt without the need for a scheme of arrangement;
  • the refinancing of the company’s debt from external sources; and
  • the raising of capital from Atlas’ current shareholders (to a maximum of AUD$180M).[9]

However, the company went on to explain why each of these alternatives had been unsuccessful as at the date of the proposed Atlas Scheme.

Outcome

In March 2016, Atlas filed an application with the Federal Court of Australia for orders approving the convening of the scheme meeting. At a hearing on 31 March 2016, Her Honour Justice Gleeson of the Federal Court of Australia granted the orders sought.[10]

On 22 April 2016, the scheme meeting was held. A majority of the Lenders (68 out of 71), who collectively held US$223.4M of the company’s debt, voted in favour of the Atlas Scheme.

Additionally, a shareholders’ meeting was required to be held to approve the issuing of new shares and options to the Lenders.[11] That meeting was held on 27 April 2016, where a 97.87% majority of shareholders approved the resolution to issue new shares and options to the Lenders.[12]

On 28 April 2016, the matter came before Her Honour Justice Gleeson once again, who made orders approving the Atlas Scheme.[13]

On 29 April 2016, Atlas lodged with ASIC the Court’s orders approving the scheme.[14] On 6 May 2016, the company announced that it had implemented the Atlas Scheme.[15]

Lavan Legal comment

In order for the Court to approve a scheme of arrangement, it must be satisfied that the proposed scheme is fair and reasonable. In the case of the Atlas Scheme, the Court considered the majorities obtained in the scheme and shareholder meetings, the expert report provided by an independent financial advisory firm in respect of the proposed scheme, and the fact that no party came forward in objection to the Atlas Scheme.

Where a company foresees challenges in respect of its current financing arrangement and has struggled to raise capital from more ‘traditional’ sources such as lenders and current shareholders, the company may benefit from considering a creditors’ scheme of arrangement.

The creditors’ scheme of arrangement, whilst not the most common form of refinancing, may provide a creative and successful means by which the company can improve its financial and corporate structure.  

 

[1] Re Opes Prime Stockbroking Limited [2009] FCA 813.

[2] Re Coalspur Mines Ltd [2015] FCA 391.

[3] See Part 5.1 of the Corporations Act 2001 (Cth).

[4] Atlas Iron Limited, ‘Atlas Iron Limited Explanatory Statement to the Atlas Scheme (Explanatory Statement)’ (1 April 2016), clause 3.3(e), page 16.

[5] Atlas Iron Limited, ‘Explanatory Statement’ (1 April 2016), clause 3.3(e), page 16.

[6] Atlas Iron Limited, ‘Explanatory Statement’ (1 April 2016), clause 4.1(f), page 24.

[7] Atlas Iron Limited, ‘Explanatory Statement’ (1 April 2016), clause 10(b), page 63.

[8] Atlas Iron Limited, ‘Explanatory Statement’ (1 April 2016), clause 3.4, page 17.

[9] Atlas Iron Limited, ‘Explanatory Statement’ (1 April 2016), clause 5.2, pages 39-40.

[10] Atlas Iron Limited, in the matter of Atlas Iron Limited [2016] FCA 366.

[11] Australian Securities Exchange, Listing Rules (at 14 April 2014), r 7.1.

[12] Atlas Iron Limited, in the matter of Atlas Iron Limited (No 2) [2016] FCA 481.

[13] Atlas Iron Limited, in the matter of Atlas Iron Limited (No 2) [2016] FCA 481.

[14] Australian Stock Exchange, ‘Atlas Iron Limited - Implementation of Creditors’ Scheme’, (Media Release, 6 May 2016) .

[15] Ibid.