Restructuring struggling businesses in France has been slower, less efficient and less creditor-friendly than restructuring businesses in the UK. Banks and funds that hold debt in French companies are subject to less protection when those companies go wrong than lenders to UK companies but, as the number of restructurings shoots up during the downturn, disgruntled debtholders are fighting back.
Thomas Gaucher, director in the European restructuring and debt advisory group at Close Brothers based in Paris, said: “The business of restructuring is newer in France and there are fundamental differences in culture and legislation. Here, the company and its employees – rather than the creditors – are most important, which is very different from the UK model. It has traditionally been less favourable for banks than in other jurisdictions, although things are starting to change.”
In some cases, creditors have been forced to take substantial writedowns on their debt to ensure the survival of the company. Hit by the slump in sales in the global car industry, private equity-owned Autodistribution was struggling to service its €600 million debt pile.
The outcome of a long restructuring battle was that lenders, led by Citigroup, took a big writedown on their debt and ended up with just 21.5 percent of the equity in the surviving business. Private equity firm TowerBrook, after agreeing to invest €88 million in the company as a going concern, ended up with 62.5 percent. The backers of Eurotunnel, the Channel Tunnel operator, also lost billions when a 2007 restructuring resulted in the beleaguered company’s debt being reduced from £6.2 billion to £2.8 billion. One problem for lenders lies in the procédure de sauvegarde pre-insolvency process introduced in 2006 and touted as an equivalent to Chapter 11 in the US.
Under sauvegarde, a company facing impending financial difficulties can apply to the French courts for protection, effectively freezing the right of creditors to enforce the terms of loans that could, in the UK for example, force a liquidation of the company or lead to the creditors taking ownership.
Rod Cork, a restructuring partner at law firm Allen & Overy in Paris, said: “The courts in France will do everything they can to protect debtor companies and their shareholders, but much less to protect the rights of the creditors. The introduction of sauvegarde has exacerbated the difficulties faced by banks and funds which are lenders to companies involved in a restructuring process. It is a very difficult environment for banks and, as the number of leveraged buyout companies facing difficulties increases, that will get worse.”
Another high-profile case, that of building materials group Monier, gives some cause for optimism to lenders. Following a battle between private equity owner PAI and a group of lenders led by Apollo Management, TowerBrook and York Capital, it was the lenders that eventually won control of the business after securing agreement for a substantial debt-for-equity swap. Banks will hope the Monier case represents a precedent and that the balance of power is starting to shift away from equity holders in favour of lenders.
