The Swift and Silent Restructuring of Pacific International Lines

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The Swift and Silent Restructuring of Pacific International Lines

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Link is provided here: https://www.businesstimes.com.sg/opinio ... onal-lines

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ON March 31, the world's 12th largest liner company and South-east Asia's largest carrier Pacific International Lines (PIL) announced the completion of the US$600 million investment by Heliconia Capital Management.

The investment resulting in Heliconia becoming the majority shareholder in the PIL group marked the completion of PIL's US$3.3 billion debt restructuring, which involved a US$1.1 billion scheme of arrangement and an out-of-court restructuring of PIL's remaining debts.

Amid the highly-publicised, long-drawn restructuring efforts of Hyflux and the bleak prospects facing creditors of the once-mighty Hin Leong Trading, the successful conclusion of PIL's restructuring stands out for having been completed swiftly and with minimal fanfare.

While detractors have taken aim at Singapore's new restructuring laws (which draw on Chapter 11 of the United States Bankruptcy Code), it is over-simplistic to conclude that Singapore's new laws have not gone far enough.

PIL's restructuring, which was achieved through its ambitious "pre-negotiated" strategy, bears testament to the major dynamics shift that the new laws have engendered in the restructuring space. It is evidence that Singapore's restructuring laws can achieve Chapter 11-type success as long as a debtor-company's management, its creditors and the professional advisors are prepared to act boldly and swiftly to rescue the debtor company.

STRATEGY FOR A PRE-NEGOTIATED RESTRUCTURING

It was no secret that along with other major container liners globally, PIL had been facing increasing pressure from the steep downturn in shipping demand in recent years. The onset of the Covid-19 pandemic exacerbated its difficulties as lockdowns restricted trade flow and adversely impacted revenue streams.

While the company could have followed the conventional route by waiting until its cash ran out before running to court for protection against creditor claims and attempting a restructuring, it was determined to avoid a similar fate as Hanjin Shipping, where a filing for court protection caused an immediate supply-chain implosion and, ultimately, its demise.

Instead, PIL took early action and adopted a bold legal strategy by embarking on a "pre-negotiated" restructuring process with WongPartnership as its legal advisor. PIL also engaged Evercore Asia (Singapore) as its investment banker to advise on capital raising plans and AlixPartners as its operational consultant.

This was an unusual move, with a cocktail of sophisticated advisers as pre-negotiated restructurings, although fairly common in Chapter 11 proceedings, are not typically undertaken in Singapore. However, it was necessary for the survival of the business that the deal proceed as expeditiously as in Chapter 11 restructurings.

PIONEERING THE PROCESS IN SINGAPORE

Conceptually distinct from a "pre-packaged" scheme or "pre-pack" (where the debtor solicits acceptances from creditors for the full terms of the restructuring), a pre-negotiated restructuring involves negotiating key terms with a core group of principal creditors before commencing any court proceedings, and without soliciting acceptances yet.

Only after agreement of the principal creditors is obtained does the debtor commence court proceedings. At this juncture, the restructuring documentation would already be in substantially final form and the debtor can justifiably request that the timelines for soliciting creditor approvals and court hearings be expedited.

While "pre-packs" are specifically provided for in Singapore's Insolvency, Restructuring and Dissolution Act, they are generally practical only where the debtor has relatively few creditors. A "pre-pack" was therefore not feasible for PIL, which needed to restructure debts owed to over 50 creditors of varied profiles such as bank lenders, financial lessors and bondholders, which included retail investors.

HOW THE NEW LAWS HELPED SHAPE THE RESTRUCTURING

Three key steps were crucial to the pre-negotiated restructuring strategy. The first was a standstill on enforcement action and a principal and interest holiday from PIL's bank lenders, without the filing of any court proceedings.

Given the highly competitive industry, PIL needed to continue its operations to preserve its business. Cash needed to be preserved and managed carefully. A strategic decision was thus made to seek an enforcement and repayment standstill from only PIL's bank lenders while repayments to trade suppliers and financial lessors in other jurisdictions continued.

On the face of it, this was an unpopular proposal. Yet, the bank lenders knew that PIL could theoretically stop any legal action against it by filing for court protection under the new restructuring laws. Having seen the commercial fallout in Hanjin Shipping, the irretrievable consequences, should PIL be forced to take that route, were clear. Further, the lenders knew that any enforcement action such as vessel arrests would have a domino effect on operations, making it nearly impossible for PIL to recover thereafter.

With the threat of potential legal proceedings firmly impressed on the bank lenders, PIL obtained the standstill without having to head to court.

The second was the formation of an informal steering committee (ISC), with the ability to build momentum towards obtaining the creditor approvals needed to implement the restructuring. In PIL's case, since having a large number of its unsecured creditors in the ISC was not feasible, it was determined that the ISC needed to hold enough aggregate debt to implement the restructuring through a "cross-class cram down".

Previously, a debtor would need to get majority approval of creditors representing 75 per cent in value in every creditor class, prior to seeking the court's approval of the scheme. However, under the new cross-class cram down mechanism, a debtor can do so if at least one creditors class and a majority of creditors across all classes, representing 75 per cent in total value, approve.

The true impact of this new mechanism goes beyond lowering approval thresholds. In effect, being able to utilise this tool reduces the ability of creditor groups to take unreasonable holdout positions, allowing negotiations to progress more quickly and for value to be distributed more fairly under the restructuring plan.

In PIL's case, although it did not have to use this mechanism eventually, the threat of the cross-class cram down allowed it to focus its efforts on developing a feasible restructuring proposal within a few months.

Finally, the lynchpin to the pre-negotiated restructuring was the US$112 million facility obtained from Heliconia to facilitate continued operations while the restructuring plan was negotiated. As Heliconia was prepared to extend financing only if the facility was backed by security, PIL had to persuade secured bank lenders with an equity cushion to provide such security as it lacked sufficient free assets.

While the "super-priority" financing provisions under Singapore's new restructuring laws allowed PIL to seek a court order for Heliconia to be granted super-priority security over certain assets in exchange for the financing, this route would likely have magnified unwanted publicity, caused delays and increased the risk of business failure in the interim.

Given the prospect of PIL being compelled to file for a moratorium to utilise those provisions, certain supportive bank lenders eventually agreed that they would each pay a fixed sum to Heliconia (which would in aggregate be equal to the new financing provided) in the event the restructuring was unsuccessful. While such sum would be payable upon the enforcement of their respective security, it was agreed that these lenders would retain the discretion to determine the enforcement timing and process.

The advantages of this structure were three-fold: First, participating lenders did not have to extend fresh cash and could support the restructuring and financing by simply sharing in the financial risk. Second, the arrangement effectively granted Heliconia "super-priority" security as its facility was guaranteed, but allowed the lenders to manage the risk of shortfalls arising from enforcement by controlling the enforcement strategy. Third, the transaction was concluded quickly because the arrangement was consensual - each participating lender determined how much to commit based on its own assessment of its security position.

With this in place, PIL was able to engage with Heliconia, as advised by investment bank Houlihan Lokey, on the terms of Heliconia's investment and formulate a restructuring plan supported by the ISC. This allowed court proceedings to move on expedited timelines and conclude in slightly under four months - a duration almost unheard of in the context of large-scale Singapore restructurings.

NEW HYBRID LAWS REMAIN ATTRACTIVE AND VIABLE

PIL's swift and silent restructuring is an example of how Singapore's new regime can be used to achieve successful restructurings similar to Chapter 11, as long as all stakeholders and advisors are prepared to act quickly. It also evidences how Singapore's updated restructuring tool kit can be used to shape the mindset, discourse and playing field between a debtor and its creditors without using these tools in court.

With the increasing adoption of selected Chapter 11-style provisions globally, PIL's pre-negotiated restructuring paves the way for complex and large-scale restructurings in similar hybrid regimes. In this regard, it is worth noting that while AlixPartners and Evercore have extensive experience in Chapter 11 restructurings, the PIL deal was both advisory firms' first foray into Singapore restructurings.

There remain many provisions with untapped potential for strategic and innovative use, and it is exciting to see what new ground can be broken with an enlarged ecosystem of advisors who can tap their experience handling complex restructurings in other jurisdictions, to advise debtors and creditors alike in Singapore restructurings.
  • The writer is a partner at WongPartnership and joint lead partner in PIL's restructuring. She was seconded to the New York office of a leading restructuring law firm in 2018 and 2019 and worked on various Chapter 11 restructurings during her time there.
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