A session summary from the IBA Annual Conference 2024 in Mexico City

Reporters

Jean-François Adelle
Jeantet, Paris

Jan Peeters
Stibbe, Brussels

Dorothee Fischer-Appelt
Greenberg Traurig, London

Shubhangi Garg
Shardul Amarchand Mangaldas & Co, New Delhi

Cecilia Mairal
Marval O'Farrell Mairal, Buenos Aires

Dorothee Prosteder
Noerr, Munich

Co-chairs and moderators

Jean-François Adelle, Jeantet, Paris; Co-Chair, IBA Banking & Financial Law Committee

Jan Peeters, Stibbe, Brussels; Conference Quality Officer, IBA Securities Law Committee 

Speakers

Dorothee Fischer-Appelt, Greenberg Traurig, London

Shubhangi Garg, Shardul Amarchand Mangaldas & Co, New Delhi; Vice Chair, IBA Financial and Banking Law Conferences Subcommittee

Cecilia Mairal, Marval O'Farrell Mairal, Buenos Aires; Member, IBA LPD Council

Dorothee Prosteder, Noerr, Munich

Summary

The panel explored the complexities of debt-to-equity (D/E) swaps as a financial restructuring tool and its success and limitations in enhancing a debtor's balance sheet by converting lenders’ claims into equity securities in several jurisdictions.

The discussion covered four main angles: economic perspectives from stakeholders, decision-making processes in D/E swaps, corporate and regulatory frameworks, and capital market implications. Speakers provided insights based on their jurisdictional expertise, focusing on trends, legal considerations and market practices surrounding D/E swaps in listed companies across Argentina, the European Union, Germany, India and the UK, and scenarios involving multiple applicable law scenarios. 

Germany

Dorothee Prosteder discussed the evolving landscape of D/E swaps in Europe, particularly from a German perspective. She highlighted an increase in pre-insolvency restructuring schemes, noting that banks are generally reluctant to take equity positions, while hedge funds show more interest in D/E swaps. Prosteder pointed out that large companies are more likely to engage in D/E swaps compared to mid-sized organisations, where banks often prefer to amend existing loans rather than realise losses. She also mentioned recent cases such as Varta AG and Leoni AG in Germany, illustrating the growing acceptance of D/E swaps within the German restructuring framework, especially under the StaRUG scheme.

UK

Dorothee Fischer-Appelt from the UK focused on the legal aspects surrounding D/E swaps, particularly regarding who controls the process. She explained that in the UK, shareholders typically need to approve significant equity issuances unless specific exemptions apply. Fischer-Appelt emphasised the importance of court-sanctioned restructuring plans, which allow for a cross-class cram-down (a concept borrowed from the US Chapter 11 process), enabling a company to proceed with a plan even if some creditor classes dissent. This mechanism is finding more takers amongst creditors in the UK who seek to stabilise companies without pushing them into insolvency. She noted that while these processes can be expensive, they provide a structured approach to managing creditor claims and ensuring compliance with legal requirements.

India

Shubhangi Garg provided insights from India, highlighting how the new Insolvency and Bankruptcy Code (IBC) has reshaped lender dynamics. She explained that financial creditors dominate the creditors’ committee, which can complicate negotiations for foreign lenders unfamiliar with local practices. Garg noted that D/E swaps are becoming more common among non-bank lenders willing to accept equity in lieu of debt, particularly in sectors with significant asset value. However, she cautioned that this approach is less favoured in financial services due to the volatility of equity values during distress. She also highlighted that the new IBC regime empowers the creditors tremendously and has to a large extent managed to democratise the decision-making process (which in turn resulted in an unprecedented increase in successful restructuring cases in India). 

Argentina

Cecilia Mairal shared her perspective from Argentina, where the environment for D/E swaps is hindered by regulatory challenges and a history of financial crises. She pointed out that while there are no specific regulations governing D/E swaps, existing laws require preferential treatment for current shareholders during any equity issuance. Mairal discussed ongoing restructuring cases involving private companies and emphasised that successful D/E swaps would require careful navigation of legal frameworks and shareholder approvals. She highlighted the need for clear valuations and compliance with local laws to facilitate such transactions effectively.

Observations

The panel discussion on D/E swaps highlighted the complexities and evolving practices surrounding this financial restructuring tool. Interestingly the consensus across various jurisdictions was that even though D/E swaps can significantly enhance a company’s balance sheet, alleviating repayment pressures, and are being increasingly preferred over liquidation, the implementation of such swaps is however still riddled with complications and influenced by various factors, including stakeholder interests, regulatory frameworks and market conditions. The discussion revealed a growing acceptance of D/E swaps across jurisdictions, particularly in Europe and India, while also noting the challenges faced in places such as Argentina.

The panel also discussed the procedural challenges in implementing the swap particularly in the context of listed companies, especially those linked to pricing, corporate approvals, insider trading implications and exemptions from the filing of a full prospectus/launching mandatory tender offers (MTOs).

Looking to the future, the speakers expressed optimism about the potential for D/E swaps as companies navigate ongoing financial pressures and seek innovative solutions to restructure their capital. Prosteder noted an increasing trend in Europe toward utilising D/E swaps within pre-insolvency frameworks, while Garg highlighted a shift among Indian non-bank lenders towards accepting equity in lieu of debt. Mairal pointed out that despite regulatory hurdles in Argentina, there remains a possibility for D/E swaps to play a role in corporate restructurings. Overall, the panel concluded that as market conditions evolve and stakeholder attitudes shift, D/E swaps could become a more prevalent tool for companies aiming to stabilise their financial positions and foster long-term growth.