APE – An Argentine Tale
By Rohit Chaudhry
Banks and other creditors are developing creative ways of restructuring distressed companies in Argentina. Their experience with the new restructuring procedure called APE has not been entirely satisfactory.
APE stands for acuerdo preventivo extrajudicial.
It is a procedure in Argentina, like a pre-packaged bankruptcy in the United States, where a privately-negotiated debt restructuring, supported by a qualifying majority of a company’s creditors, can be imposed on recalcitrant creditors. The plan is filed with an Argentine court for approval. Once court approval is obtained, the terms of the restructuring are binding on all creditors affected by the APE, whether or not they were part of the qualifying majority that supported the terms of the restructuring.
During the last three years, companies in Argentina have spent significant amounts of time reformulating their businesses and negotiating restructuring plans with their creditors. A large majority of these distressed companies have used APE as the preferred way of implementing their restructurings.
However, as APE filings have progressed at a slow pace and have become increasingly litigious, in recent months companies and their creditors have begun viewing the APE as a less desirable restructuring vehicle than they originally anticipated. This change in perception has forced companies and their creditors to rethink their restructuring strategies and to come up with more creative and incentive-oriented approaches to restructurings.
The Argentine bankruptcy laws were amended in May 2002 in response to the economic collapse. (For earlier coverage, see the NewsWires for February and June 2002.) Among other changes, the 2002 amendments let distressed companies and their creditors use the APE, upon endorsement by the court, to bind all creditors affected by the APE, including dissenting and non-participating creditors. In addition, the amendments provide that upon filing of an APE all claims against the distressed company that are affected by the APE are frozen.
Before the 2002 amendments, debt restructurings were accomplished primarily through concurso preventivo proceedings, which are similar to chapter 11 proceedings in the United States. The out-of-court restructuring agreements under the APE procedure that existed prior to the 2002 amendments were not popular because they were not binding on creditors that were not parties to the agreements and did not bar litigation related to the restructured claims. They led in many cases to legal challenges and then to the distressed company filing for concurso preventivo.
Under the amended APE procedure, a company that is in default or in general financial distress may enter into an out-of-court restructuring agreement with its creditors – just as before. However, as a result of the 2002 amendments, upon filing of such an agreement in an Argentine court, all claims against the distressed company that are affected by the APE are frozen. Further, upon court endorsement, the agreement is binding upon all creditors.
In order to implement an APE, the executed restructuring agreement must be filed in an Argentine court for endorsement, together with supporting documentation such as a statement of assets and liabilities, a schedule of creditors and a schedule of outstanding litigation.
Court endorsement of an APE requires the consent of holders of a majority in number and two-thirds in total outstanding amount of the affected unsecured debt. Unsecured creditors that are also controlling shareholders of the distressed company are not taken into account when determining the qualifying majorities.
In a concurso preventivo proceeding, the consents to the restructuring plan typically would have to be obtained by the distressed company at the end of the restructuring process, which commences upon the filing of a petition seeking relief. In contrast, in an APE, the consents are generally required up front at the time of filing of the APE. However, in certain cases, APEs have been filed without obtaining the required creditor consents. This has allowed a company to get the benefit of the freeze on all claims affected by the APE while it sought support from a qualifying majority of its creditors.
A company and its creditors are free to restructure as they see fit. The APE rules provide for almost no substantive review of the restructuring agreement by the APE court. Once a petition for court endorsement has been filed, it must be publicly disclosed by publishing notice of the filing for five days in Argentine newspapers and in the official gazette. Creditors then have 10 court days to file objections. Objections can only be filed on the ground that the company overstated or understated its assets or liabilities or on the ground that the qualifying majorities have not been obtained. If objections are filed, then a further 10 court-day period is provided for the production of evidence, after which the court is required to issue its opinion. If no objections are filed, then the judge must endorse the APE simply upon verification that the necessary documentation has been filed and the qualifying majorities obtained. Thereafter, objecting parties and creditors have a period of six months after endorsement to challenge the endorsing court’s decision.
Theory vs. Practice
Although in theory the APE rules provide an expedited mechanism for restructurings, the reality has been that APE restructurings have been litigious, complex and time-consuming.
While it is clear that the time periods involved in a restructuring implemented by means of an APE are far smaller than the typical two to four years required in concursos preventivos, these time periods are far in excess of what was originally contemplated under the statute. The APE rules are, in many important aspects, vague and incomplete. Over the last couple of years, numerous court decisions have shed new light on these provisions. In addition, since the 2002 amendments, numerous Argentine bankruptcy law commentators have theorized about the application and interpretation of the APE rules and their interplay with the rules governing concursos preventivos. However, ambiguities remain that result in delays and conflicting interpretations.
The duration of the APE process is one problem. The rules provide an expedited timetable for endorsing the APE once it is filed with an Argentine court (five days for publishing notices of an APE filing plus 10 days for the filing of objections and an additional 10 days for addressing any such objections and issuing the endorsement decision). However, this statutory timetable has rarely been followed. In practice, it has taken up to one year from the filing of an APE to obtain court endorsement.
Such delays have resulted from a number of factors ranging from the substantial delays in declaring the process commenced and the admission of challenges from alleged creditors who failed to make even the most basic case that they are affected by the APE to the filing of appeals to an APE based on the unconstitutionality of the 2002 amendments to the Argentine bankruptcy laws. For instance, in the Multicanal APE, the court delayed its decision to endorse the APE for several weeks as a result of a challenge filed by a Paraguayan company that was suing Multicanal in Paraguay in connection with indemnity issues under a stock purchase agreement. The Paraguayan company argued that Multicanal “had omitted such entity from the schedule of creditors and understated its liabilities.” However, under Argentine accounting principles, it was clear that the lawsuit did not have to be recorded as a liability by Multicanal and, therefore, the claimant appeared to lack standing to oppose the APE.
Delays of up to one year have occurred even in cases where creditor support was as high as 90%. In Sideco Americana, it took three months for the court to declare the process commenced after the filing date, even though the APE rules provide that the process should commence “upon filing of the APE.” In addition, the Sideco Americana court delayed its decision on endorsement as a result of objections filed by third parties who neither held loans, bonds or any other claims of Sideco Americana nor proved standing to oppose the APE. The table on page 38 lists cases where the APE approval process has taken longer than the statutory timetable.
The delays raise special concerns for restructurings in the energy and utility sectors in Argentina, above and beyond the concerns one might typically expect a creditor to have in any delayed closing. This is because in these restructurings, in addition to the distressed company and creditors, the Argentine government is very often the unseen third party at the negotiating table.
Over the last few years, the Argentine government has been looking for ways to overcome the crisis in the energy and utility sectors by requiring additional investments by private companies in these sectors. Needless to say, such investments have not been voluntarily forthcoming from the players involved.
As a result, the Argentine government has been looking to use different degrees of coercive measures to compel the existing companies in these sectors to make further investments. For example, the Argentine government is contemplating creating “financial trusts” for making these investments and ordering private companies to divest a portion of their future revenues or existing cash to fund these financial trusts. It is not clear how large a portion of future revenues or existing cash the existing companies might be asked to divest to fund these financial trusts.
This threat is magnified by the fact that in many cases Argentine companies stopped paying debt service soon after the commencement of the economic crisis in order to increase leverage over their creditors. Consequently, many of them have large amounts of cash on their balance sheets, which is being eyed as much by the Argentine government as by the creditors of the companies. While the companies generally acknowledge that this cash ought to be used to pay creditors, they are reluctant to make such cash payments prior to APE endorsement in order to maintain their leverage throughout the restructuring process. Any delay in the APE process increases the risk that this cash may not be available by the time the APE is endorsed if the companies are compelled to use the cash for government-mandated investments.
The process for court review of restructuring agreements is another problem. Following the introduction of the APE rules, a number of commentators noted that a novel feature of the new rules was that a distressed company and its creditors could structure the APE agreement in any manner that they deemed fit, and that court review would be limited to verifying compliance with basic legal requirements (requisite majorities, completeness of accompanying documentation, etc.). This principle was initially construed as allowing flexibility for a company to negotiate the terms to be offered to its creditors and provide incentives that could increase the level of support or attractiveness of the offer. However, in practice, Argentine courts have not allowed absolute freedom to companies and creditors in structuring APE agreements. In fact, in most of the APE cases, Argentine courts have borrowed concepts that govern concursos preventivos and have performed thorough substantive reviews of these agreements. Moreover, in some cases courts have gone as far as modifying the terms of the APE agreements filed with the court to equate the treatment of consenters and non-consenters or to remove certain features that the court viewed as contrary to bankruptcy law principles of fairness and equal treatment.
Due to such substantive reviews by courts, distressed companies and creditors are now reluctant to include certain terms in restructuring proposals that might otherwise have made the restructurings more robust. For instance, it is not uncommon in restructurings to provide for certain up front cash payments only to consenting creditors (but not to holdout or non-participating creditors) in order to induce creditors to consent to the restructuring. It is not clear whether such payments would pass the fairness and equal treatment tests that Argentine courts apply to APEs. In some restructurings, debtors use coercive measures such as stripping the covenants that run to the benefit of holdout or non-participating creditors. The idea is again to induce creditors to consent to the restructuring in order to receive a more favorable covenant package. It is not clear whether such covenant stripping would be permitted by Argentine courts in an APE.
In the Multicanal APE, holdout and non-participating creditors were only given a ratable portion of new notes and a combination of new notes and shares (which were two of the three options offered to consenters) in exchange for their restructured claims, but were excluded from the cash payment offered to consenting holders. To avert the likely risk that the court could find the APE objectionable on the basis of discrimination against non-consenting creditors, the Multicanal APE was amended to provide that non-consenting creditors will receive a prorated portion of each of the three options offered to consenting holders. Upon confirmation of the APE, the court required as a condition to endorsing the APE that Multicanal provide bondholders who voted against the APE or abstained a 30-day period to elect the same consideration options given to those who voted in favor of the APE. In Sideco Americana, where the APE was filed with the support of 95% of the company’s creditors, the court required that the APE be amended as a condition to endorsement to provide that non-consenters receive one of the three options available to consenters (10-year floating rate notes) instead of a residual and less attractive option provided to non-consenters.
Another issue that has puzzled Argentine companies and has been the subject of extensive debate is when the APE is deemed “performed”.
This is critical for debtors because until an APE is deemed “performed,” non-performance by the debtor of any obligation under the restructuring plan requires that the reviewing court declare the commencement of liquidation proceedings or quiebra (similar to chapter 7 liquidation proceedings under the US bankruptcy code).
Unlike in US chapter 11 reorganization proceedings, an Argentine company only emerges from its concurso preventivo when the reviewing court issues a resolution confirming the full satisfaction of all the restructured claims, which may take several years. This principle of Argentine bankruptcy law was undisputed until 2003, when a Buenos Aires court, in apparent contradiction of the concurso rules, confirmed a restructuring plan that provided, upon delivery of the new notes to the affected creditors, the distressed company will be deemed to have performed its obligations under the restructuring plan, thereby emerging from bankruptcy. On the theory that this also applies to APEs, Argentine companies restructuring debt through an APE included provisions in their restructuring plans providing that, upon delivery of the new instruments to their creditors, the terms of their APEs will be deemed performed. However, in the recent Acindar APE decision, the court rejected the theory of performance by delivery of the new instruments and expressly stated that the principles applicable to concursos preventivos that dictate that the reorganization plan is only performed upon full repayment and performance of the obligations in the plan also apply in an APE proceeding. As a result of this decision, the risk for Argentine debtors in an APE is that if the company fails to perform any of its obligations under the restructured debt, then the company could be liquidated, without the possibility of any further restructuring.
Another issue with APEs is how to count whether one has support from a majority of the creditors. APE rules require the support of creditors representing two-thirds of the total outstanding unsecured debt amount and a majority in number of unsecured creditors. Although this seems simple enough, these calculations can get complicated in the case of noteholders. And the APE rules provide little guidance. There is a procedure governing this issue that applies to concursos preventivos that was not expressly contemplated under the APE rules, but that has been upheld in APE cases such as Multicanal.
For instance, in the case of headcount majorities, it is not clear how noteholders should be counted. Under the concurso procedure, once a noteholders’ meeting is called and validly held, all votes of the noteholders of a particular series supporting the APE are computed as given by one person and all votes opposing the APE are computed as given by one person, regardless of the actual number of noteholders of that series that vote in favor of or against the APE. Then, the votes are added to the individual consents of the other creditors included in the APE to determine whether a majority in number of all unsecured creditors has voted in favor of the APE.
Further, it is not clear whether all outstanding unsecured notes need to be counted or only the notes represented at a meeting of holders convened to approve the restructuring. Court decisions have not been consistent on this issue. For instance, in Multicanal, the court held that the rules governing concurso proceedings also had to be followed for counting majorities in the context of an APE. Concurso rules provide that only the notes represented at a meeting of holders convened to approve the restructuring should be counted in the calculation of qualifying majorities. In Autopistas del Sol, the APE was endorsed without a noteholders’ meeting and, when dismissing an opposition from a creditor, the court in the Autopistas case held that the procedures described above were just one of the options for providing consent to an APE but not the only method.
The manner in which qualifying majorities are calculated is extremely important since the method chosen could determine (and, in many APEs, has determined) whether or not qualifying majorities have been achieved. However, there continues to be uncertainty under the APE rules and case law on this important issue.
Section 304 Proceedings
Even if a restructuring pursuant to an APE is successful in Argentina and receives court endorsement, there is a risk that the restructuring may not be honored in other jurisdictions.
If a company’s debt is governed by New York law, then a creditor could bring action in New York courts. To address this risk, an Argentine company might seek recognition of the Argentine bankruptcy proceeding in the US in order to, among other things, bar separate actions in the United States. An ancillary proceeding under section 304 of the US bankruptcy code is the mechanism by which this is done.
In order to obtain relief in a section 304 proceeding, certain minimum standards must be satisfied. Until recently, it was unclear whether an APE would satisfy these minimum requirements since a restructuring under the APE procedure occurs outside of actual bankruptcy with less court involvement than in other judicial restructurings. This issue was recently addressed by a US bankruptcy court in the Multicanal case.
Multicanal filed a petition under section 304 commencing a case ancillary to its APE. It wanted a temporary restraining order and preliminary injunction to bar two lawsuits commenced by Huff, a noteholder holding a significant amount of Multicanal’s unsecured debt. Huff wanted a New York court to order Multicanal to repay its notes and bar the company from restructuring them through an APE. The US bankruptcy court granted a temporary restraining order preventing Huff and the other related entities that filed litigation in the US against Multicanal from prosecuting the state court lawsuits or taking action in the US which would interfere with Multicanal’s restructuring proceedings in Argentina.
In holding that the APE regime is enforceable in the United States and that dismissal of the Huff lawsuit was warranted, the court stated that the APE procedure bears strong resemblance to US prepackaged bankruptcy plans and rejected Huff’s argument that the APE has to satisfy all the conditions for confirmation of a chapter 11 case. The court said that the conditions for confirmation of a concurso preventivo need not be satisfied either.
Although the bankruptcy court sided with Multicanal, it expressed concern about the treatment of US creditors under Multicanal’s APE and directed the company to remedy what the court perceived as unfair discrimination against US retail holders of Multicanal’s notes (who were only eligible to receive a discounted cash-only option and were excluded from the combination of notes, cash and shares offered to Multicanal’s other more sophisticated US and foreign creditors). In addition, the bankruptcy court was troubled by Multicanal’s criminal actions against creditors and questioned whether US creditors may be subject to coercion by threats of criminal prosecution in Argentina. To address these issues, the court demanded evidence that the criminal actions were not commenced for improper purposes. The resolution of these two issues is still pending in the bankruptcy court.
As a result of the increasingly contentious nature of, and uncertainties and delays associated with, the APE process, distressed companies and creditors are exploring other ways of restructuring debt.
In many recent APEs, the restructuring proposals have included parallel restructuring options depending on the level of creditor support. Under these restructuring proposals, if creditor consent exceeds a specified high threshold (typically more than 95% or 96%), then instead of an APE, the restructuring is consummated by means of a voluntary exchange offer. However, below such threshold, the APE procedure is used since the level of holdout creditors then becomes too high for an exchange offer.
In the recent TGS restructuring in Argentina, a more creative version of these parallel exchange/APE options was utilized. In TGS, in addition to the 96% threshold for an exchange offer without an APE, a second threshold of creditor consent was introduced. If this threshold, which was set at 85%, was reached, then the restructuring was to be implemented by means of both an APE and a voluntary exchange. Under this option, the debtor would file an APE.
However, instead of waiting for the APE to be endorsed, the consenting creditors were to exchange their debt pursuant to an exchange offer that would be consummated while the APE was pending. This exchange offer for the consenting creditors within the APE procedure was to be consummated within a few days after the filing of the APE, thereby allowing the consenting creditors to receive their exchange notes and cash consideration up front, instead of waiting for the APE to be endorsed. The holdout and non-participating creditors would receive their new notes and remaining consideration upon a “cramdown” when the APE was endorsed by the Argentine court. However, since the majorities received in the TGS case exceeded the 96% threshold for an exchange offer, the restructuring will be implemented by means of an exchange offer without the filing of an APE. Hence, the idea of an exchange during an APE remains untested in Argentina.
Another recent development is an amendment to the APE rules that was passed by the Argentine Senate in December 2003. The amendment would reduce the qualifying majority required to approve an APE from two-thirds to 51% of the unsecured debt. The headcount majority requirement would remain unchanged. The amendment would also require that for purposes of calculating qualifying majorities, US dollar debt should be notionally converted into Argentine pesos at an exchange rate of US$1.00 to P$1.00, even though the current exchange rate is far more favorable for the US dollar. The amendment has not yet been approved by the Argentine House. If it is ultimately enacted, then creditors holding dollar debt will be in a less favorable position.