No Obstacles to Penalize: Nostrum Oil & Gas PLC’s Plan of Arrangement | Hogan Lovells
Nostrum Oil & Gas PLC (the “Company”) is a company incorporated under English law whose shares are listed on the main market of the London Stock Exchange. It is the ultimate parent company of a group of companies (the “Band”) which operates an oil and gas activity in Kazakhstan, the Group’s sole source of revenue being an oil and gas field in Kazakhstan (the Chinarevskoye field). The Group has encountered problems lately, as production from the Chinarevskoye field has been declining since 2017, which has led to a significant write-down of the Group’s oil and gas reserves, as the reserves have been found to no longer be technically or economically viable. The Group has therefore initiated discussions with its creditors and its reference shareholder on the terms of a financial restructuring (the “Restructuring”) in May 2020.
The Group’s existing debt consists of two series of bonds, both unsecured and listed on the Irish Stock Exchange, with an aggregate principal amount of approximately $1.125 billion (the “Existing Notes”). No interest has been paid on the Existing Bonds since 2020, and one set of Existing Bonds was due to be redeemed in July 2022 (the other maturing in 2025). Various abstention agreements have been entered into between the Group and the holders of the Existing Bonds (the “Existing ticket holders”) for the Group’s inability to make these payments. Two Russian financial institutions, each subject to direct or indirect sanctions in the UK, EU, US and Guernsey, hold 7.1% of existing bonds (these institutions being the “Penalties for disqualified persons”).
The Existing Notes were originally issued by Nostrum Oil & Gas Finance BV (incorporated in the Netherlands) pursuant to trust indentures governed by New York law. In order to be able to avail itself of an arrangement under English law, the Group (with the consent of the required threshold of Existing Bondholders) has amended the terms of the Existing Bonds to: (a) join the Company as a joint issuer of the Existing Bonds (thereby rendering the Company jointly and severally liable thereunder); (b) change the law applicable to the Existing Notes into English law; and (c) amend the jurisdiction provisions so as to confer jurisdiction on the English courts in respect of proceedings brought by a debtor of Existing Securities.
The Plan proposed by the Company has the following characteristics:
- Immediate Moratorium on Enforcement Actions by Existing Bondholders (the “Plan creditors”), in order to provide the Group with a “stable platformto obtain the necessary authorizations to implement the Restructuring (see below). The moratorium will remain in place until the earliest of the following dates: (i) the date on which the Restructuring is completed; and (ii) on December 16, 2022, but may be terminated by a majority in value of Scheme Creditors.
- Each Scheme Creditor (including Sanctions Disqualified Persons) is entitled to receive a pro rata allocation of New Notes governed by English law as follows:
- $250 million of new senior covered bonds, bearing interest at 5% per annum and maturing on June 30, 2026 (the “New SSNs”). The New SSNs will be guaranteed by the members of the Group and will benefit from a first ranking lien on the assets of the Group; and
- $300 million of new senior unsecured notes, bearing cash interest at 1% per annum and PIK interest at 13% per annum, and maturing on September 30, 2026 (the “New SUNs”). The New SUNs will be guaranteed by members of the Group but will not benefit from collateral other than second-ranking collateral on certain Group bank accounts.
- Each Scheme Creditor (including Sanctions Disqualified Persons) is entitled to receive a pro rata allotment of new shares issued by the Company, which will represent 88.89% of the fully diluted share capital of the Company (the “New actions”).
- Each holder of New SUN will receive a pro rata allocation of the new BSAs issued by the Company, which will allow these holders to increase their stake in the Company to 90% (the “New Warrantsand, with New SSNs, New SUNs and New Actions, the “Plan Consideration”).
- The Existing Titles will be fully paid up.
Under the Scheme, Scheme Creditors are expected to recover between 29.4% and 40% of the amounts currently due under the Existing Obligations. In contrast, Grant Thornton’s benchmarking showed that plan creditors would receive 16% in planned insolvency or 10.6% in unplanned insolvency. In the summons judgment, Meade J made it clear that this comparison was “appropriate and credible”.
Sanctions for disqualified persons
The fact that Persons Disqualified by the Sanctions are subject to direct or indirect sanctions in the UK, EU, US and Guernsey means that they (and, in some cases, others) do not do not have the right to process the Existing Titles in the absence of licenses from the competent authorities. This has resulted in a number of interesting features of the scheme:
- Plan vote:
- U.S. sanctions law prohibits U.S. persons from voting on the program and receiving consideration from the program due to the involvement of Sanctions Disqualified Persons in the structure. A license from the United States Office of Foreign Assets Control within the United States Department of the Treasury (the “OFAC license”) was therefore required before a meeting of Scheme Creditors to vote on the terms of the Scheme could be held, and even before notice of such meeting could be given to Scheme Creditors.
- At the convening stage, Meade J considered whether Sanctions Disqualified Persons could be included in the same class as other creditors of the Scheme in a situation where Sanctions Disqualified Persons cannot receive any consideration from the Scheme while they are sanctioned. David Allison QC (as the company’s lead solicitor) argued that this fact did not divide the class on the grounds that there was a fundamental distinction between: (a) a regime conferring different rights on different groups of creditors ( which would divide the group); and (b) a regime conferring the same rights on all creditors, but with some creditors unable to enjoy those rights under “some personal characteristic they possess(which shouldn’t fracture the class). Meade J accepted this argument and agreed that this fact had no impact on the analysis of class composition.
- Sanctions Disqualified Persons were prohibited from voting on the Scheme. In considering at the sanction stage whether the scheme complied with the relevant law and whether the class of creditors was fairly represented, Justice Mellor considered whether this prohibition had an impact. It was relevant that those excluded from the sanctions had signed the restructuring lock-in agreement (in December 2021 before the applicable sanctions were imposed) and that, even if they had been authorized to vote on the plan and had voted against , the required statutory majorities would still have been obtained. It was also relevant that attendance at the creditors’ meeting was high (85.11% by value) and that 147 of the 148 Scheme creditors who voted for the Scheme voted in favour. Judge Mellor was therefore of the opinion that the law had been complied with and that the meeting of creditors was “clearly representative of the class as a whole”.
- Plan fairness: When considering whether to approve a plan of arrangement, the court considers whether it is a plan which an intelligent and honest man, acting in accordance with his interests, could reasonably approve. Under the Program, individuals disqualified by the Sanctions may not receive Program consideration (including blocking fees) while they remain subject to the Sanctions. Instead, the regime’s consideration will be held in confidence for those disqualified by the sanctions (the “Holding Period Trust), with the possibility for these persons to claim the plan consideration from the trust within 60 days of the date on which they are no longer subject to sanctions.
At the sanctioning stage, Mellor J examined the treatment of those disqualified by sanctions under the program. It was relevant that, as David Allison QC had argued, the holding period trust structure was an example of a concept that has been used in a number of schemes where a noteholder cannot receive consideration for regulatory reasons. It was also relevant that the trust structure did not place those excluded from sanctions at a greater disadvantage than those they already faced under applicable sanctions law. Mellor J was therefore satisfied that the holding period trust was a “fair and proper wayto deal with Disqualified Person Sanctions.
- Implementation of the scheme: In addition to the OFAC License, the implementation of the Restructuring may require licenses from the sanctions authorities in the UK, the Netherlands and Guernsey; these licenses are required because the Restructuring will result in the treatment of Existing Obligations, which are assets held by Persons Disqualified by the Sanctions. Obtaining these licenses is therefore an express precondition to the implementation of the Restructuring, and the Scheme provides for a moratorium on enforcement measures to give the Group time to obtain them.
The English court’s approval of a plan of arrangement in which some of the plan’s creditors are subject to sanctions resulting from the war in Ukraine is a useful development for debtors with sanctioned institutions in their capital structure and indicates that the existence of sanctioned entities within the debt may not be an impediment to a successful restructuring when the necessary licenses have been obtained. It will be interesting to see if the outcome is different in a scenario where sanctioned creditors do not support the restructuring in question or seek to challenge the regime in some form.