Stine D. Snertingdalen considers the consequences of Norway’s insolvency legislation against the current economic crisis, and proposes an introduction of restructuring tools to contribute to a more practical and flexible legal framework.
1. What trends, in terms of activity levels, affected industries or investor focus, have you seen in the restructuring and insolvency market in your jurisdiction over the last 12 months?
A substantial part of Norwegian industry and economy evolves around the offshore, oil and gas industries. In the past, this has helped us keep a stable economy through financial and industry based crises, compared to other western economies. However, Norway now seems to be heading into a crisis hitting these very industries hard.
Following a drastic drop in oil prices in November 2014 and the following months, the profitability of projects has worsened, resulting in fewer new projects and ongoing contracts being cancelled, as well as cost reduction measures being carried out by a large part of the market participants. As the oil prices have stayed low all through 2015, cost reduction measures have intensified and there are fewer and fewer new projects. At the same time parties attempt to get out of existing contracts. This is resulting in an overcapacity in the market, i.a. with regard to supply vessels, rigs and seismic projects. In the previous year, approx. 25,000 jobs in the Norwegian oil industry have been lost. The situation is already critical for many market participants, but so far the situation has been contained through an "amend, extend, pretend" approach by the financers. The question is, however, whether this is containing the situation, or only postponing a crisis.
2. What is the market view on prospects for the coming year?
Unless the oil prices increase significantly from today's levels of around USD 40 per barrel or lower (as of December 2015), many companies will run out of cash in 2016 and 2017. Both bond financing and syndicated loans fall due in 2016, 2017 and 2018, and will need to be extended or refinanced for those companies who cannot meet such payment obligations. It is expected that many companies will encounter serious difficulties with raising new capital or credit in a market in crisis.
The financers within the offshore and oil related industries are typically banks, bank syndicates, Eksportkreditt/GIEK (providing Norwegian export credit) and bondholders with high yield bonds operating through Nordic Trustee. While the banks, bank syndicates and Eksportkreditt/GIEK are expected to continue to seek solutions in an attempt to reduce the crisis' overall effect on the market, the bond holders might have a shorter horizon for their investments. Bond holders often have diverse individual purposes with their investments. They are a shifting mass of creditors as the bonds are traded, and they are often anonymous and may therefore be difficult to understand in negotiations. As of December 2015, several high yield bonds in the offshore and oil businesses are being traded on levels way below 50 % of face value.
Prospects of oil prices increasing considerably or returning to the same levels as before the drastic drop last fall seem dim. Many businesses now aim to stay afloat through 2016 and 2017, with the hope of a normalised market sometime in 2017 or 2018.
However, despite refinancing negotiations between the largest stakeholders and efforts to conduct out-of-court restructuring, overcapacity in the market and serious liquidity problems will probably result in several large bankruptcy proceedings in Norway in 2016 and 2017. In some cases, international businesses based in Norway may opt for U.S. Chapter 11 proceedings, British Scheme of Arrangements or other foreign proceedings.
3. What are the key tools available in your jurisdiction to achieve a corporate restructuring – are they primarily formal, court-driven processes, or are informal out-of-court restructurings possible? Do you feel that the tools you have available are effective in terms of providing speedy, fair and predictable outcomes?
While Norway has regulation on both judicial debt restructuring proceedings and winding-up proceedings, out-of-court restructuring is by far the most applied approach to corporate restructuring. In the current crisis in offshore and oil businesses, the large stakeholders and the market participants must all work together to find livable solutions. The question may in many cases no longer be what the parties are obligated to under a written contract, but how the contract can be amended in order to ensure the survival of the parties. Therefore, at its presently early stage, the crisis has triggered high refinancing and renegotiation activity between contract parties and between companies and their creditors. However, as mentioned above, this might not be sufficient in the long run. If the overcapacity in the market stays high, some businesses will probably have to be wound up for others to survive. And we will probably see situations where amicable solutions cannot be reached with all the necessary stakeholders, necessitating judicial restructuring processes.
The key judicial debt restructuring tools in Norway are the voluntary debt restructuring process, and the compulsory debt restructuring process; the latter having provisions of cram-down. Both are regulated by the Norwegian Bankruptcy Act of 1984.
In both processes, there is an automatic stay against bankruptcy petitions and against unsecured creditors obtaining execution liens, and for the first six months there is also a stay on the enforcement of security interests. Furthermore, a standstill is introduced for debt accrued prior to the opening of proceedings.
Judicial debt restructuring proceedings may only be opened upon a petition from the debtor. The debtor must show that the company is unable to meet its payment obligations as they fall due (i.e. is illiquid), but there is no requirement that the company is insolvent (i.e. is both illiquid and has negative net assets). Once proceedings are opened, the court appoints an administrator (in practice a lawyer) and normally 2-3 creditors forming a creditors' committee – together forming a debt restructuring committee.
The debtor's business continues as usual under the supervision of the debt restructuring committee, with full disclosure of the debtor's economy to the committee. The committee shall oversee that the security holders' interests are protected if the business continues, meaning, e.g., that the security holders' economic interests shall not deteriorate from the company selling encumbered assets, such as inventory/stock.
The main differences between voluntary and compulsory debt restructuring processes are that in the former process, one creditor voting against the restructuring plan will overturn the whole plan, while in the latter process a majority of creditors will cram-down any minority voting against the plan. Further, in compulsory proceedings the stay against new bankruptcy petitions lasts throughout the proceedings, while in voluntary proceedings the stay needs to be extended every three months by the court upon request from the debtor. Only in compulsory proceedings may the debt restructuring committee launch claw-back claims, and they shall make a more thorough report to accompany the debtor's suggestion for a rescue plan than what is the case in a voluntary process.
The Norwegian judicial restructuring scheme is mainly designed for providing a stay on creditor actions while attempting to reduce a too heavy baggage of unsecured debt. It lacks the necessary flexibility and tools to ensure an efficient restructuring of complex and large businesses.
4. In terms of intercreditor dynamics, where does the balance of power lie as between shareholders and creditors, and as between senior lenders and junior/mezzanine lenders? In particular, how do valuation disputes between different stakeholders tend to play out?
A company is allowed to pose close to all its assets as security under Norwegian law, and Norwegian financial institutions traditionally demand security in all of their customers' assets of any value. Thus, upon the default of any credit agreement, the security holders will normally have a powerful position in negotiations arising out of a distressed situation in a company, leaving little leeway for the company and unsecured creditors to find solutions not agreed to by the financial institutions.
5. Have there been any changes in the capital structures of companies based in your jurisdiction over recent years caused by the retreat of banks from loan origination? In particular, have you found that capital structures now increasingly comprise debt governed by different laws (such as New York law governed high yield bonds)? If so, how do you expect these changes to impact on restructurings in the future?
Norwegian loan documentation is normally governed by Norwegian law, though the contracts are ever more often based on the LMA standards or "light versions" of the LMA documentation. High yield bonds in Norwegian companies are usually regulated by Nordic Trustee's standard documentation which is governed by Norwegian law, and Eksportkreditt's loan documentation also applies Norwegian law as governing.
6. Is there significant activity on the part of distressed debt funds in your jurisdiction? How successful have they been in entering the market, and how much has market practice (or law) evolved in response? If funds have not successfully entered the market, can you identify reasons why?
The Norwegian economy has been stable for the last few years, with little activity from distressed debt funds. However, with the crisis currently hitting the offshore and oil industries, distressed debt funds show an increasing interest in Norwegian debt within these industries.
7. Are there any unusual features of your insolvency or restructuring law that an external investor should be aware of (such as equitable subordination, or substantive consolidation)?
The ground principles of Norwegian insolvency regulation are not so different from other Scandinavian and European countries. It is worth mentioning, however, that quite often businesses pledge all of their assets as security for their financers. Furthermore, the bankruptcy estate in insolvent winding-up proceedings is given a super-priority statutory lien in all assets posed as security for the debtor's obligations, securing necessary handling costs of the bankruptcy estate though limited to 5% of the gross value of those assets.
8. Are there any proposals for reform of the legal framework that governs insolvency and restructurings in your jurisdiction?
The judicial restructuring scheme in Norway is currently under review. The Ministry of Justice has mandated Mr. Leif Villars-Dahl, presiding as Judge with the Oslo Court of Probate and Enforcement, to evaluate the current judicial restructuring legislation.
The report shall, inter alia, analyse current restructuring legislation and evaluate whether or not this is sufficiently effective, and discuss whether the current legislation can be made more flexible. The aim is to save businesses and preserve jobs to a larger extent than under the current legislation. Judge Villars-Dahl shall evaluate the creditor voting system, whether a debt for equity swap should be an option to dividend payment and whether the employees' protection should be somewhat reduced to facilitate downsizing and other cost reduction measurements. If deemed sensible, he shall suggest legislative amendments.
The Ministry of Justice has appointed a reference group of three lawyers and one economist to support Judge Villars-Dahl in his work: attorneys Knut Ro, Staale Gjengseth and Stine D. Snertingdalen (the author), and Professor Nils-Henrik von der Fehr. The report is to be submitted by the 1 of March 2016.
In October 2010, Professor Mads Henry Andenæs submitted a report on Norwegian international insolvency law to the Ministry of Justice. However, more than five years later no changes have been made, even though Andenæs suggested several amendments in Norwegian international insolvency law. Further, there have been discussions and written hearings on whether or not Norway should implement the EC Insolvency Regulation, but there are no prospects of such implementation taking place anytime soon.
9. If it was up to you, what changes would you make?
The main purpose of insolvency law is to facilitate a value preserving restructuring process by providing a transparent procedure, ensuring equal treatment of and visibility for creditors, and a tool for the debtor to find solutions in the best interest of all stakeholders while at the same time preserving the ongoing business and jobs. Winding-up proceedings will almost always give a lower dividend payment – if any – to the unsecured creditors than if the company is restructured.
The current Norwegian restructuring legislation is often not a realistic option for businesses in financial difficulty, since there is a lack of financing options such as DIP-financing or similar super-priority financing, and the possibility of debt/equity swap being part of a plan (unless all creditors and the shareholders agree). When filing for judicial restructuring proceedings, the businesses usually do not have access to new money. Furthermore, the businesses will often have difficulties in obtaining an operating profit after restructuring proceedings have been opened. Without tools such as those mentioned above, it is difficult for businesses to finance the proceedings while working out a plan to propose to the creditors, and to satisfy classes of creditors in other ways than through dividend payments. Implementing such and other tools could contribute to more practical and flexible restructuring legislation.
In order to expand the scope of the restructuring legislation from more or less only facilitating a composition of unsecured claims, possible amendments include (in addition to the ones mentioned above) the introduction of creditor classes and reducing the minimum dividend required to carry out a composition. These changes would presumably, in the author's opinion, contribute to larger flexibility and a more holistic restructuring approach under Norwegian law.
Further, in order to obtain effective international debt restructuring legislation, Norwegian law will need to achieve a satisfactory set of rules on international insolvency law, cf. question 8 above.
Norway is in need of more internationally focused insolvency legislation to enable a proper handling of international restructurings and winding-up proceedings.