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— Bankruptcy —
Be careful what you wish for. When French vodka maker Belvédère SA broke the terms of a loan agreement by running down its cash position with stock repurchases, its lenders made an opportunistic raid on the spirits company. At first glance, bankruptcy seemed a smart route to take financial control. Now the creditors, whose ranks include U.S. investors Farallon Capital Management LLC and Oak Tree Capital Management LP, face the distasteful specter of France's "procédure de sauvegarde," or safeguard procedure, the French equivalent of Chapter 11. In a worst-case scenario, creditors could have to wait 10 years to recoup all their loans.
"French bankruptcy is far less creditor-friendly than what you see in the U.S. or even elsewhere in Europe," says Forrest Alogna, an attorney at Paris law firm Bredin Prat, which is representing some of Belvédère's creditors. Belvedere's covenant violation opened the door to the immediate repayment of €375 million ($489 million) of floating-rate notes that were due in 2013. About 34% of the holders of those FRN asked for early repayment, presumably with the full knowledge that Belvédère, which had only a little more than €100 million in available funds, couldn't meet the claim and would be forced to negotiate new terms, file for bankruptcy or seek court protection. It opted for the latter, applying in July 2008 for protection from creditors under the safeguard procedure, which is open to companies that are unable to meet loan obligations but are still solvent in cash flow terms. It's the closest thing France has to Chapter 11. The Tribunal de Commerce, which has jurisdiction over Beaune-based Belvédère, approved its application for an initial six months of protection and then extended it for a further six months. In mid-April, Belvédère, make of Sobieski vodka, had presented the Tribunal with a plan to repay creditors over 10 years, significantly longer than the initial terms of the floating-rate notes. Worse still, repayments will be funded principally from revenue, exposing creditors to the vagaries of Belvedere's cash flow. Speaking a few days after presenting Belvédère's plan, Alain Ribeyre, a lawyer for the vodka maker, said he expected the court to impose only minor changes to some asset sales, principally of real estate in Poland and Bulgaria, that were also suggested as part of the plan. A final ruling is due May 14. If Ribeyre's confidence is vindicated, the creditors will have been handed the worst possible outcome. The term of the repayment is the longest the court can approve. As one French lawyer says, "Repayment over 10 years is the stick" with which to threaten creditors to force them to negotiate. It usually works. No creditor wants to extend terms of repayment, and even less so when there is no extra compensation in terms of added interest, which is the case under French law. For that reason, in almost every case where a company is granted protection under the safeguard procedure, its lawyers will present the 10-year option as one scenario for recovery, allowing the court to consider the option. Typically, they will also present a more reasonable compromise plan. Belvédère's 10-year plan is certainly a long way from the option proposed to the court by a creditors' steering committee, which represents the holders of 60% of the vodka maker's floating-rate debt. It asked the court to convert loans into equity and sell assets to immediately cut Belvédère's total debt from about €600 million to €175 million. That would have given control to the creditors, a situation that was always going to be contested by Belvédère's founders and largest shareholders, Jacques Rouvroy and Krzysztof Trylinksi. Rouvroy is also Belvédère's chief executive. The creditors might reasonably argue that the founders have forfeited their ownership rights. Under their stewardship, Belvédère has overreached in terms of its ambition "to become one of the top ten world players in wine and spirits." It borrowed heavily to fund the 2006 acquisition of French fruit liqueurs maker Marie Brizard & Roger International SA, which was bought from London-based buyout shop Duke Street Capital in a deal valuing the business at €573 million. The management blunder that exposed the company to the early repayment of much of the loans catastrophically compounded the danger of that spiraling debt. That mistake had its origins in an ownership dispute that began in 2006, when Trinidad and Tobago-based conglomerate CL Financial Ltd. bought a 62% stake in the company. Despite that holding, CL found itself in a minority position on the board, where it was subordinate to the founders, who owned just 22% of the company. Relationships between the two groups broke down, and in August 2007, CL Financial agreed to sell its holding for €345 million to unnamed institutional investors Belvédère brought to the table. When some of those shares turned up in Belvédère's own balance sheet, raising its holding beyond a 10% limit agreed to with lenders, the creditors were handed what looked like an opportunity to snatch control. But when the creditors backed the company's management into a corner, they didn't seem to fully appreciate the painful fine print of the safeguard procedure. "The idea behind the safeguard procedure was in fact to make a scheme more attractive to debtors," said Bredin Prat's Alogna. "[The French authorities] wanted to encourage debtors to file earlier while there is still a chance to turn the company around, so an effort has been made to give a lot of benefits to the incumbent management." That aim translates into some key differences between the safeguard procedure and Chapter 11, French lawyers say. The most notable difference, and the one Belvédère creditors face, is that judges and the rules of the safeguard procedure tend to favor management and shareholders' plans for salvaging the company. That is expressed in the nuance of judge's decisions but also in more formal ways. For example, creditors cannot count on the shareholders of an insolvent firm being wiped out and the equity being redistributed to creditors, as often happens in Chapter 11. France's safeguard procedure remains relatively rare. Only 1% of insolvency proceedings in France have been conducted under the safeguard procedure since it was introduced in January 2006, according to a briefing paper by law firm Freshfields Bruckhaus Deringer. The French government wants that to change. At the start of the year, the procedure's rules were tweaked to make it more accessible to troubled companies by easing the financial tests. Recently, the procedure was revised for the court to allow management more easily to remain in place as part of a company's turnaround plan. Team that with the difficult economic conditions, and Belvédère's creditors surely seem unlikely to be the last group of lenders to find themselves on the wrong end of France's Chapter 11. |
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