Distressed Debt Legal Insights

Welcome to Distressed Debt Legal Insights, Ropes & Gray's new source of timely insights for professionals navigating the complex world of liability management and special situations finance.

This issue will address Fossil Group's foray into the world of UK restructuring, implementing a refinancing and recapitalization transaction using an innovative cross-border solution structured in part by Ropes & Gray attorneys.

Background

Fossil Group, Inc. (NASDAQ: FOSL) ("Fossil") needed to address $150 million of outstanding unsecured notes maturing in November 2026. These notes were about 60% held by HG Vora Capital Management and Nantahala Capital Management (the "Majority Holders"), with the remaining 40% broadly held among dispersed (possibly hundreds of) retail investors.

In an effort to obtain the needed maturity date extension from its unsecured noteholders, in August, Fossil entered into a transaction support agreement ("TSA") with the Majority Holders pursuant to which the Majority Holders agreed, as part of a holistic transaction, to participate for their pro rata share in an SEC-registered $32.5 million first out first lien notes rights offering, and to further backstop said rights offering. In accordance with the TSA, Fossil also concurrently commenced an SEC-registered exchange offer in which all noteholders were offered the chance to exchange and up-tier their existing unsecured notes into either (i) 9.5% first out first lien notes due 2029, if they participated for their pro rata share in the rights offering, or (ii) 7.5% second out second lien notes due 2029, if they did not. In addition to the new notes, all consenting noteholders would also receive a consent premium payable in additional notes (of the same form as their exchange notes), all exchanging noteholders would receive warrants, and participants in the rights offering would receive an additional common stock premium.

The exchange was contingent on participation by holders of at least 90% of the principal amount of notes. If that threshold was not reached, per the TSA, the company would turn to the English courts to implement its restructuring (a so-called "stapled exchange"). To create a sufficient jurisdictional connection with England, Fossil created an English subsidiary, which guaranteed the notes, and amended the indenture with the consent of a majority of noteholders to be governed by English law.

Ultimately, the exchange offer garnered approximately 84% participation, below the requisite threshold.

The English Plan

In September, while the exchange offer remained open, Fossil launched its restructuring plan using its new English subsidiary under Part 26A of the English Companies Act. An English plan requires approval by 75% of creditors or members voting in the relevant class determined by value, with no numerosity requirement. In a U.S. Chapter 11, on the other hand, approval of a plan by an impaired class of creditors requires the consent of two-thirds in dollar amount and more than one-half in number of that class.

What does this mean, practically speaking? Suppose a class consists of 22 creditors holding $100 of total debt. Two of the members hold $40 each, and each other member holds $1. Under an English plan, the support of the two biggest holders, who together hold 80% of the value of the debt, is sufficient to reach the voting approval threshold. In the U,S,, however, a consenting vote would also require that 12 holders in total approve the plan, giving each $1 creditor significant holdout value.

At the Fossil plan meeting, holders of about $125 million of the unsecured notes voted, with 99.99% voting in favor of the plan. All but one of the creditors who were not providing a portion of the new money financing voted in favor. The English court sanctioned the plan on November 10, and a U.S. bankruptcy court gave full force and effect (pursuant to a Chapter 15 case that was commenced) to the English proceeding on November 12.

Why This Matters

While similar transactions have occurred in Europe before, this is the first time a U.S.-listed company has undertaken a restructuring of U.S.-governed debt outside the U.S., and Fossil is the first publicly listed U.S. company to adopt a stapled exchange.

More broadly, in a restructuring or refinancing situation where a company has support from holders of more than 75% in value of at least one class of its debt to be compromised, but less than 100%, the English plan could be a helpful tool to drag along minority holdouts. While only one class of creditors was subject to Fossil's English plan, the process also allows multiple classes of debt to be compromised, and under certain circumstances, cross-class cramdown is permitted. It is not overly onerous to create an English subsidiary and join it as an obligor, nor is it (typically) a sacred right to change the governing law of a debt document to English law. Implementation using an English plan will be more expensive than the consensual route, via an exchange or consent solicitation, but typically it is significantly cheaper than Chapter 11. There is a timing advantage too – once terms and preliminary documents are agreed, an English plan can be carried out in around eight weeks. So, is the English plan the next frontier of liability management?

Well, maybe, but it is not without drawbacks. While the drag-along power can be very useful, English courts will scrutinize the fairness of the plan, and require that all lenders have the opportunity to participate on the same terms, including economic terms, subject to exceptions (e.g., a reasonable backstop fee, with reasonableness typically more stringent than U.S. standards). Extracting significant value for the steering committee or ad hoc group has its limitations. In Fossil, the Majority Holders received a 5% premium, payable in additional notes, for backstopping the rights offering, but all other fees were offered ratably to all participants.

If, as in Fossil, Chapter 11 is not feasible because of widespread holdings or desirable because of the complexity of addressing other creditors and equityholders, then the English plan offers a viable alternative, so long as the majority holders are cognizant of the economic limitations thereof.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.