One
creditor’s unsuccessful High Court challenge to Solid Energy’s capital
restructuring has exposed how government held a pistol to the banks’ heads. Banks were strong-armed into the
restructuring rather than run the risk of getting as little as twenty cents in
the dollar on their debts.
By late 2012 Solid
Energy was in deep financial difficulty.
Over the previous 24 months, the benchmark hard coking coal price had
dropped by over fifty per cent in US dollar terms. Increasing prices depended on demand for
Chinese steel and there was little prospect of improvement on the horizon. Solid Energy’s losses were compounded by
unfavourable movements in the USD/NZD cross-rate.
The court heard that
Solid Energy risked default in early 2013.
Directors would not sign off on the company’s solvency; an approval
needed as part of a $120 million debt rollover.
All the major trading
banks in New Zealand were by now exposed to Solid Energy: $300 million had been
borrowed unsecured from ANZ, BNZ, CBA, Westpac and Bank of Tokyo. TSB held a
portfolio of $67.5 million medium term notes.
Several banks had issued performance bonds guaranteeing that Solid
Energy would make good remediation work at mine sites. These totalled $58 million in value. On top of this was over $270 million owed to
other creditors.
With warning of
possible default, the major banks jointly held a series of meetings with
Treasury who was negotiating on behalf of government as owner of Solid
Energy. A standstill agreement was
negotiated: the banks would not enforce their loan contracts while discussions
continued. A report by corporate
restructuring specialist KordaMentha indicated that a further $100 million
equity would be needed to save Solid Energy.
The court was told
that the major banks were expecting government to inject more cash into the
company. Government refused. The banks were told government had “no
economic interest” in Solid Energy: the company was broke and was now
effectively owned by its creditors. If
the creditors did not want to save it, then government would put the company
into liquidation. KordaMentha estimated
banks would get back 19-28 cents in the dollar on liquidation.
By September 2013,
directors of Solid Energy had a loaded pistol pointed at the banks. The directors were required to report to
parliament with audited accounts for the year ended 30 June 2013. Without agreement by the end of September from
the banks for restructuring, then the audit report would be qualified – Solid
Energy would not report as a going concern.
This would trigger substantial debt write-offs for all the banks with
consequences for their own reported profits.
Faced with this
ultimatum, the major banks in conjunction with Solid Energy implemented a Part 14 scheme of arrangement. The banks swapped
$75 million of their Solid Energy debt for redeemable preference shares in the
company and extended out to late 2016 all maturity dates for the remainder of
their debt. The shares carry a five per
cent dividend, compounding quarterly, and are redeemable at the discretion of
the Solid Energy board.
Government did offer
some support. Provided creditors voted
in favour of the scheme, it committed to putting up $25 million in cash for
further redeemable preference shares and to contribute $130 million by way of
working capital to assist with liquidity.
Use of the Part 14 procedure
in the Companies Act meant affected creditors who did not like the proposed scheme
could be forced into the deal provided a majority had voted in favour.
All the major banks
voted in favour, except Bank of Tokyo.
It was agreeable to any proposal for reducing interest payable and extending
maturities, but was opposed to the debt for equity swap saying this would be in
breach of its own policies and Japanese law.
Bank of Tokyo
challenged use of the Part 14 procedure saying that the bank had been unfairly
prejudiced and that the Part 14 procedure had not been properly followed. The High Court ruled against the Bank on all
counts. This forced Bank of Tokyo into the
Part 14 scheme requiring it to exchange $16 million in debt for redeemable
preference shares of the same face value. Along with BNZ, Bank of Tokyo was forced
to take the biggest proportion of redeemable preference shares in the debt for
equity swap; the other banks were exposed for a lesser amount.
Bank
of Tokyo v. Solid Energy – High Court (18.12.13)
14.004