Global A&T Electronics (GATE), an outsourced semiconductor assembly and test services company based in Singapore, has reached a deal with noteholders to restructure its USD 1.12bn in bond debt through a prepackaged Chapter 11 bankruptcy in the Southern District of New York and end a nearly four-year legal battle with noteholders. In this report, the Debtwire legal analyst team reviews the terms of the restructuring and weighs in on potential complications to what the parties hope will be a swift trip through Chapter 11.
Battle for a better recovery
On 2 November 2017, the company announced that it had entered into a Global Settlement, Forbearance and Restructuring Support Agreement (RSA) with its key stakeholders “that will strengthen the Company’s capital structure while enabling its day-to-day business operations to continue without disruption.” Reaching a consensual restructuring has been a hard-fought battle between the company and its private equity sponsors, Affinity Equity Partners and TPG Capital, on the one hand, and three ad hoc groups of noteholders with diverging interests, on the other.
The battle began after the company exchanged a USD 543m second-lien loan, 35% of which was held by Affinity-owned Costa Esmeralda Investments Ltd., for USD 502m 10% senior secured notes in September 2013. Certain holders of the company’s initial USD 625m 10% senior secured notes issued in February 2013, referred to as the “initial holders,” commenced a lawsuit in the Supreme Court of the State of New York in early 2014 accusing the company and its private-equity sponsors of fraudulent inducement and breach of the intercreditor agreement and the indenture governing the notes. In particular, the plaintiff-holders alleged that the new notes, which were made pari passu to the initial notes, violated the priority scheme outlined in the documents.
The Debtwire legal analyst team detailed this litigation in a prior report. What is important in terms of the global settlement that was reached is the fact that the litigation survived not one, but two motions to dismiss by GATE, which is often the barometer of the leverage that such litigation has in negotiations. Here, likely due to the strength of the debt exchange litigation, the plaintiff-holders managed to obtain a greater recovery under the RSA than other holders of the same notes, including those who commenced a copycat litigation against the same parties with the same allegations in the same court (discussed below).
The noteholders that are plaintiffs in the initial lawsuit against the company formed an ad hoc committee to steer debt restructuring negotiations. The group is represented by Milbank, Tweed, Hadley & McCloy as legal counsel and PJT Partners as financial advisor and comprises GSO Coastline Credit Partners LP/Blackstone, Brigade Capital Management, Income Partners and Southpaw Asset Management, among others.
As noted, a second group of the company’s initial noteholders, first led by KLS Diversified Asset Management and Marble Ridge Capital and later joined by Taconic Capital Advisors (formerly a member of the initial noteholder committee), Alden Global Capital, Autonomy Capital, Millstreet Capital Management, Mercer Investments Fund, Ronin Capital, Halycon Capital Management, EG Capital Advisors and Wazee Street Capital Management are parties to a similar lawsuit against the company and Affinity and TPG. Certain of these plaintiff-noteholders, including KLS, Marble Ridge and Taconic are also part of a second ad hoc committee of the company’s initial noteholders that is represented by Dechert in restructuring negotiations.
Rounding out the parties is the third and final ad hoc committee, comprised of the company’s additional USD 504m noteholders, referred to as the “additional holders,” which includes Goldman Sachs SSC, Bain Capital and Tor Investment. This committee is represented by Ropes & Gray as legal counsel and Houlihan Lokey as financial advisor in restructuring negotiations.
GATE is represented in the restructuring by Kirkland & Ellis and Moelis & Co.
After several months of “tense” negotiations, which included a coordination agreement among the KLS/Marble Ridge/Taconic committee to block the company’s restructuring proposal, as well as competing restructuring proposals submitted by every side of the table, the company appears to have reached a comprehensive restructuring agreement with all parties. As with the company’s previous proposal, the backbone of the restructuring is the sponsors’ contribution of their equity in valuable GATE affiliate, UTAC Manufacturing Services Ltd. (UMS), to a reorganized GATE.
The economic terms of the deal are as follows:
- Each initial noteholder will receive its pro rata share of USD 508.75m in new secured notes. The notes will bear interest at 8.5% and have a five-year maturity date.
- The initial noteholders that are plaintiffs in the first litigation (GSO/Blackstone, Brigade, Income Partners and Southpaw, among others) will receive USD 15m in additional new secured notes and USD 5m in cash.
- All other initial noteholders will receive USD 5m in additional new secured notes and USD 5m in cash.
- Each additional noteholder will receive its pro rata share of USD 84.9m in new secured notes, provided that USD 5m in new secured notes that would otherwise be distributed to Affinity-affiliate Costa Esmeralda will be distributed to the other initial noteholders as set forth above.
- The additional noteholders will also receive 31% of the common equity of UTAC (Costa Esmeralda included), which equity interests are subject to dilution by UTAC’s management incentive plan.
- Initial noteholders that sign on to the RSA by 8 November will receive a “forbearance fee” of USD 31.2m in additional new secured notes; additional noteholders, including Costa Esmeralda, that sign on by 8 November will receive USD 25.1m in new secured notes. Holders that sign on by 15 November will receive half of the applicable forbearance fee.
In addition to the financial terms of the deal, which will reduce the company’s USD 1.12bn in funded debt to USD 665m and reduce its annual debt service by nearly half (to approximately USD 56.6m), the RSA provides that both of the debt exchange lawsuits will be dismissed with prejudice (i.e., permanently). In conjunction with the dismissal of the lawsuits, the RSA provides for releases in favor of, among others, GATE and the sponsors, including Costa Esmeralda. Although undoubtedly a key component of the RSA, such third-party releases may prove problematic in Chapter 11, as discussed below.
As far as timing, the RSA contemplates GATE being in and out of Chapter 11 by 17 March 2018. To get there, the company will:
- Commence solicitation of the plan by 20 November 2017;
- Receive ballots from noteholders holding at least 66 2/3% of notes accepting the plan by 14 December 2017;
- Commence its bankruptcy case by 17 December 2017;
- Confirm a plan by 31 January 2018; and
- Emerge by 17 March 2018.
Hurdles left to clear
The company appears to be well on its way to consummating a consensual restructuring. Indeed, it disclosed in a press release that, in addition to Affinity and TPG, the RSA is supported by approximately 87% of the initial noteholders and 83% of the additional noteholders. Further, with these holders voting to accept the plan (as they have agreed to do in the RSA), any claims of unfair discrimination or that the plan is not fair and equitable based on the payment waterfall and the fact that the sponsors are retaining 69% of their equity would not be an issue. Those are cram fights for a dissenting class, not for a drug along dissenter in an accepting class. However, there are still roadblocks that may stand in the way of GATE’s swift trip through Chapter 11.
The first is the tight timeline that the parties have agreed to in the RSA. Indeed, the RSA contemplates court approval of the plan and disclosure statement forty-five days after commencing GATE’s Chapter 11 case. While prepackaged plans have been confirmed on tighter timelines, the schedule assumes that there are no noteholders that come out of the woodwork to challenge the settlement or otherwise try to derail the company’s bankruptcy case.
One issue that has the potential to send the case off its tracks are the third-party releases for Affinity, Costa Esmeralda, TPG and others in connection with the debt exchange and otherwise. The occurrence of the effective date is conditioned on court approval of a plan containing such releases. Notably, the RSA provides that the releases are to be provided “regardless of whether any Releasing Party consents to this ‘Third-Party Release.’”
GATE is treading here on non-consensual third-party release territory which will undoubtedly draw an objection from the US Trustee and scrutiny from the bankruptcy court. The increasing scrutiny that bankruptcy courts in the Southern District of New York have given to third-party releases is something the Debtwire legal analyst team has covered in great detail. Although noteholder consent to the third-party releases is not likely to be an issue, the releases to be provided by unsecured and other creditors who are to be paid in full and will likely be deemed to accept the plan, i.e., not voting, may raise an objection from the US Trustee. In response, GATE would likely argue that (1) such creditors are deemed to have consented to the releases, or, alternatively, (2) the releases in favor of the sponsors satisfy the Second Circuit’s standard in Metromedia Fiber Network for approving nonconsensual third-party releases based on the sponsors’ “substantial contribution” to the estate in the form of its equity in UMS and that the releases are an integral and necessary part of the restructuring. Putting the necessity of the releases aside, which are certainly necessary from the company/sponsors’ perspective, the US Trustee may raise an argument regarding how substantial the sponsors’ contribution of UMS really is. Post-bankruptcy, the sponsors will continue to own 69% of the reorganized company. Thus, although cash-rich UMS is valuable, the sponsors are really only contributing 31% of that value to the estate. Nevertheless, the company has a good argument here and, given that it is unclear what claims, if any, non-noteholder creditors would even have against the sponsors, a court may find this argument persuasive (as may the US Trustee and decide not to bring an objection in the first place) and choose not to disrupt a global settlement among the parties.
Regardless of whether the third-party releases draw the attention of the bankruptcy court or the US Trustee, one lesson that can be learned from GATE is how valuable litigation that can withstand a motion to dismiss or summary judgment can be as leverage in negotiations. It can drive a settlement in the litigating-party’s favor and even earn them a greater recovery than similar, non-litigating creditors.
CLICK HERE for all Debtwire intelligence on GATE.
by Sarah Foss
Sarah Foss is a former practicing restructuring attorney. Prior to joining Debtwire as a Legal Analyst, Sarah practiced in the New York and Houston offices of Winston & Strawn LLP and Dewey & LeBoeuf LLP in the area of business reorganizations, including complex Chapter 11 cases and out-of-court restructurings. She has represented large corporate debtors, creditors’ committees, secured lenders, distressed asset acquirers and investment banks across a broad range of industries.
Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.