The APE Prepack in the Time of Covid-19

by Ricardo W. Beller

The COVID-19 pandemic has paralyzed the World economy. Companies are in survival mode, but also need to make plans for the day after. A very useful legal tool that served to overcome the 2001 crisis in Argentina was the “Acuerdo Preventivo Extrajudicial Procedure” or “APE”. I summarize in this article its main features, and provide some tips based on practical experience.   

The APE is a procedure by which a debt restructuring agreement that is entered by a debtor with a certain majority of its unsecured creditors becomes enforceable against all the unsecured creditors, including those who did not consent or voted against it.  In English it is known as a “prepackage debt restructuring agreement”, or “prepack” for short. 

The enforceability of the APE against all unsecured creditors is the key feature that makes the APE an extremely useful tool to achieve a successful debt restructuring. This feature was introduced in May 2002 by an amendment made by Law 25,589 to the Argentine Bankruptcy Law 24,522 (the “ABL”).

To become enforceable against all unsecured creditors, two basic requirements need to be complied with: (i) the APE debt restructuring agreement must be consented by the majority of creditors provided by the ABL (as described below), and (ii) the court must endorse or validate the agreement (this court ruling is denominated an homologación, which basically consists of a judicial confirmation that the ABL legal requirements have been complied with).

Any company can file an APE, with a few exceptions related to certain activities that are regulated by special insolvency rules (v.g.: banks and insurance companies).

Debt Restructuring Implementation

Described below are the typical mechanics for the implementation of a debt restructuring using the APE procedure. These descriptions are based on the analysis of several of the 2001 crisis debt restructuring experiences.

First Stage: Preparation of the Proposal

The debt restructuring procedure is generally commenced by the debtor proposing debt restructuring terms to its unsecured creditors.

The ABL provides freedom of content of the debt restructuring agreement. The debtor company and its unsecured creditors may agree to any or all of the following: amendments, waivers, “haircuts” and/or deferral of principal or interest payments, exchange of notes for new notes and/or equity, new guarantees, payments in cash or in kind, or others.

The ABL does not require a steering committee to be constituted. However, the debtor generally prefers to negotiate with such a committee to ensure a minimum of consents will be obtained. The creditors also prefer to be members of the steering committee to ensure that the proposal addresses their payment terms preferences. Otherwise an inconvenient agreement negotiated by creditors with agendas that are different to their own may be “crammed down” on them under the APE procedure.

In the negotiations undertaken during the beginning of 2002 most of the committees of creditors were integrated by the underwriters of the bonds and the banks that had made loans to the debtor. If negotiations were extended over a period of more than six months, these were gradually replaced by “distress” funds. Certain distress funds took aggressive judicial action against the debtors (including filing claims before the Courts of the State of New York).  However, in many cases the appearance of the “distress” funds helped unblock negotiations. This was especially so if the distress fund had purchased the debt with considerable discounts, which left them a significant amount of room to come to a profitable agreement with the debtor.

During this period the debtor will generally request a standstill agreement from the creditors.  Obtaining this protection is important for the debtor, as the ABL does not provide any standstill protection prior to the APE being filed in Court.

During 2002 and 2003 some debtors conducted a tender offer of notes prior to the implementation of the APE. Under these tender offers, the debtor generally offers to purchase the notes of those holders that tendered their notes at a lower price following an “inverse dutch auction” procedure. The tender offer price was generally paid in cash. Given that any outstanding debt held by the debtor or by controlling shareholders of the debtor may not vote to consent and will not be computed when determining the majorities required to approve the APE, the debt which is repurchased is generally cancelled by the debtor.

Second Stage: Consent Period

Once the debtor and the committee of creditors agree on the terms of the debt restructuring agreement, the debtor proceeds to launch the restructuring proposal in order to obtain the consent of a majority of the unsecured creditors.

To obtain court endorsement of the agreement under an APE procedure, the consent of creditors that represent: (i) the absolute majority (more than 50%) of all unsecured creditors, determined on a per capita basis, each individual creditor being computed as “one”, regardless of the amount of their credit, plus (ii) at least two thirds (2/3) of the aggregate principal amount of such unsecured creditors (the “APE Majorities”), is required.

In the 2001 restructurings, the proposals included different restructuring alternatives according to the amount of consents obtained, as follows:

(i) Direct Exchange. If the agreement was consented by a significant number of the creditors (v.g. creditors representing 95% or more of the unsecured debt), then the debtor would enter into a direct exchange with the consenting creditors. In this scenario, the benefit of enforcing the restructuring agreement against the “holdouts” was outweighed by the time and cost required for obtaining court approval under an APE procedure, and the debtor would be able to pay the small portion of the debt that was not restructured.

(ii) APE Procedure. If the agreement was approved by creditors that represented at least the APE Majorities, but less than the majorities required for a direct exchange, then the debtor proceeded to file the debt restructuring with the Court under the APE procedure in order to make the debt restructuring agreement enforceable against all the unsecured creditors.

(iii) Failure of the Proposal. If the APE Majorities were not reached, the debtor had the option to improve the terms of the debt restructuring and launch a new consent period with the aim of obtaining the consent of the required APE Majorities, or file a “concurso preventivo” (Argentine equivalent of a Chapter 11 of the U.S. Bankruptcy Law) if the debtor considered that the APE Majorities would not be reached or was under too much judicial pressure of creditors requesting its bankruptcy.

These majority requirements created various incentives that facilitated the debt restructuring negotiations as follows:

(a) The creditors became less concerned if other creditors would obtain better restructuring terms, and therefore were less reluctant to grant their consent. They reasoned that if the APE Majorities were reached, the agreement would become enforceable against all creditors under the APE procedure. If on the other hand the APE Majorities were not reached, then the conditions precedent would not be complied with and the agreement they had consented to would not become enforceable. A properly drafted agreement would include such a conditions precedent provision as the agreement does become binding against individual consenting creditors upon execution.

(b) If the proposal did not obtain the consent of the APE Majorities, the debtor might be forced to file a “concurso preventivo” proceeding before the courts. As the “concurso” is more complicated, costly and time consuming than an APE proceding, this creates an incentive for creditors to grant their consent to the APE proposal.

(c) The “holdouts” speculate that they will be paid their credits under the original terms. This is possible only if the debtor obtains the percentage of consents that allow it to implement a direct exchange (v.g. at least 95%), that allows the debtor to restructure without imposing on the “holdouts” the “cramdown” that would otherwise occur under an APE. Therefore the “holdouts” also have the incentive to support the debtor in obtaining the consents of the other creditors.

Third Stage: Court Filing / Implementation

If majorities for a direct exchange are obtained, the debtor and the creditors proceed to implement the debt restructuring under the terms of the agreement. The debtor would then need to deal with the “holdouts”, but it is not obliged to pay them immediately and could continue negotiating with them under the terms of their outstanding credits.

If the APE Majorities are obtained, the executed debt restructuring agreement is filed with the Court together with a dossier of documentation that mainly refers to the financial situation of the debtor.

The filing of the APE before the relevant court has the effect of staying all actions to enforce unsecured claims against the debtor. However, it does not suspend the accrual of interest on outstanding debt.

The Court will conduct a review of the compliance of the APE Majorities and other formal requirements, and a limited review of the substantive terms of the APE (for example, to determine that basic standards of Argentine law have not been breached, such as compliance of public order regulations, non existence of fraud, etc. or that the proposal does not discriminate creditors on unreasonable grounds).

The Court will subsequently order the publication of notices of the filing of the APE. Non-consenting creditors may subsequently contest the APE on very limited grounds, such as omissions or exaggerations of the assets or liabilities, non-compliance of the APE Majorities, or non-compliance of the other formal or substantive requirements mentioned in the prior paragraph. Once the oppositions, if any, have been resolved, and the compliance of the APE Majorities and other legal requirements are verified, the court should endorse the APE.

Upon court endorsement, the APE becomes effective against all unsecured creditors, including those that did not consent to the APE.

APE Case Law

Several of the 2001 debt restructurings resulted in proceedings being initiated before several courts. Among others we may mention:

(i) The New York courts ruled in several cases that the debt restructuring agreements approved under an APE proceeding were enforceable in the USA under the terms of Section 304 (currently Chapter 15) of the US Bankruptcy Law (In re: Telecom, Multicanal, and Cablevisión, among others); and

(ii) The Argentine courts confirmed the validity of the APE proceding in several cases; in re: Cablevisión, in particular, the Commercial Court of Appeals affirmed the validity of the APE which was being challenged on unconstitutionality grounds; this ruling was appealed before the Supreme Court, who did not accept to hear the case and rejected the appeal based on procedural grounds.

Looking ahead

The COVID-19 crisis is very different to the 2001 crisis in Argentina, and for that matter to any other crisis the World has ever seen. The hardship the economy is suffering will result in a significant amount of unpaid debts. For the reasons explained above, the APE will prove to be a very useful tool to restructure these debts.

Buenos Aires, April 13, 2020

Ricardo W. Beller (rwb@marval.com)