Secured creditors scheme to get Channel Nine deal approved

Key Points:

Justice Jacobson's unwillingness to depart from the interests of the majority in relation to Nine Entertainment should give parties confidence that Schemes remain an effective way to effect debt for equity swaps or similar transactions.

Last year we explored the driving factors and possible agendas behind the negotiations surrounding the restructuring of Nine Entertainment's financing arrangements, focusing on the importance of valuation methodologies in the context of asserting an economic interest in a company.

At the time, it was foreshadowed that, as a result of a concession by the senior lenders, a deal would be done for a debt for equity swap that was to be effected through a Scheme of Arrangement. The approval of the Scheme was, it was thought, a foregone conclusion. While the Scheme was ultimately approved in late January, not every creditor was satisfied and the Court applications required to approve the Scheme provided the dissatisfied creditors with a chance to be heard.

First Court hearing

On 17 December 2012, Justice Jacobson of the Federal Court of Australia (in NSW), first heard the application by Nine Entertainment Group Limited to approve the Scheme pursuant to s 411 of the Corporation Act 2001 (Cth). As we suggested in October, the Company sought orders convening meetings of two classes of secured creditors: the senior beneficiaries (Senior Creditors) and the mezzanine or subordinated beneficiaries (Junior Creditors).

Apollo Management LP and Oaktree Capital Management LP formed the bulk of the Senior Creditors (together they held approximately 45 percent of the senior debt through a number of investment funds). In total, however, the Senior Lenders comprised approximately 35 financial institutions; this included 13 financial institutions with whom the Company had entered into interest rate swaps in order to hedge its interest rate exposure (Hedge Counterparties). The Hedge Counterparties ranked equally with other Senior Lenders.

The Junior Creditors comprised six institutions associated with Goldman Sachs who held their interests through 10 separate funds.

The Court indicated that amounts owing to the Senior Creditors and Junior Creditors were approximately $2.5 billion and $1.14 billion respectively. The senior debt was due on 7 February 2013; hence the urgency of the negotiations and Court application. Failure to pay the senior debt by 7 February 2013 would have led to an inevitable insolvency appointment.

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