Part 1 of the 2023 edition of R+I In Brief explores restructuring and insolvency developments in Australia in FY22/23.
Overview
Despite the challenges flowing from increasing global inflation and supply chain disruptions, the Australian economy has to date remained resilient and a technical recession has been avoided in 2023. However, after many years of historically low interest rates, the Reserve Bank of Australia raised interest rates rapidly from April 2022 (12 rate rises and counting) as inflation became uncontrollable.
With consumer spending slowing, there remains a degree of uncertainty for Australia’s near-term economic outlook. Notwithstanding this tightening monetary environment, however, capital has remained available for opportunistic buyers looking for investment opportunities or strategic angles to acquire distressed businesses. What we are observing, however, is a less buoyant refinancing market than we have seen in recent times, despite the deep pockets and numerous players that comprise the debt markets. The result of this is that where businesses once had numerous options to roll over or refinance their debt at expiry, borrowers are now having more trouble securing suitable financing leading to protracted negotiations and, in some instances, delicate negotiations. In an environment where equity markets are tight, this has created opportunities for company-side balance sheet restructures.
Insolvency practitioners in Australia are now watching closely whether macroeconomic factors, including inflation (which, while it may have levelled off is still objectively high) will lead to an increase in insolvency appointments and distressed asset sales, especially for struggling businesses that meandered through COVID-19 off the back of the generous relief packages, but have struggled since.
In FY21/22, the Australian Securities and Investments Commission (ASIC) recorded a total of 4,912 companies that entered external administration or had a controller appointed for the first time. That number rose significantly in FY22/23, with 7,156 companies entering external administration or having a controller appointed for the first time for the period spanning from 1 July 2022 to 31 May 2023.
We expect voluntary administration followed by deeds of company arrangement (DOCAs) will continue to be popular as restructuring tools and, where appropriate, vehicles for effecting debt-for-equity swaps. Drivers for restructurings of this type include:
the power given to deed administrators to compulsorily transfer shares with court approval (if the shares have no economic value);
the speed with which DOCAs can be initiated from the date the administrator is appointed; and
the validation DOCAs obtain by being dependent upon creditor approval.
Inquiry into corporate insolvency in Australia
On 28 September 2022, the Parliamentary Joint Committee on Corporations and Financial Services commenced an inquiry into the effectiveness of Australia’s corporate insolvency laws in protecting and maximising value for the benefit of all interested parties and the economy. The inquiry is arguably the broadest review of Australia’s insolvency laws since the Harmer Report in 1988. It comes after a decade of industry consultations, legislative amendments to the existing legislative framework, and an increased desire from insolvency practitioners for more fundamental and considered law reform.
On 12 July 2023, the Committee released its Report including 28 recommendations to improve the effectiveness of Australia’s insolvency system. As a result of the inquiry, the Committee found that Australia’s insolvency laws are “overly complex”, might not reflect modern business practices, are not keeping pace with the Australian and global economy and have been subject to piecemeal reforms.
The key recommendation is for an independent and comprehensive review of Australia’s corporate and personal insolvency laws (Comprehensive Review). Separately, the Committee has identified a number of “Near-Term Actions”, which should be progressed independently of the Comprehensive Review, to address clear and broadly recognised failings in the current law.
While the Report and recommendations are welcomed, all eyes will be on the government to see the extent to which it implements these recommendations.
Significant transactions in the Australian restructuring and insolvency market
Basslink
ASX-listed APA Group (APA), a leading Australian energy infrastructure business, acquired Basslink Pty Ltd (Basslink) for $773 million in September 2022, including 100% of the secured bank debt which had a face value of approximately $526 million in late 2021 and early 2022. It also entered into revised network services and operational arrangements with Hydro Tasmania and the State of Tasmania respectively, to facilitate the operations of the interconnector and also provide APA with a pathway to convert Basslink to a regulated asset.
Basslink owns and operates a 370km high voltage direct current electricity interconnector between Victoria and Tasmania. In November 2021, Basslink’s Singaporean owner, Keppel Infrastructure Trust, placed the business into administration and the senior secured lenders at the time appointed receivers and managers to Basslink and its related entities.
APA secured this unique piece of critical infrastructure, initially with APA confirming its interest in acquiring Basslink through its acquisition of the secured debt. This involved APA participating in the receiver-led competitive process for the sale, restructure or recapitalisation of the business, which concluded with APA being selected preferred bidder.
The complex transaction then involved APA entering into binding documentation with the receivers which led to APA acquiring the shares in Basslink from the Cayman Islands-based holding company (to which the receivers were also appointed) and entering into a DOCA. The DOCA provided the platform for Basslink to exit external administration and continue trading, unsecured trade creditors to be paid in full and the ongoing employment of Basslink’s staff.
Camp Australia
In one of the largest restructuring debt packages in Australia for 2022, Camp Australia was a pioneering restructuring deal of the post pandemic and changing economic landscape and involved several innovative and ground-breaking features. This successful restructuring enabled Camp Australia, Australia’s largest out of school hours services provider, to deleverage and reposition its debt profile, providing certainty to its 3,700 employees and hundreds of thousands of customers reliant on it for child-care services after a challenging period coming out of the pandemic.
As certain lenders bought into the first lien debt from the second tier, this reinforced the highly complex nature of the restructuring and its one-of-a-kind nature. The deal also involved the negotiation of an amended debt facility and a new shareholders agreement between the lenders/shareholders of the target.
Gilbert + Tobin advised APA and the second lien lenders to Camp Australia in relation to the above transactions.