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Digital Subscriptions > The Hedge Fund Journal > Issue 135 – Oct 2018 > Distressed Debt Investing and Loan to Own Strategies

Distressed Debt Investing and Loan to Own Strategies

Should a Cayman Islands Scheme of Arrangement be your next play?

CAROLINE MORAN and NICK HERROD, MAPLES AND CALDER

Overview: Identifying the Most Viable Restructuring Jurisdiction

Where debtors and creditors need to have recourse to, or a contingency plan for, a court process to implement a debt restructuring (including a debt for equity swap), the first step is to identify the most viable jurisdiction to implement the restructuring. This jurisdiction needs to provide a legal process that is efficient, cost-effective and sufficiently robust to deal with any minority dissenters who may seek to derail the restructuring. The earlier consideration is given to the most viable jurisdiction and the more pre-planning that is carried out before filing, the better the results are likely to be for the distressed debt investor.

In many cases, a US Chapter 11 will be the natural or possibly only choice (particularly if consideration of strategic options has been left until late in the day and a Chapter 11 filing is needed to obtain the worldwide automatic stay). However, as demonstrated by their use in England over the last ten years, schemes of arrangement – which are available in the Cayman Islands – can also be a powerful company restructuring and rescue tool. Cayman Islands schemes are available to both domestic and foreign companies and for non- Cayman Islands law-governed debt. In the right circumstances, they can deliver real value to debtors and investors seeking to implement a restructuring.

This is demonstrated by the successful and highly publicised 2017 Ocean Rig restructuring, where it has been widely recognised that the costs of implementing the restructuring through Cayman Islands schemes was a fraction of the likely costs if the restructuring had, instead, been implemented through Chapter 11. A more cost-efficient restructuring returns greater value to creditors and debtor alike.

The Ocean Rig restructuring involved the compromise of US$3.69 billion of New-York-law-governed debt through four interlinked Cayman Islands’ schemes of arrangement – essentially the debt was swapped for equity in the Ocean Rig parent. The four schemes concerned the Cayman Islands’ registered parent and three of its Marshall Islands incorporated subsidiaries. The debt was New-York-law-governed and the schemes were recognised and given full force and effect through Chapter 15 proceedings in the US.

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