Yesterday's judgement in the Powerhouse company voluntary arrangement (CVA) dispute has been hailed as a victory for landlords, but in reality will lead to landlords seeking greater security from tenants.

Reported in The Times and Citywire, the High Court decision (Etherton J) in fact held that parent company guarantees can effectively be avoided through a CVA, provided the value of the guarantee is recognised in the proposal. In other words, guaranteed creditors must get a better deal than ordinary unsecured creditors.

Whilst the landlords' advisers, Addleshaw Goddard and Lovells, are keen to emphasise the judge's ruling against "guarantee stripping", a well-crafted and balanced CVA remains a powerful tool for managing minority creditors' claims.

Who do you think actually got the better deal here, the landlords or the beleaguered insolvency practitioners trying to find an equitable solution for all stakeholders? Will the commercial property market suffer, or is this another attack (like the Trident case on administrators' liability for business rates) on the proper and efficient use of insolvency procedures as rescue tools? Let us have your comments.

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Schefenacker PLC's creditors' meeting, which was due to have been held on Friday 30 March to cram down €200million of bondholder claims to a 5% equity stake through a Company Voluntary Arrangement, has been adjourned to 4 May, according to the company and as reported by Plastics Industry News. Modifications offering bondholders 15% of the equity and a total of €7.5m in cash will be put to the vote when the meeting reconvenes.

Speculation (see earlier post) that the original proposals, published on 9 February, did not offer enough for bondholders proved correct.

Full details of the modifications - particularly how far Dr Schefenacker, the original shareholder, will be diluted if the bondholders receive 15% - have yet to emerge, but it is clear that bondholders were prepared to risk losing everything in a liquidation rather than settle for 5%.

After a very difficult 6 months, is there light at the end of the Schefenacker tunnel? And is migration becoming a successful and accepted mechanism for restructuring distressed German companies?

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Schefenacker AG, the €930m turnover automotive parts group manufacturing rear-view mirrors with 7,900 employees in 33 locations worldwide, which was founded in Esslingen (near Stuttgart), Germany in 1935, has become Schefenacker PLC with a registered office in Portsmouth, UK. (Were some reports of the company moving to Brighton a mis-translation of Britain?)

In a move redolent of the Deutsche Nickel restructuring in 2004/05, the owner of this typical Mittelstand family business, Dr Alfred Schefenacker, is likely to be diluted to below 4%, with the majority of the equity passing to bondholders in a debt for equity swap. German debt for equity deals are rare and don't often go below 10% equity retention, but greater dilution is the norm in the UK.

Binding all creditors with a 75% majority vote is posible in the UK through a Company Voluntary Arrangement or a s425 Companies Act 1985 Sceme of Arrangement, whereas in Germany a small minority could hold out. This stage of the deal has not yet been reached, but is expected to be thrashed out between the 90% of creditors said to be based in London.

Further incentives for the choice of mechanism include the German "21-day rule" where German management face criminal sanctions if they fail to file for insolvency within 21 days of the company being unable to pay its debts as they fall due. The more flexible UK test - a reasonable prospect of avoiding insolvent liquidation - and the absence of criminality facilitates consensual restructurings like this one.

Another factor is the bondholders' perception that they have more control or influence in the UK system, which is less dependent on court involvement than Germany.

The group's recent history involved the acquisition of Britax Vision Systems in 2000, which resulted in too heavy a debt burden. Refinancing in 2005 put some €400m in hedge funds' hands. Q3 2006 figures were below target and on 19 October 2006 the company announced the appointment of Dr Burghard Knolle of AT Kearney as CRO/COO. At that time Hedgeco.net reported bonds trading at 30% and loans at 85%.

On 12 December 2006 the company announced the appointment of Stephen J. Taylor of Alix Partners as CRO

Reuters reports an estimated enterprise value of €200m, based on a conservative distressed multiple of four times a projected EBITDA of €50m (down from €78m in 2005). €50m of senior debt and €155m of second-lien debt is expected to be paid back.

Who else is involved? (sources: Legal Week, Global Turnaround)
Company advisers:

• Freitag & Co


• Allen & Overy - David Frauman, Mark Sterling

• Freshfields - Ken Baird, Lars Westpfahl


• Deloitte

• Latham & Watkins - John Houghton, Frank Grell

• Houlihan Lokey - Peter Marshall, Joe Swanson


• Cadwalader - Andrew Wilkinson, James Douglas

• Bingham McCutchen - James Roome


• Close Bros - Matthew Prest

• Clifford Chance - Mark Hyde, Kolja von Bismarck

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