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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Debtors migrate but creditors forum shop.

Robert Hickmott and Alex Ballman write in Legal Week about how the trio of German cases:

• Deutsche Nickel


• Hans Brochier


• Schefenacker

It has been established through cases like Staubitz-Schreiber that debtors can move their COMI, and this facility was used in the Collins & Aikman restructuring and insolvencies.

But forum shopping, where creditors race to their court of choice, is what the European Insolvency Regulation sought to avoid.

With COMI now established as elsewhere than the place of a company's registered office only as a result of factors that are both objective and ascertainable by third parties, such cynical or opportunistic forum shopping by creditors is rightly deprecated.

There are many reasons why a debtor might choose to make use of an alternative insolvency regime by moving its COMI, such as:

• to give UK and US stakeholders comfort that a flexible and familiar (UK) restructuring environment will be available;


• to make use of Insolvenzgeld funding (Germany & Austria);


• to avoid Acquired Rights Directive/TUPE problems with employees (Netherlands);


• to enhance employee protection (France); or


• to use DIP financing (Sweden).

The Deutsche Nickel mechanism - conversion to a limited partnership and transfer of the assets and liabilities to the new general partner (in that case an English company) by universal succession - is a specific form of migration that nevertheless requires a COMI to be established in another jurisdiction.

Migration is the acceptable face of forum shopping, and we will see more of it!

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Bondholders may not find 5% of the equity an appealing prospect, but the level of pain to be borne by Schefenacker's existing shareholders is yet to emerge.

The company has announced replacement of €250m 1st and 2nd lien debt and €200m of subordinated bonds with new debt of €305m:

• €25m senior revolving credit
• €170m senior term loan
• €110m mezzanine

Some of the €55m "new money" is said to come from a mezzanine investment from the group's owner, Dr Alfred Schefenacker, who is also transferring minority interests in Schefenacker Engelmann Spiegel GmbH to the group. His shareholding in the group is to be reallocated in part to the senior lenders.

The value of his financial contributions and the extent of his the equity dilution may be enough to make the deal work. The company says it doesn't need bondholder approval, but neither has it yet announced the detail of the restructuring mechanism. . . .

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Bloomberg.com reports progress in the restructuring.

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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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