Codere Finance 2 (UK) Ltd

JurisdictionEngland & Wales
CourtChancery Division
JudgeMrs Justice Falk
Judgment Date13 Sep 2020
Neutral Citation[2020] EWHC 2441 (Ch)
Docket NumberCase No: CR-2020-003544

[2020] EWHC 2441 (Ch)

IN THE HIGH COURT OF JUSTICE

BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES

INSOLVENCY AND COMPANIES LIST (CHD)

7 Rolls Buildings

Fetter Lane, London, EC4A 1NL

Before:

Mrs Justice Falk

Case No: CR-2020-003544

In the Matter of Codere Finance 2 (UK) Limited
And in the Matter of the Companies Act 2006

David Allison QC and Ryan Perkins (instructed by Clifford Chance LLP) for the Company

Felicity Toube QC (instructed by Milbank LLP) for an ad hoc group of Scheme creditors

Tom Smith QC (instructed by Jenner & Block London LLP) for Kyma Capital Limited

Hearing dates: 3, 4 and 7 September 2020

Judgment Approved by the court for handing down

Mrs Justice Falk

Introduction

1

These are my written reasons for my decision on an application by Codere Finance 2 (UK) Limited (the “Company”) for an order convening a single meeting of certain of its creditors (“Scheme creditors”) for the purpose of considering, and if thought fit approving, a scheme of arrangement under Part 26 of the Companies Act 2006 (the “Scheme”). In view of the urgency I made a convening order following the issue of this judgment in draft, on 11 September 2020.

2

The Company is part of the Codere group of companies (the “Group”), the parent of which, Codere S.A. (the “Parent”), is listed on the Madrid stock exchange. The Group is an international gaming operator with operations in Latin America, Spain and Italy. It also has some online gaming operations, although in 2019 these only represented around 4.3% of sales. It employs over 12,000 people worldwide.

3

The Group's financial position has worsened significantly during the Covid-19 pandemic, as a result of venues being closed and major sporting events being cancelled. This has resulted in the Group facing a liquidity crisis. The Company's position is that, absent the Scheme, it will enter into liquidation.

4

The convening hearing was fixed for one day, which the Company's advisers had considered to be sufficient. However, the proposed class composition was opposed by Kyma Capital Limited (“Kyma”) on behalf of a fund managed by it. Kyma sought an adjournment of the convening hearing on the basis that one day was insufficient. This was opposed by the Company based on its understanding that any adjournment would (at least absent an order for expedition) be to a date well into October, which would leave insufficient time to implement the Scheme before the Group ran out of funds. The Company suggested that, if I was satisfied that there was a reasonably arguable basis for Scheme creditors to vote as a single class, then I should make a convening order on that basis, without prejudice to the ability of creditors to raise class issues again at the sanction hearing (currently fixed for 6 and 7 October).

5

I concluded that it would be preferable to resolve the class issues that had been raised at the convening hearing if at all possible, by allowing the hearing to run over into what became a total of two days, comprising one full day and two half days.

6

I heard submissions from David Allison QC for the Company and Tom Smith QC for Kyma. Felicity Toube QC also appeared and made submissions on behalf of an ad hoc committee of Scheme creditors (the “AHC”). I am grateful to all Counsel for their assistance.

The Group's financial liabilities and the proposed Scheme: overview

7

At present, the key financial liabilities of the Group are as follows:

i) The Company and Codere Finance 2 (Luxembourg) S.A. (“Codere Finance”) are co-issuers of two series of notes with face values of €500 million and US $300 million respectively, currently scheduled to mature on 1 November 2021 (the “Existing Notes”). The Existing Notes are issued in registered global form and traded through Euroclear and Clearstream. It is the ultimate holders of the beneficial interests in the Existing Notes who are the proposed Scheme creditors. (This is on the basis that they are contingent creditors for Part 26 purposes, given their entitlement to call for the issue of definitive notes.)

ii) Another group company, Codere Newco S.A.U., is the borrower under a €95 million super senior revolving credit facilities agreement (the “RCF”), due to mature on 15 November 2020.

iii) Codere Newco S.A.U. and the Parent are primary obligors under a €50 million super senior surety bond facility agreement (the “SBF”).

iv) Codere Finance is the issuer of €85 million super senior notes due on 30 September 2023 (the “Interim Notes”). The Interim Notes were issued on 29 July 2020 in circumstances discussed further below.

8

All of these liabilities benefit from substantially the same guarantee and security package granted by a number of Group companies (although the SBF also benefits from some cash collateral). Pursuant to an English law governed intercreditor agreement, the RCF, SBF and Interim Notes rank senior to the Existing Notes with respect to the proceeds of enforcing security, and pari passu amongst themselves. The two series of Existing Notes similarly rank pari passu amongst themselves. Furthermore, pursuant to a separate agreement, enforcement proceeds in respect of the Interim Notes are required to be turned over to the RCF lenders until the RCF is discharged, therefore effectively subordinating them to the RCF.

9

If the Scheme is implemented:

i) The maturity of the Existing Notes will be extended from 1 November 2021 to 1 November 2023.

ii) The interest rate on the Existing Notes will be increased. The rate on the euro denominated notes will be increased from 6.75% to 4.5% in cash plus either a further 5% in cash or 6.25% payment-in-kind (“PIK”) at Codere Finance's option. The rate on the dollar denominated notes will increase from 7.625% to 4.5% in cash plus either a further 5.875% in cash or 7.125% PIK.

iii) The covenants in the Existing Notes indenture will be amended, in particular to allow the issue of the New Notes referred to below and to impose a new minimum liquidity requirement.

iv) Codere Finance will raise new money by issuing a further €165 million of notes (the “New Notes”). These will be offered pro rata to holders of Existing Notes. Once these are issued, the Interim Notes and the New Notes will have the same terms, as a single class of “New Super Senior Notes” (or “NSSNs”). The NSSNs will have a maturity date of 30 September 2023.

v) Part of the proceeds of the New Notes will be used to repay the RCF.

10

The AHC comprises five institutions who between them own or manage approximately 55% by value of the Existing Notes. The fund managed by Kyma holds around 0.74% by face value of the Existing Notes.

Evidence

11

The evidence for the hearing included witness statements from Manuel Martínez-Fidalgo, a director of the Company and a non-executive director of the Parent, who is also a managing director of the restructuring specialist Houlihan Lokey, and Angel Corzo Uceda, the CFO of the Group. Kyma produced evidence in the form of a witness statement from its Chief Investment Officer, Akshay Shah.

12

There had been a suggestion that time for cross-examination of the Company's witnesses would be required. The Company was particularly concerned at what it took to be allegations that its witnesses had provided misleading evidence in respect of some issues. In the event cross-examination was not needed. It was made clear that Kyma was not suggesting that the witness evidence failed in any way to reflect the honest beliefs of Mr Martínez-Fidalgo and Mr Corzo. This was a helpful, and appropriate, clarification.

13

As noted further below, I required some additional evidence during the hearing. This was provided in the form of a second witness statement by Mr Martínez-Fidalgo, to which Kyma responded with a second witness statement from Mr Shah.

The liquidity crisis and the effect of the Scheme

14

The existence of a liquidity crisis was very clear from the Company's evidence. That indicated that the Group's requirement for fresh funds increased, and became more urgent, as the pandemic continued and its impact worsened. It became apparent that without immediate new cash the Group was projected to run out of funds in mid-August. The Interim Notes have provided a breathing space, but this is projected to last only to the end of October. By November a cash shortfall of €119 million is projected. Although the shortfall could potentially be addressed initially by seeking deferrals of the repayment date for the RCF (15 November) and a €27 million coupon due on the Existing Notes on 31 October, that would still leave liquidity at what the Group regards as an impossibly low level.

15

The Company's evidence indicates that, if the Scheme is implemented, the Group's cashflow issues are projected to be resolved and the Group is expected to be placed on a sustainable footing. In particular, the extension to the maturity date of the Existing Notes will mean that they will not need to be categorised as current liabilities for accounting purposes, which would have led to a qualified audit opinion in respect of the Group's ability to continue as a going concern. The increase in coupon on the Existing Notes obviously reflects this extension, along with the fact that the Existing Notes holders' consent is required for the issue of the New Notes in priority to the Existing Notes. 1

16

A report produced by Deloitte concludes that if the Scheme is successful the Group will have an enterprise value in excess of its total debt. The Group's view is that it would then have every prospect of being able to continue to trade and pay its debts, including paying the Existing Notes in full as they fall due.

17

Mr Shah's assessment...

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4 cases
  • Selecta Finance UK Ltd
    • United Kingdom
    • Chancery Division
    • 14 October 2020
    ...than to divide them. I note that that decision is consistent with the reasoning of Falk J. in in Re Codere Finance 2 (UK) Ltd [2020] EWHC 2441 (Ch), at [105]. I also note the concerns expressed by Snowden J. about a total 0.5% consent fee in Re ColourOz Investment 2 LLC [2020] EWHC 1864 (......
  • Sunbird Business Services Ltd
    • United Kingdom
    • Chancery Division
    • 18 September 2020
    ...of cases at first instance, but serious concerns remain: see e.g. the recent discussion by Falk J in Re Codere Finance 2 (UK) Ltd [2020] EWHC 2441 (Ch) at paragraph 51 et seq.. Questions may well arise as to whether the payment of such fees should either result in the court ordering separa......
  • Sunbird Business Services Ltd
    • United Kingdom
    • Chancery Division
    • 28 October 2020
    ...Finance Ltd [2016] BCC 194 at [17]–[18]; and the recent discussion of this approach by Falk J in Re Codere Finance 2 (UK) Limited [2020] EWHC 2441 (Ch) at [49] et 24 Applying these principles to the facts of the instant case, it seems to me self-evident, first, that the New Scheme and Righ......
  • Re Codere Finance 2 (UK) Ltd
    • United Kingdom
    • Chancery Division
    • 6 October 2020
    ...to convene a single meeting of Scheme creditors. I handed down a judgment in respect of that decision on 13 September 2020 ( [2020] EWHC 2441 (Ch)) (the “convening 4 The background to the proposed Scheme is set out in greater detail in the convening judgment. In summary, the Company is par......
1 firm's commentaries
  • Scheme update: fees, class composition and forum shopping in Re Codere Finance
    • United Kingdom
    • LexBlog United Kingdom
    • 17 November 2020
    ...those fees and benefits were not so material as to fracture the single voting class of noteholders. Re Codere Finance 2 (UK) Limited) [2020] EWHC 2441 (Ch) and [2020] EWHC 2683 (Ch). The court also considered Codere’s incorporation of a new English subsidiary and the assumption by that subs......

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