Restructuring in the mining sector

Authors: Daniel Metcalfe, Mark Craggs Publication | April 2018

Introduction

Following the high of 2011, with gold prices in excess of US$1900/oz, copper prices in excess of US$10,000/tonne and iron ore prices in excess of US$190/tonne, metal prices crashed and with those prices fell some of the junior mining companies that depended on them.

Not only have mine operators suffered, but so too (and in some cases more so) have mining service and supply companies. Cancellation or postponement of services and orders, and failures to renew contracts (or renegotiation of those contracts) has been commonplace, resulting in a negative impact on future revenue streams. Moreover, claims for outstanding debts owed to service companies by developers and operators rank as unsecured debt, and will be paid only after any senior secured lender or bondholder claims have been met.

The result has been a spate of restructurings and collapses in the junior mining sector in recent years. After early stuttering signs of recovery metal prices have rallied strongly since 2015 with renewed signs of optimism in the market. However, whilst an uptick in metal prices is undoubtedly positive news for the mining industry, many juniors and their suppliers remain weakened by the impact of a long period of downturn. Both those companies and their lenders will need to be cognisant of the potential need to restructure financings and any other more drastic measures – as ever, the sooner problems are diagnosed, the more options are available for the taking of remedial actions.

This guide considers some of the key issues and considerations around restructurings and insolvencies that are specific to the mining industry. The content of the guide is based on our experience on assignments in a number of jurisdictions. Issues are approached from primarily an English common law point-of-view although, in any given case, there are likely to be jurisdiction-specific issues which give rise to equivalent questions on which local law input will be necessary.

Typical corporate and funding structure in the mining industry

Often developers and producers in the mining industry have their parent listed in one of the key listing jurisdictions of London, Toronto, Moscow, Sydney, Johannesburg, Hong Kong and New York. There is then typically one or more intermediary holding companies, established in offshore tax advantageous jurisdictions, sitting between the parent and the operating companies in the relevant opco jurisdiction.

Junior developers (or mid-tier or majors seeking off-balance sheet financing) in the mining industry will, where they access debt funding, typically be required to give security over their assets, including (so far as possible within regulatory limits and local law requirements) interests in relevant licences, production sharing contracts and shares in the local operating company. A parent guarantee will also typically be sought from juniors, at least until the commencement of commercial production, so as to mitigate development and construction risk.

There will often be opco commodity hedging requirements, to afford lenders with price certainty comfort, with relevant hedging counterparties being granted equivalent security and intercreditor voting and ranking rights. There may also be other financing layers in the capital structure, including parent company bond issuances or working capital facilities, as well as opco equipment financings. There may or may not be intercreditor agreements governing the relevant creditor rights among the different classes of debt, and the absence of these can lead to complications for enforcement or restructuring for both the borrower and any individual creditor group.

Key issues in a mining restructuring/insolvency

Licences and concessions

The value of any project company is underpinned by its rights to develop and exploit the mine. Licences and concessions or other contractual arrangements (such as production sharing contracts and joint operating agreements) in the resources sector typically contain change of control restrictions, provisions requiring the owner to be sufficiently capable of developing or operating the asset from a financial, technical and operational perspective and provisions which guard against any abandonment or suspension of activity. Equally, it is typical that insolvency of the operator can lead to termination of the licence or concession against the operator.

Each of these requirements can cause major concerns in an enforcement and insolvency scenario. Preservation of licences and concessions is fundamental to any successful enforcement and there is often a risk that it will be jeopardised in a free-fall insolvency scenario. Relevant ministerial consent will typically be required to transfer the licence or concession or shares in the relevant operating company, which can be a complicating factor in any proposed pre-pack exit arrangement.

A recurring theme in many jurisdictions is whether pre-packaged sales through an insolvency process are available. Pre-packs represent a relatively quick sale technique often with the objective of minimal disruption to the underlying business. Different insolvency regimes have different procedures and requirements but pre-packs normally involve the commencement of insolvency proceedings in circumstances in which the sale of certain assets and/or the business has been negotiated with, and agreed in advance by, the prospective insolvency office-holder (who will also have carried out any required marketing and/or valuations, subject to strict confidentiality terms). The office-holder then approves the sale on or immediately following his appointment. As with other insolvency sales, the assets are normally acquired on an “as-is” basis without the benefit of any disclosure, representations or warranties. Care will need to be taken to ensure that any pre-pack sale does not trigger insolvency termination provisions in licences, concessions and other relevant agreements (such as PSCs, JOAs or preferential offtake arrangements), or, as noted above, that appropriate ministerial consents are obtained to ensure that such provisions will not be relied upon.

Pre-packs are a useful tool in the armoury of secured creditors where a going concern sale is thought to be paramount or, indeed, in circumstances in which there are potential liabilities for an insolvency office-holder by virtue of the nature of the business conducted or assets held by the company (e.g. environmental liabilities, subject to local law advice on the incidence of such liabilities), such that trading the business is unattractive from the office-holder’s perspective.

Consent would also be required for any “loan-to-own” sale to a lender vehicle (whether an orphan or otherwise). The viability of this structure (which is widely used in other sectors) is uncertain due to question-marks (whether perceived or real) surrounding technical and operational (and, in the case of an orphan vehicle, financial) capability to develop and operate the mine. Lenders will also be concerned in such scenarios to avoid being seen to be dictating or assuming responsibility for day-to-day operations in order to avoid potential exposure to liability.

It is important to understand the corporate look-through nature of any applicable change of control provisions, in order to understand whether a need for ministerial consent can be circumvented by way of a sale higher up the corporate chain. Some jurisdictions have sophisticated legislation which considers all direct and indirect control, however, others have arrangements focusing only on direct control. Ultimately this is a political as much as a legal issue.

In an insolvency, the operating company may not have sufficient cash resources to continue developing and operating, including resources to pay contractors or employees to do so. This could result in a suspension or abandonment of operations. Lenders will need to consider this factor carefully when assessing whether to provide additional funding, or allow the company to obtain additional funding (which may be given priority status as a matter of law or contractual agreement), for care and maintenance or other operations.

Dialogue with the relevant minister is very important. However, sensitivities abound in terms of discussions around precipitative lender action and the impact this could have on any operating company board decision if they were made aware of the same (knowingly or unwittingly) and therefore careful and informed planning is key.

Environmental and decommissioning concerns

Many mining projects fall into category A of the World Bank standards, as projects that are likely to have “significant adverse environmental impacts that are sensitive, diverse, or unprecedented”.

This risk, along with decommissioning liability risk, is known and carefully considered at the outset of any financing, but becomes particularly apparent to financial creditors in an insolvency or enforcement scenario. It is one of the key reasons behind lenders’ caution in adopting self-help regimes on enforcement, and is likely to be an important factor in influencing the strategy to be taken by any insolvency office-holder. It is also a key underlying concern when addressing the issue of shadow directorship (discussed further below).

Environmental and decommissioning regulations often impose strict liability for companies and their affiliates and shareholders for breach by that company of those regulations so lenders are particularly keen to avoid establishing any ownership rights in relation to a project. This is particularly true in a scenario where the operating company has been developing and operating for a period of time but limited financial resources may have been set aside to cover future environmental and decommissioning obligations. Liability exposure can be considerable and careful due diligence is required, as well as detailed local law advice on the potential scope and reach of the legislation in question.

The likelihood and quantum of any potential environmental claims and decommissioning liabilities must also be assessed by lenders as part of any value determination, as in certain cases these may be afforded a priority position in terms of ranking in an insolvency, thereby potentially eroding – or, in extreme cases, wiping out completely – the lenders’ secured claims. In this regard, it will be important to understand the nature of the claim and the time at which liability is said to have arisen, as well as the applicable tests for liability attaching (and any exceptions, e.g. in favour of insolvency office-holders appointed at the instigation of the lenders).

Depending on a number of factors, including the nature of the project and the resources being extracted, the potential reach of the relevant environmental and decommissioning legislation and, in some cases, the compliance track-record of the operating company, environmental and decommissioning concerns may form the basis for the requirement of an indemnity by an insolvency office-holder or receiver as a precondition to accepting an appointment. As such, opting for an enforcement and/or insolvency outcome does not necessarily completely shift the risk of liability away from the lenders.

As well as legal risks, reputational concerns for lenders as regards environmental and decommissioning issues cannot be underestimated. These further enhance the sensitivity of lenders in such situations.

Not only are these concerns relevant for the lending institutions, but also for any security agent or trustee. A security agent or trustee may be required to take certain enforcement action at the request of the lenders, and reputational concerns and legal risk will be at the forefront of their thought-process in this situation.

Reserves and resources

Reserves and resources are key to the success of any mining project – these underpin the ability of the operating company to service its debt and generate an equity return. Lenders and bondholders will conduct significant due diligence on reserves and resources, employing their own technical experts (internal and external) to corroborate and challenge the company's own findings, prior to making any funding available. However, feasibility studies and reserve reports cannot be conclusive, and rely on best estimates of overall reserves and resources based on seismic and drilling; it is only once a discovery has been fully appraised and production or extraction begins that the size and quality of the reserves can be better understood, which affects offtake arrangements and the ability to service debt from affected revenues.

Shortcomings in reserves and resources, when compared to those projected initial feasibility studies, are a regular contributor to resource company woes. Remodelling will be required based on revised projections, in order to determine the economic viability of any resources project and its ability to service debt over time. This will form an important part of any debt restructuring, particularly if the debt tenor is extended as this will inevitably impact the reserve tail that lenders had initially modelled.

Quantity and quality of reserves and resources will also significantly impact any valuations carried out when considering values and potential recoveries in enforcement and insolvency scenarios.

De facto and shadow directorship

In pre-enforcement and restructuring scenarios, lenders and bondholders need to be conscious of the risks of rendering themselves by their conduct as de facto or shadow directors, with the attendant duties and potential consequences of personal liability (both civil and criminal).

The issue is particularly pertinent when lenders are considering secured account controls, appointment of chief restructuring officers (CROs) to the board or exerting pressure on the company to endorse a particular restructuring plan.

The applicable rules will be the rules of the jurisdiction(s) in which the relevant company is likely to be subject to insolvency proceedings and the onus of proving shadow directorship will normally fall on a subsequently-appointed insolvency office-holder.

There is normally an increased risk to lenders in a restructuring scenario, at a time when they will be exercising increased scrutiny and imposing tighter controls over cash flow, cash-management, and operating and capital expenditure. That said, lenders’ reliance on their strict contractual rights under financing arrangements in times of distress and/or during the continuation of defaults (for example, in the case of the imposition or tightening of control over project accounts) is unlikely, of itself, to constitute them as shadow directors.

Precautions that lenders can take to minimise the risk of liability include (i) making it clear that any lender stipulations are presented as conditions to the continuation of their support of the company, as part of the ongoing commercial lending relationship, and (ii) ensuring that the board remains independent and retains its own decision-making discretion, such that any recommendations by lenders are framed as such and not as directions or instructions (e.g avoiding any firm prescription of which parties ought and ought not to receive payment during periods of distress).

Composition of the lender group

The lender group may be comprised of a combination of at-risk commercial lenders, commercial lenders with known cover (e.g. ECA-backed, development/international finance institutions) and commercial lenders who have insured or sub-participated their participations. The debt may also be tranched, with elements of senior, mezzanine and/or junior debt, and certain lenders may have participations in more than one tranche. Project financing will also typically be combined with some hedging, particularly commodity price hedging. The hedge counterparties may be some or all of the commercial banks.

Each lender will have different drivers and considerations depending on the nature of the institution in question, the participations in the various tranches of debt, the extent of any guarantees/insurances of their debt, and their exposure to hedging. The participations in the debt will need to be carefully considered in order to understand the likely voting patterns and particularly in the context of the thresholds required to make certain decisions.

Development finance institutions are typically involved in large-scale junior mining financings for single developments. Their involvement in a loan will have an interesting impact on intercreditor issues. They may have particular entrenched rights on key policy issues, but in any event their stance on enforcement or insolvency proceedings may be different to that of commercial lenders as a result of policy or other sensitivities.

It is important for lenders to understand the nature of their group, the nature of the decision-making process and quorum in terms of enforcement action (of whatever nature), and the general position of the group on key issues both from the outset and as the matter progresses. Injection of new funds, and any priority nature of the same, in a work out scenario, can have a dramatic impact on control and will be important to consider as this can also further skew the voting arrangements.

Intercreditor issues

It is not unusual for an opco project financing supported by a corporate parent guarantee (at least until completion) to allow the parent company to incur debt. The rationale being that the parent debt is subordinated since value is at the opco level, over which project lenders have full asset and share security.

However, unpaid debt at the parent level may enable those lenders to commence insolvency procedures against the parent, which may in turn (through shareholder loans, for example) result in a potential domino-effect of insolvency procedures down the corporate chain of ownership to the opco, which the opco lenders may be seeking to avoid for a number of reasons – moratoriums on enforcement of security, risk of revocation of key licences/permits, and loss of control. Whilst project lenders will have sought to prevent such a domino-effect of insolvency procedures by agreeing subordination provisions with holding company/parent entities, there is nevertheless a risk that such subordination provisions will be unenforceable or capable of being successfully challenged in an insolvency scenario (e.g. depending on the applicable law and the avoidance actions available to the insolvency office-holder).

The lenders to the parent may be independent from the opco lenders, but sometimes there is overlap in the lender groups. This adds another dimension to how the project lender group might be expected to vote (for example, with respect to proposed enforcement action) as there is at least the possibility of the taking of self-interested actions by those lenders which have exposure at different levels in the structure which may be contrary to the interests of those lenders whose exposure is exclusively at the opco level. For this reason, it does not necessarily follow that a structurally subordinated loan carries no influence for the lender concerned.

It will be apparent, therefore, that it is critical in any financing structure to have in place a carefully negotiated and drafted intercreditor agreement. Particular attention should be paid to the rights accorded to subordinated lenders at the outset of the financing as well as during the life of the project. It is also important that the full lender group is alive to the level and nature of unsecured debt at the parent company level (e.g. permitted corporate loans), and is cognisant of the implications that the incurrence of such indebtedness may have elsewhere in the structure.

LMA complications

Loan Market Association precedent documentation has its roots in unsecured, investment-grade lending. It is not always appropriate for an emerging market secured financing. Indeed for projects there is no LMA standard form loan agreement. Nevertheless, a market practice has emerged that LMA boiler-plate provisions form the backbone of boiler-plate provisions on English law emerging market finance provisions and agents/security agents and their advisers will typically benchmark to those provisions in negotiations.

There are a number of issues to consider with some of these LMA-style provisions. For example:

  • the ability to remove the agent or security agent without borrower consent, which is relevant in circumstances in which the incumbent agent or security agent wishes to avoid any potential reputational (or liability) issues that might be involved in fronting any enforcement action or the taking of steps with a view to the commencement of insolvency proceedings, or indeed refusing to take action (given its potential ability to refuse to act until it has sufficient assurances and/or indemnification relating against potential liabilities which may result from acting on particular instructions);
  • the ability for the agent or security agent to resign without lender or borrower consent, which typically comes to the fore in circumstances in which the incumbent agent or security agent wishes to avoid any potential avoid reputational (or liability) issues that might be involved in fronting any enforcement action or commencing insolvency proceedings;
  • confidentiality provisions, in particular the ability to disclose information to interested buyers following the taking of enforcement action; and
  • the need for lenders, and not just the borrower, to have controls over the composition of the lender syndicate.

Retention of title

Very often mine developers will purchase supplies on retention of title (RoT) terms, meaning that the supplier retains title to the goods until payment is made for the same in full. These supplied assets may be part of what the lenders instinctively understand to be part of their security package, as ‘borrower assets’, and moreover part of an asset class which is more easily realisable through sale than others. However, it is very important to consider possible RoT arrangements when contemplating any enforcement action in relation to assets, or any insolvency filings, in order to make a better assessment of likely lender recoveries by taking account of any potential adverse title claims. The applicability of stays or moratoria on repossession of assets supplied on RoT terms in insolvency proceedings in certain jurisdictions can give rise to further complications (for example, if office-holder or court consent is required as a precondition to taking possession).

Retention of title arrangements may not be obvious on the face of it. Even if there is no framework retention of title mechanic in initial supply contracts, it may be that RoT provisions are included in invoices or purchase orders, and acceptance of the same may occur not expressly, but by way of conduct (i.e. by the company paying those invoices without contesting the RoT provisions), without specific knowledge of the same by the lender or even the borrower. The legal position will depend on the true facts of the situation (for example, whether the RoT provisions are on all invoices or only some, whether those invoices have been paid or not, and whether there is any contrary intention in other documents/dealings) and there can be complex legal issues involved in ascertaining parties’ entitlements in enforcement or insolvency scenarios.

Hedging considerations

Hedging arrangements are an important consideration in any resources work-out scenario, most particularly commodity hedging and the need to determine whether these are in or out-of-the-money (as well as to consider potential impact of projected price curves) is vital. Hedging contracts may themselves provide a potential source of revenue for the company in times of distress, if the marked hedging value is higher than the market price for the underlying commodity, thus counterbalancing downside market price falls. Closing out relevant hedging contracts may then yield a cash influx for the company to utilise towards operational costs or debt service, depending on the nature of those hedging arrangements.

There are complications, however, both in terms of ability to close out hedging and the implications of doing so. The company may have no ability to close out without the consent of the relevant hedging counterparty (or indeed the lenders), however, often the lenders and the hedging counterparties will be the same institutions (albeit from different desks and with different drivers dictating approach) which can result in an inability to close out. The implication of closing out is that the company then removes (or reduces, as the case may be on a partial close out) its commodity price protection, which was seen as a key credit requirement at the time the lenders structured the original transaction. The decision will be driven by commercial concerns and attitude towards further downside price risk and importance of cash at the relevant point in time.

Hedging exposure is also relevant to intercreditor decisions. Commodity hedging counterparties will typically benefit from the overall financing security package and be afforded intercreditor voting rights. Those votes will typically be linked to their exposures from time to time under the hedge, but will often be subject to caps so as not to afford them with majority voting positions in a scenario where lenders will argue that their more structured credit arrangements and knowledge of the underlying operations give them a better informed understanding of the issues and ability to assess risk. Lender-prescribed caps and collars around the level of hedging mitigate the hedging counterparty exposure from time to time in this regard. However, the hedging counterparties will carry an often influential vote, which can tip the balance in favour of one decision or another and the lender/hedging counterparty make-up will be important to analyse.

Care and Maintenance Costs

The need for new funding will be impacted by the nature of the operations, cash reserve position of the borrower (or any sponsor with earmarked funds) and the relative merits of full shut-down as against a care and maintenance mothballing from both a cost and operational perspective. It will also be critical to consider the terms of the relevant licences, as set out above, especially in jurisdictions where a cessation of operations entitles to the relevant minster to revoke the applicable licence.

A complete shut-down may have a detrimental impact on machinery and supplies (such as fuel), and may also result in security concerns for the site and all assets. There may also be a need to pay certain employees to remain on site, or otherwise engaged, given their technical understanding of operations in order to assist any potential sale on enforcement. As such, even in a scenario where lenders wish to minimise costs and halt operations, in connection with any insolvency proceedings or otherwise, it is not unusual for a care and maintenance budget to be required. Once any relevant cash reserves have been exhausted (particularly those in lender secured accounts) there will be a need to consider funding options. The same concerns in this regard arise as in all sectors.

Local jurisdiction limitations

Mines are often located in emerging market jurisdictions, where the laws and regulations applicable to the mining industry are at an early stage in their development and legal counsel may not be familiar with the industry. It is important to understand these limitations and the reliance on international counsel as coordinating counsel should not be underestimated in terms of being able to interpret, understand and guide local counsel so as to highlight key legal risks and opportunities in any scenario.

Many mining restructurings involve complex cross-border insolvency and conflicts of laws-related questions and it is critical that lenders and others have an understanding of the full picture before formulating and implementing any particular strategy.

Public disclosure and shareholder approvals

For companies with listed debt or equities, the disclosure obligations and approvals required can add real challenges and the need for advice in a restructuring scenario. In some cases, it may be possible to obtain dispensation from disclosure and approval requirements (often with strict evidential burdens) and a number of jurisdictions have formal court-based processes to force through proposals without the approval of all shareholders or creditors.

Case study

To illustrate some of the issues described above on practical level, consider the position of a c. $200m project finance facility to mining opco incorporated and developing a mine in a Southern African state. The opco was 100% owned by an offshore SPV holding company, which in turn was 100% owned by the ultimate parent, which was incorporated and listed in one of the key listing jurisdictions referred to above.

The senior lenders had a comprehensive security package, including all-asset security at opco and holdco levels and share security in respect of both opco and holdco. Two of the same lenders then provided a c. $20m loan to the parent on an unsecured basis for general corporate purposes.

At the time when commodity prices tanked and equity markets collapsed, the project was experiencing acute difficulties during the construction phase and, once it came on-line, produced significantly sub-standard ore body when compared to projections contained in the initial reports/studies that had been commissioned in the planning phase. The combined effect of these factors was that the entire group was left in a position of extreme financial and operational difficulties.

Following an initial restructuring round, the debt terms were amended, amongst other things, to extend the tenor of the debt and give the borrower a degree of latitude on the making of early scheduled repayments. However, the project continued to experience difficulties and, after a number of months following the initial restructuring, the opco borrower was again in a position in which it was unable to service payments of the restructured principal and had begun to breach a number of the key financial covenants that had been reset previously. Given the liquidity difficulties faced by the borrower, steps were taken to close out the hedging arrangements, with the proceeds being applied towards meeting ordinary course operational costs, in order to allow the borrower to continue as a going concern for long enough that a longer-term solution could be found to save the project. Other steps were taken to “keep the show on the road”, such as a cost-cutting programme and the use of amounts standing to the credit of the debt service reserve account to make payments to key suppliers whose continued supply was critical to the continued operation of the mine.

In the background, the lenders commenced and ran a sales process to seek potentially-interested parties to acquire the shares in either opco or holdco in the event they decided that it would be appropriate to enforce their share security. The sales process did not generate as much interest as had been anticipated, given the perilous state of commodities prices, but nevertheless, several potential buyers expressed an interest, some of whom already had operations in-country or in neighbouring states and therefore appeared to be prepared to take a calculated risk against the eventuality that commodities prices would “bounce back” in due course and the mine would become viable once again.

In addition, lenders were also becoming slightly misaligned in their interests and different drivers emerged. The previously benign parent financing became influential in determining the approach of two of the lenders; one lender was being guided by its insurers; and one lender had a particular interest in acquiring some of the assets (fleet) of the borrower, should it not be possible to sell the company as a going concern.

Following the initial expressions of interest from interested parties, two front-runners emerged and negotiations with each of them were conducted in parallel for a number of weeks. Eventually, the lead bidder was able to negotiate a period of exclusivity in order to fine-tune the terms of its offer and to conduct further due diligence on the mine and its management team and supply chain. In the meantime, the project’s difficulties continued and the opco’s liquidity crisis became so severe that it appeared that, absent a further equity injection or emergency funding, an insolvency filing would be inevitable. The directors were taking advice on their duties to creditors and other stakeholders and, despite discussions between the lenders and the responsible government agency, it was not easy to determine what the attitude of the government would be if an insolvency filing were in fact made. The company was running out of funds at a critical time in the sale negotiations and, in order to head off a premature insolvency filing by the directors or one of the major creditors, the lead bidder agreed to advance a modest loan to the company in order to allow it to continue operating as a going concern for long enough to consummate the sale. The loan was on unsecured terms but intercreditor arrangements agreed to by the senior lenders afforded it super-senior status in any subsequently-commenced insolvency proceedings. Access to additional liquidity gave management the comfort they needed in order to continue to trade and steps were taken to renegotiate or stretch credit terms with existing suppliers.

The lead bidder began to have concerns around the valuation placed on the mine as a result of findings in the course of its due diligence and a number of the lenders’ stipulations on the terms of the sale which it considered would not give it sufficient protection going forward. Accordingly, the bidder determined that it would withdraw its offer and the sale negotiations collapsed.

At this point, certain of the directors began promoting their own rescue package, with the support of a minority shareholder, and actively explored options for the raising of third-party financing to enable a management buy-out. The lack of ready availability of financing meant that negotiations took longer than expected, and the directors became increasingly nervous that the lenders would seek unilaterally to take action which would frustrate the process. As such, a majority of the board applied ex parte for, and obtained, an all-encompassing injunction from the courts in the borrower’s home jurisdiction which not only excluded the taking of enforcement steps or the commencement of insolvency proceedings in-country for a limited period while management’s rescue plan could garner support and come to fruition, but also purported to preclude the taking of enforcement action and insolvency filings in other jurisdictions, further up the group structure, against the eventuality that the lenders would enforce their share security in the meantime. It rapidly became apparent that management’s rescue package had received no firm funding commitments and was unlikely to succeed in its current form. The lenders moved quickly to challenge the injunction in-country, and the courts acceded to the application, withdrawing the injunction granted previously, leaving the lenders free to pursue the full range of enforcement options available to them.

The lenders soon concluded that there was little purpose to be served by commencing a further sales process and reached the view that they had been left with little alternative but to commence insolvency proceedings at the opco level in-country. Accordingly, they petitioned for the winding-up of the company and the appointment of provisional liquidators with a view to displacing the incumbent management and preserving and keeping the mine in operation until a buyer could be found and thereby avoiding the kind of extreme value-destruction that might result from an immediate cessation of business. The court acceded to the petition and provisional liquidators were appointed. The provisional liquidators immediately commenced an accelerated sales process and the former lead bidder again expressed an interest in acquiring the mine. Given its position as super-senior lender, the same bidder also became aware of details of other bids received and disclosed by the provisional liquidators to the companies’ creditors, and was able to participate in creditors’ meetings. Throughout this time the mine was operating on a care and maintenance basis, with the provisional liquidator exercising all management functions and meeting creditor demands with revenue generated from the sale of surplus assets and stock piles.

The lead bidder worked on formulating a post-acquisition restructuring plan setting out a medium-term plan for the restructuring of opco’s indebtedness and the operation of the mine in the event it succeeded in acquiring the project out of its insolvency proceedings. The provisional liquidators and the lenders worked with the bidder to develop the terms of the proposal and, once it had been agreed in principle, the decision was taken to seek creditor and court approval of the restructuring plan. The creditors and the court duly approved the plan. The sale eventually proceeded by means of the enforcement of the holdco-level share security (as the buyer perceived this to result in a cleaner share transfer given the jurisdictions involved) through the appointment of a receiver and a pre-pack-style sale to the lead bidder shortly following the appointment of the receivers.

There was frequent and open engagement with the Ministry of Mines in the borrower’s home jurisdiction following the commencement of provisional liquidation, in order to ensure that they would cooperate in approving the change of control. Initially this was a lender-led process, and then, once the lead bidder obtained exclusivity, the lead bidder began to engage directly. The Ministry remained largely neutral throughout, in that it was not involved in determining the most favoured bid and made no representations to the creditors or to the court in this regard. Ministerial approval was required as a condition to sale.

Lessons learned: a number of lessons can be drawn from this case study:

  • Early engagement with government interests is key because, irrespective of the strict legal position under the relevant licences and concessions, the support of the government affords the assurances required at a local level that the buyer will be able to continue to exploit the mine post-acquisition. However, this needs to be handled carefully and sensitively to avoid messages being relayed to the borrower which may spook the board into taking precipitous action that risks derailing a lender-led plan
  • It may be possible for a bidder in a pre-insolvency scenario to achieve a better outcome in terms of price payable by waiting to acquire the project out of insolvency proceedings. That said, however, such a strategy can be risky, given the potential for the commencement of insolvency proceedings to trigger insolvency termination events (e.g. in contracts with suppliers and under licences/concessions for the exploitation of the mine), and the prospect of the cessation of operations in the case of terminal insolvency proceedings, which can lead to a rapid destruction in the longer-term value and viability of the project.
  • Lenders should be wary, when negotiating with potentially-interested buyers prior to any enforcement or insolvency scenario, to avoid engaging in brinkmanship. Continued insistence on commercially unrealistic terms carries with it the risk of prospective buyers’ interest falling away or such buyers resolving that there is a better deal to be done once enforcement action has been taken or insolvency proceedings commenced.
  • In circumstances in which a bidder or some other party is prepared to advance new money in order to finance the continued operation of the mine in the short-term, and to allay directors’ concerns and avoid the need for a premature insolvency filing, the existing lenders may be prepared to agree to afford super-priority terms to such debt.
  • Any (abortive) bidder or other provider of rescue finance which advances new money on super-priority terms can, through gaining creditor status in subsequently-commenced insolvency proceedings, negotiate itself into a priority position so far as the availability of information in those proceedings is concerned. In the event that such a creditor is a member of a creditors’ committee, however, it may find itself in a position in which its personal interests and its fiduciary duties to other creditors come into conflict. Such conflicts can be extremely difficult to manage in practice.
  • There will rarely be an appetite for enforcement at a local, opco level in relatively unsophisticated emerging market jurisdictions which lack developed and widely-used insolvency and restructuring laws, but in exceptional cases, the secured lenders may feel there is no other choice but to seek to commence insolvency proceedings in-country, in order to see if a solution could be found and some return accomplished.
  • Entry into insolvency proceedings, particularly at the operating company level, without a clearly-defined exit-route is potentially open-ended and a risky strategy to follow.

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