Bond Workouts, Distressed Equity Offerings and State Interventionism - Analysis of the Consequences of the Inefficiency of French Law Concerning the Restructuring of Large Size Companies
Revue Trimestrielle de Droit Financier- RTDF n°2 2017
90 Pages Posted: 28 Sep 2017
Date Written: June 2, 2017
Between 2009 and 2017, 82 capital increases were carried out by companies in difficulty listed on the Euronext exchange following cash contributions by their existing shareholders. Out of these 82 transactions 30 were carried out by companies seeking to raise more than 50 million euros during this same period. The French State played a role in more than one-third of these major transactions.
Except in those cases where creditors agree to major concessions in the form of debt waivers entailing, as the case may be, a significant dilution of shareholders’ rights, such recapitalizations result in a massive transfer of wealth from subscribers to creditors, who are thus distanced from the risk of corporate default. An analysis of the stock market performance of those shares issued in connection with the 30 most significant transactions confirms that this type of transaction often constitutes a risky gamble for their subscribers and sometimes unnecessarily delays in-depth restructuring of the company’s debt.
The risk that these distressed equity offerings prove to be ruinous for shareholders and, in the end, contrary to the interest of the companies, is even greater when their balance sheet is complex and their debt is dispersed over financial markets. Such situation renders obtaining concessions from creditors in exchange for a contribution of fresh money more difficult. In this respect, it is symptomatic that no company listed in France has ever carried out a public offer for the exchange of bonds for shares, which, aside from insolvency proceedings, is the only means of realizing a significant waiver of bond debt.
In a context which is propitious for the development of European bond markets and the optimization of the financial structure of companies, the risk of a future multiplication of ruinous distressed equity offerings as well as costly insolvency proceedings is very high.
The purpose of this study is to demonstrate that the deficiencies in French law render the latter responsible for these negative effects:
1) it is impossible for a large French company to organize public offers for the exchange of bonds for shares in order to obtain significant concessions from their creditors since it cannot use the opening of insolvency proceedings as a credible threat,
2) the rules relating to corporate governance inadequately protect creditors, as well as minority shareholders, from the risky choices of their managers, often put in a state of denial confronted with the magnitude of the difficulties, and
3) the obligations of transparency and information of financial markets incumbent upon companies are inadequate for enabling investors to truly assess the risks of distressed equity offerings.
The intervention of the State, again acting too systematically as shareholder of last resort, serves as a stop gap measure for the inefficiency of French law.
Whenever State intervention takes the form of aid, the European Commission is obliged to force companies to make painful concessions in order to avoid distortion of competition on the Common Market.
Moreover, State intervention is such as to misleadingly encourage minority shareholders, who are not as well informed, to take unnecessary risks in order to reinforce a company’s equity.
For all of these reasons, France has everything to gain by a major reform of its law, in particular insolvency law. In order to do so, it must rely on the initiative of the European Commission acknowledging the fundamental importance of adopting minimum standards concerning insolvency law for growth in Europe, made public on November 22, 2016.
Such reform would allow a market to develop for the acquisition of control of large companies in difficulty by the purchase of their debt on the secondary market and promote the intervention of private investors capable of becoming majority shareholders of companies in difficulty, irrespective of their size.
Ultimately, only the creation of such a market for controlling large companies in difficulty will allow the fatality of certain «distressed» equity offerings to be avoided, thereby reducing the losses incurred by poorly informed minority shareholders, as well as the unnecessary risks that the State is often forced to assume by acting as shareholder of last resort.
This empirical study is completed by a detailed analysis of the restructuring of Bull, Technicolor, CGG, the Solocal Group, Eurotunnel, Alcatel, Alstom, PSA Peugeot Citroën, Areva and General Motors.
Keywords: Corporations, Bankruptcy, Corporate Finance, Securities, Bonds, Financial Distress, Reorganizations, Debt Restructuring, Collective Action Clauses, Creditor Coercion, Financial Distress, Equity Issues, Equity Offerings, Wealth Transfers, Debt Overhang, State Interventionism, State Aid
JEL Classification: K
Suggested Citation: Suggested Citation