What is the Adler Plan?

Adler Group S.A. (together with its subsidiaries, the “Group”) owns and manages a portfolio of multi-family residential rental properties in Germany. The Group has faced financial headwinds caused by a downturn in the German property market and a negative global macroeconomic landscape exacerbated by, amongst other things, the COVID-19 pandemic and the ongoing war in Ukraine.

The Group’s external debt totals over €6 billion, and the Group has been facing a liquidity crisis, unable to repay the €500 million senior unsecured notes issued by Adler Real Estate AG due on 27 April 2023 (the “2023 Notes”). Faced with the alternative of imminent insolvency, the Group proposed a restructuring plan (the “Plan”) under Part 26A of the Companies Act 2006 (“CA 2006”).

The key debt instruments affected by the Plan were six issuances of German law-governed pari passu senior unsecured notes maturing between 2024 and 2029 with an aggregate principal totalling €3.2 billion (the “SUNs”). The creditors under each of the SUNs (the “Scheme Creditors”) were placed into separate creditor classes for the purpose of voting on the Plan.

The Group substituted AGPS BondCo PLC (the plan company) for the original issuer under each of the SUNs in January 2023 using contractual issuer substitution clauses, creating the jurisdictional nexus for the Plan.

The Plan proposed to amend the SUNs, including by (i) elevating the priority of the 2024 SUNs in exchange for an extension of maturity to 2025; and (ii) permitting the Group to incur €937.5m of super-senior secured new money term loans, with lenders of the new money entitled to 22.5% of the equity in the Group post-Plan implementation. Except in the case of the 2024 SUNs, the maturity dates of the SUNs were not amended by the Plan.

All classes of Scheme Creditors except for the 2029 SUNs approved the Plan by the necessary majorities. 62% of the 2029 SUNs Scheme Creditor class also approved of the Plan, but fell short of the requisite 75% majority. Therefore the Group was reliant on cross-class cram-down for the success of the Plan. The Plan was sanctioned by the Court on 12 April 2023, and the reasoned judgment of Mr Justice Leech was published on 21 April 2023, shedding light on a number of key issues for future restructuring plans.

Key takeaways 

The “pari passu” principle: Under the pari passu principle in English insolvency law, all unsecured creditors are entitled to a pro rata share of recoveries in a formal insolvency process. Citing Houst (Re Houst Ltd [2022] BCC 1143), the Court noted a precedent for altering the priority of payments where it is faced with a binary decision to sanction or not sanction a plan that provides for a more beneficial result for all creditors than they would enjoy in the relevant alternative, noting: “a departure from the existing priorities of the classes of creditors is not fatal to the success of the plan.” 

The Court found that the Plan did not constitute a departure from the pari passu principle due to the preservation of the maturity dates of the SUNs (save the 2024 SUNs) and the high likelihood, on the balance of probabilities, that all holders of SUNs would be paid in full under the Plan. If the Plan fails, i.e., the Group fails to perform in line with submitted forecasts, all SUNs would most likely be accelerated, and holders will recover their investment on a pari passu basis. 

The “no worse off” test and the importance of valuation evidence: One of the conditions to obtaining a cross-class cram down under a restructuring plan is the “no worse off” test under section 901G CA 2006, which provides that any dissenting class must be no worse off under the proposed restructuring plan than they would be under the relevant alternative (which is often, as was the case here, an insolvent liquidation).

The Court found that, although the Group’s valuation evidence was inherently uncertain, the 2029 SUNs would, on the balance of probabilities, be fully repaid, and that even in the event the Group’s valuation forecasts were not achieved, the 2029 SUNs would still be better off under the Plan than under the relevant alternative. The Court’s findings in this respect were based on extensive consideration of the valuation evidence presented both by the Group and by the 2029 SUNs, and a determination that the outcome forecast in the Group’s evidence was more likely than the outcome forecast by the evidence submitted by the 2029 SUNs. We expect that such energetic contestations of valuation evidence will become an increasingly important feature of restructuring plans going forward.

Creditors as judges of their own interests: All classes of Scheme Creditors except for the 2029 SUNs approved the Plan by the requisite 75% statutory threshold. Whilst only 62% of the dissenting class approved of the Plan, Mr Justice Leech viewed this majority as an important factor in the exercise of the Court’s discretion. Following on from the decision in ED&F Man, this further demonstrates that the Court will normally consider creditors as the best judges of their own interests. (In Re ED&F Man Holdings Ltd [2022] EWHC 687 (Ch), 69% of the dissenting class had voted in favor of a restructuring plan. Mr Justice Trower found this majority to be a relevant factor in exercising the Court’s discretion.)

What happens next?

On 25 April 2023, Mr Justice Leech refused an application from the dissenting 2029 SUNs Scheme Creditor class for leave to appeal against his sanctioning of the Plan. The group now has 21 days (until 24 May 2023) to appeal against the sanctioning directly at the Court of Appeal. Mr Justice Leech indicated during the appeal hearing that he did not believe the group had a realistic chance of success at the Court of Appeal.