The “New Norwegian” is ready for takeoff: Norwegian Air secures consent for its restructuring plan

May 19, 2020

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What's going on here?

Norwegian Air, one of the most prominent low-cost carriers in Europe, announced on 4 May 2020 that it will go forward with its complex restructuring plan. The announcement comes after the company secured consent from its three main stakeholders: leassors, bondholders and shareholders. The plan is set to keep Norwegian afloat until 2021, when its fleet will start flying again.

What does this mean?

There are two major components to the restructuring strategy. On the one hand, new shares will be issued, raising 400m Krones (NKr) . 

On the other hand, and more importantly, the plan will turn more than 10 bn NKr in debt into equity. Approximatively 80% of the sum will come from debt owed to leasing companies and the rest from various bondholders. Shareholders have been overwhelmingly supportive of the plan, Norwegian declared, even if it will mean that existing shareholders will own only 5% of the company when the process is done. 

In addition, the restructuring now allows the carrier to tap into the pool of government-backed loan guarantees that are currently on offer. This will add another 2.7 bn NKr to the company’s “reserve”.

What's the big picture effect?

There are two points worth keeping in mind about debt-to-equity swaps of this sort. 

First of all, they are complex agreements designed to help companies avoid going into administration and preserve solvability. The way they accomplish this is by, as the name suggests, turning the existing debt into equivalent equity. That means that if the company owed £500m, for example,  to a creditor, the debt will be “erased” and the creditor will receive new shares worth the same value. 

Secondly, such transactions are extremely complex and require a lot of legal assistance. For example, a whole suite of fundamental documents will be changed as a result of the swap. Two of the significant ones are: 

  • The finance agreements, which will be altered to reflect the reduced loan amount;
  • There will be a new shareholder`s agreement to govern the relations between the new shareholders. This document will be roughly negotiated as surely the new shareholders will request certain rights, such as: 
    • Pre-emption rights which allow the existing shareholders to have priority if one them decides to sell;
    • The requirement for shareholder consent to budgets, business plans, etc.

It is also worth noticing that tax implications are also very sensitive in this type of restructuring, and it is the subject of a detailed regulatory regime in the UK. The reason for the tight regulations is to  make sure no tax evasion results from the conversion of debt to shares- for which different taxation regimes apply. 

Given the bleak prospects of most businesses, such deals will surely become more common in the future. This will translate into a lot of work for law firms, including assisting with  the shareholders’ meetings, negotiating the terms of the contracts and drafting all the necessary documentation to facilitate the restructuring process.

Report written by Bogdan Ciacli

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