International Insolvency & Restructuring Report 2021/22
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International Insolvency
& Restructuring Report
2021/22
capital
markets
intelligence
Insolvency cover 2021-22.indd 1 29/04/2021 11:12:07
International Insolvency & Restructuring Report 2021/22
The restructuring of corporate
bonds in Singapore
by Stephanie Yeo, Clayton Chong and Muhammed Ismail Noordin,
WongPartnership LLP
Large-scale restructurings in modern times almost invariably involve bonds and other debt
securities. In this article, we discuss the mechanisms and processes for restructuring bonds in
Singapore, and highlight common legal and practical issues that arise in bond restructurings.
This article should interest not only Singapore restructuring practitioners, but also international
practitioners whose clients may want to leverage on the robust, efficient and well-developed
Singapore regime to implement complex debt restructurings.
Introduction each class of creditors (by a majority in number
The Singapore restructuring industry has and three-quarters in value) and the court.2 A
seen a spike in the number of restructurings scheme of arrangement, once effective, binds all
involving corporate bonds in 2020 and 2021. This creditors including any dissenting creditors who
development is unsurprising given the flourishing voted against the scheme.
bonds market in Singapore which has grown In broad terms, a typical scheme process
steadily over the years, with the total outstanding involves circulating an explanatory statement
corporate bonds reportedly rising 10.2% to to the scheme creditors, convening a scheme
SGD420bn as of December 31, 2019. Where a
1
meeting (which requires the leave of the court),
company that has issued bonds in Singapore’s and thereafter applying for the court’s approval
capital markets seeks to restructure its bonds, it of the scheme assuming the creditors have
will need to consider a variety of legal issues in approved it at the scheme meeting. A “pre-pack”
determining its approach. scheme of arrangement, which is an expedited
procedure that does away with a scheme meeting,
Procedures for bond is also possible where the requisite majorities of
restructurings creditors have pre-negotiated and agreed to the
Bonds are usually restructured in Singapore scheme terms.3
either by way of a:
(a) consent solicitation exercise; or Choosing the right procedure
(b) scheme of arrangement. Choosing between a consent solicitation exercise
A consent solicitation exercise involves and a scheme of arrangement is a critical
restructuring the bonds by amending the terms decision in any bond restructuring, requiring an
of the bonds pursuant to the amendment analysis of an interplay of strategic, legal and
and modification clauses set out in the commercial considerations.
bond documents. Typically, the approval of
a supermajority of 66 2/3% or 75% of the Getting a restructuring across the line
bondholders would be required. A meeting of The analysis usually begins with an assessment
the bondholders is usually convened for them to of which procedure is more likely to meet
consider and vote on the restructuring proposal. the approval thresholds required to get the
A scheme of arrangement is a court-supervised restructuring across the line.
restructuring plan that requires the approval of The approval threshold for a consent
83
solicitation exercise may be lower than that for a debtor company proposed a single scheme of
scheme of arrangement. It is not unusual for a arrangement for two sets of bonds to prevent a
consent solicitation to require the approval of only dissenting group of bondholders from vetoing a
66 2/3% of bondholders, compared to the 75% restructuring.4
value requirement for schemes.
Additionally, a scheme requires the approval “Supercharged” scheme of arrangement
of a majority in number of the scheme creditors The key advantage of a scheme of arrangement
(sometimes referred to as the “headcount test”). compared to a consent solicitation exercise is that
It can be challenging to meet the headcount test the debtor company can access a suite of tools
where the bonds are held by a dispersed and wide to help facilitate its restructuring. These tools
group of bondholders, especially for bonds issued were introduced in legislation as part of efforts to
to retail investors. The headcount test gives rise “supercharge” the scheme of arrangement regime
to other unique legal issues which are discussed in Singapore:
later in this article. (a) moratorium protection against legal
For deal certainty, practitioners may therefore proceedings and enforcement action (including
prefer consent solicitation exercises over schemes an automatic 30-day interim moratorium upon
to avoid having to meet the headcount test. This filing), which can be given extraterritorial in
could be particularly advantageous in a situation personam effect;5
where a small number of key bondholders have (b) moratorium protection for related entities of
entered lock-up arrangements and own enough the debtor company;6
bonds to carry the vote in a consent solicitation (c) a super-priority rescue financing regime;7
exercise. (d) a cross-class “cram-down” mechanism
Another relevant factor to be considered is the allowing the court to sanction a scheme even if
time required for the processes to be completed. there are dissenting classes of creditors;8 and
As compared to a typical scheme of arrangement (e) an ipso facto regime that restricts the exercise
which would require the filing of at least two court of ipso facto contractual rights, such as
applications (which may be contested by creditors termination of contracts on the basis of the
who oppose the deal), consent solicitation debtor company’s insolvency.9
exercises can typically be completed on a much These tools can be particularly helpful to a
quicker timeline. debtor who has not yet formulated a detailed
However, there are strategic advantages restructuring proposal but whose bonds are
to undertaking a bond restructuring through about to fall due as they provide crucial breathing
a scheme of arrangement. In complex space to the debtor and help to preserve the
restructurings with multiple creditor groups, a debtor company’s position while it carries out
debtor company may want to encompass the negotiations with its creditors. For these reasons,
bondholder group in a scheme together with the a debtor company may very well choose to
other creditor groups, in order to help sway the undergo a scheme process even though it entails
overall vote in its favour. If the bondholders are being placed under the supervision of the court.
supportive, including them in the scheme can help
the debtor company increase the pool of votes in International bond restructurings
favour of the scheme, making it more likely for the in Singapore
scheme to be passed. The Singapore scheme of arrangement process
We discussed a real-life example of these and its “supercharged” scheme tools can be
strategic calculations at play in our previous utilised by foreign companies as long as they can
article in this publication in 2020, where a show a “substantial connection” with Singapore.10
84
International Insolvency & Restructuring Report 2021/22
A “substantial connection” can be shown by, creditor analysis” was affirmed in 2018 in a
among other things, the company having a place thorough and lucid judgment of the Singapore
of business or substantial assets in Singapore, the High Court, following a detailed survey of cases in
company being registered as a foreign company other common law jurisdictions.14
in Singapore, or the company having submitted to In order for the “contingent creditor analysis”
the jurisdiction of the Singapore court for one or to apply, the test is whether the bond documents
more of its transaction disputes. entitle the ultimate beneficial owners to require
In 2020, the Singapore High Court held that definitive securities to be issued to them (e.g.
having the company’s securities traded on a upon an event of default), and thus to acquire
Singapore exchange was a strong connecting direct rights against the debtor in respect of their
factor, which on its own was sufficient to meet the interests in the bonds. In this regard, we have
jurisdictional test.
11
The debtor company in that observed in practice that bond documents are
case was able to obtain moratorium protection in not consistent across the board, and a careful
Singapore even though it did not have substantial scrutiny of the bond terms is required in each case
business activities or assets in Singapore and to determine the extent to which the “contingent
its bonds were governed by New York law. This creditor analysis” applies.
decision helps to provide an important gateway Leaving aside the strict legal position, Singapore
for foreign debtors to access the Singapore regulators have also (in at least one instance)
restructuring regime, especially considering that required the debtor company to treat the ultimate
the Singapore Exchange lists over 3,000 debt beneficial owners as the creditors for the purpose
securities in issuances from 45 countries. 12
of the scheme, even though the bond documents
did not lend itself to such treatment. That
Unique legal issues in bond restructuring involved debt securities purchased
schemes by many individual “mom-and-pop” retail investors
A unique issue that arises in schemes of which affected the dynamics of the restructuring
arrangement involving bonds is whether the and public perception.
ultimate beneficial owners of the bonds should These various issues discussed above
be regarded as creditors for the purpose of the have given rise to slightly different results in
scheme, or whether the bonds trustee should be restructuring matters:
regarded as the only relevant creditor. (a) Hyflux (2019) – a hybrid approach was applied,
This peculiar issue arises where the bonds are whereby sub-account holders whose debt
held through global custodian arrangements. securities were held through regulated entities
In such arrangements, the debtor company (e.g. the Central Provident Fund, capital
covenants to pay the bond debt to the trustee (not market services licensees, and banks) had
the ultimate beneficial owners) while the trustee direct votes (via proxy), while beneficial owners
holds the debtor’s covenant on trust for the benefit whose debt securities were held through
of the ultimate beneficial owners of the bonds. sub-account holders had to vote through their
Superficially, the trustee may be seen as the sub-account holder.15
only ‘true’ creditor as it is the party with a direct (b) Miclyn Express Offshore (2020) – beneficial
monetary claim against the debtor company. 13
owners of the bonds were treated as
However, there are situations in which the contingent creditors of the scheme companies
courts would recognise the ultimate beneficial and were allowed a direct vote on the
owners of the bonds as contingent creditors of scheme.16
the debtor company, thereby giving them a right (c) Pacific International Lines (2021) – the
to vote directly on the scheme. This “contingent persons registered as bondholders with the
85Central Depository (“CDP”) (which provides In the Singapore context, a practice has
clearing, settlement and depository services developed where the company takes the lead
in the Singapore securities market) were in commencing the process to form an ad-
entitled a direct vote. The persons registered
17
hoc committee for the relevant stakeholder
as bondholders with the CDP might not constituency. An ad-hoc committee can serve
necessarily be the ultimate beneficial owners to facilitate coordination, negotiations, and
of the bonds, and could be custodians or information exchange, between the stakeholder
nominees holding on behalf of such ultimate group and the debtor as well as with other
beneficial owners. creditor groups inter se, ultimately enabling the
This has important practical implications for the formulation of a restructuring plan with better
calculation of votes on the putative scheme (and prospects of success.
the prospects of getting the scheme passed): In bond restructurings, the formation of an
(a) If the ultimate beneficial owners of the bonds ad-hoc committee comprising bondholders
are regarded as creditors, each one of them who hold a significant amount of bonds can be
would be counted for the purpose of the useful in generating momentum for obtaining the
headcount test, giving them a substantial necessary approvals as well.
influence in determining whether the scheme Townhall sessions are also a common feature
passes or not. Given that an issuer may of bond restructurings. These townhalls provide
not necessarily have visibility over who the a platform for engaging with the bondholders,
ultimate beneficial owners of the bonds are sharing information and explaining the
(as the bonds could be held by nominees restructuring proposal. Interestingly, due to the
and banks on behalf of their clients whose safe distancing restrictions in Singapore that were
identities are to be kept confidential), this implemented in light of the COVID-19 pandemic,
increases the level of uncertainty involved in townhall sessions which previously took the form
getting the scheme passed. of large-scale physical meetings in Singapore are
(b) If the trustee is regarded as the only creditor, now taking place via video conferencing platforms
the trustee has to split its vote into a vote which allows bondholders residing outside
for and a vote against the scheme based on Singapore to participate as well.
the instructions of the ultimate beneficial It is also commonplace for the debtor company
owners (assuming their instructions are not to seek the support of investor advocate groups
unanimous). For the purpose of the headcount such as the Securities Investors Association
test, the trustee’s votes for and against the (Singapore) and to get buy-in from regulators such
scheme cancel each other out, which means as the Singapore Exchange at key milestones of
its vote effectively has no influence on the the restructuring process.
headcount test. 18
Conclusion
Practical aspects of bond As outlined in this article, bond restructurings in
restructurings19 Singapore give rise to important strategic, legal
Bond restructurings give rise to distinctive and commercial considerations. With the growing
practical challenges, considering the bond market, the size and complexity of cross-
sometimes-vast number of bondholders border bond restructurings in Singapore will likely
involved, particularly for retail bonds. One such continue in an upward trajectory. Practitioners
challenge is coordination between the creditors will therefore increasingly be required to deftly
and the debtor in conducting negotiations and navigate the complex terrain of nuances unique to
information flow. such restructurings in Singapore.
86International Insolvency & Restructuring Report 2021/22
Notes: Order of Court granted on January 28, 2021
17
Singapore Corporate Debt Market
1
by the General Division of the High Court of
Development 2020 by the Monetary Authority the Republic of Singapore, HC/ORC 531/2021
of Singapore (accessible at https://www.mas. (Pacific International Lines (Private) Limited).
gov.sg/-/media/MAS/News-and-Publications/ A direction was made by the Court for the
Surveys/Debts/Singapore-Corporate-Debt- scheme manager to preserve the instructions
Market-Development-2020.pdf). of the beneficial owners received by the
Section 210 of the Companies Act (Cap. 50)
2
nominees for the Court’s consideration at the
(“Companies Act”). scheme sanction stage. This left open the
Section 71 of the Insolvency, Restructuring and
3
possibility that if the beneficial owners’ votes
Dissolution Act 2018 (Act 40 of 2018) (“IRDA”). did not meet the threshold for the headcount
Smitha Menon and Clayton Chong, “The
4
test, the Court might have exercised its
emergence of a debt restructuring regime for discretion not to approve the scheme.
corporate groups in Singapore”, International Re Swiber Holdings Ltd [2018] 5 SLR 1358 at
18
Insolvency & Restructuring Report 2020/21 [69] to [72].
at pages 65 to 68 (accessible at https:// For a more detailed discussion on the practical
19
www.iiiglobal.org/sites/default/files/media/ aspects of bond restructurings, see Smitha
International%20Insolvency%20%26%20 Menon, Clayton Chong and Muhammed Ismail
Restructuring%20Report%202020-21%20 Noordin, ‘Singapore’ in The Art of the Ad Hoc
e-book.pdf). (Morris, Peck and Van de Graff eds, 2nd ed,
Section 64 of the IRDA.
5
2020), pages 151-162 (accessible at https://
Section 65 of the IRDA.
6
www.wongpartnership.com/upload/medias/
Section 67 of the IRDA.
7
KnowledgeInsight/document/14125/GlobalRe
Section 70 of the IRDA.
8
structuringReviewTheArtoftheAdHocEdition2-
Section 440 of the IRDA.
9
SingaporeChapter.pdf).
10
Section 63(3) read with section 246(1)(d) and
(2) of the IRDA. Authors:
11
Re PT MNC Investama TBK [2020] SGHC 149.
Stephanie Yeo, Partner
12
https://www.sgx.com/fixed-income. Tel: +65 65173796
13
Re Swiber Holdings Ltd [2018] 5 SLR 1358 at [33].
Email: stephanie.yeo@wongpartnership.com
14
Re Swiber Holdings Ltd [2018] 5 SLR 1358 at
[37] to [41], [45]. Clayton Chong, Senior Associate
15
Orders of Court granted on February 21, Tel: +65 64162472
2019 by the High Court of the Republic of Email: clayton.chong@wongpartnership.com
Singapore, HC/ORC 1515/2019 (Hyflux Ltd),
HC/ORC 1512/2019 (Hyflux Engineering Pte Muhammed Ismail Noordin, Senior Associate
Ltd), HC/ORC 1516/2019 (Hyflux Membrane Tel: +65 65173760
Manufacturing (S) Pte Ltd), HC/ORC Email: MuhammedIsmail.KONoordin@
1527/2019 (Hydrochem (S) Pte Ltd). wongpartnership.com
16
Orders of Court granted on March 16, 2020 by
the High Court of the Republic of Singapore, WongPartnership LLP
HC/ORC 1983/2020 (MEO Finance Company 12 Marina Boulevard Level 28
Limited), HC/ORC 1988/2020 (Miclyn Express Marina Bay Financial Centre Tower 3
Offshore Pte Ltd) and HC/ORC 1989/2020 Singapore 018982
(Miclyn Express Offshore Limited). Website: wongpartnership.com
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