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Last month, the UK High Court sanctioned Independent Builders Merchant Group’s (IBMG) restructuring plan involving the transfer of the group to private credit lenders Ares and Farallon. Private credit cases in UK courts remain a rarity, but with a market expected to reach $3tn in the next five years, we should prepare to see more.

“Restructurings of private credit tend to stay out of the public eye… That said, in recent times we’ve seen several situations where private credit has taken control of their borrower business and a Restructuring Plan via the English courts has been used to restructure its balance sheet,” said Jat Bains, head of restructuring and insolvency at Macfarlanes, which has worked on IBMG and several such cases.

Having spent over 26 years at the firm, Bains chairs Macfarlanes' Trainee Solicitor Committee, overseeing all recruitment matters, and has earned a place in the Legal 500 Hall of Fame.

9fin sat down with Bains to discuss the distinctive characteristics of private credit restructuring, the likelihood of seeing more cases, and how funds are preparing for these situations.

1. With the increasing role of private credit in the corporate lending space are you seeing more situations going wrong and an increasing number of business takeovers by private credit funds?

Yes, certainly, albeit I don’t think that there is anything about that trend which ties to something inherent in the nature of private credit. Indeed, our private credit clients generally tend to avoid riskier sectors such as retail and so are less exposed to risk than some lenders in the market. 

Ultimately, I think this is a consequence of the growing prevalence of private credit in the market and the law of averages.

2. What are the key differences between traditional restructurings and private credit restructurings in terms of negotiations and main challenges?

A key difference tends to be that a private credit fund can typically write a bigger cheque when a business has a funding need, either providing all of the necessary debt capital alone or at least being in a very small club. 

Consequently, restructuring negotiations are often much simpler and the process is most cost-efficient for the benefit of a business as a whole, involving less of the posturing that one sees amongst bondholders and other debt investors in the largest multi-tiered public debt transactions in the market.

3. Which notable private credit restructuring cases have reached the courts?

The reality is that restructurings of private credit tend to stay out of the public eye (and therefore the courts) on the basis that they are generally dealt with consensually amongst stakeholders, albeit the threat of an enforcement will always exist and can be deployed if necessary. That said, in recent times we’ve seen several situations where private credit has taken control of their borrower business and a Restructuring Plan via the English courts has been used to restructure its balance sheet. Please forgive the self-promotion, but the two most recent ones I can think of would be the restructurings of Dobbies Garden Centres and IBMG– both of which Macfarlanes advised the company on.

4. IBMG’s restructuring plan covered 13 companies and required 68 class meetings — what were the challenges and unique aspects of this structure?

Ensuring that the process was seamlessly tied into the taking of control by the secured lenders to IBMG was a critical factor and not straightforward. 

As you’ve identified in the question, the inter-conditional series of plans and consequential number of meetings also gave rise to significant logistical challenges.

Given that the leases which were the subject of the proposed compromises sat in various group companies, the view that we took along with Counsel was that this was a necessary pill to swallow given that alternatives such as the execution of a ‘deed poll’, in our view, carried too much legal risk.

5. The court mentioned Petrofac in the IBMG judgment. What has been the impact of Petrofac so far, and what future effects do you anticipate? 

The key outcome of Petrofac, to my mind, is the concept that the benefits (i.e. value) preserved or created by a Restructuring Plan must be shared “fairly” between stakeholders, reflecting what they are contributing and/or giving up.  In order to evidence this, one can expect an additional layer of expert opinion being required and that is precisely what we obtained for the purpose of the IBMG judgment.

6. What major complexities arise in out-of-court situations involving private credit?

As with most transactions, it’s tax! An array of concerns will arise whenever a lender and borrower become connected, far too many for inclusion in this response. Fortunately we have a top-rated tax practice at Macfarlanes and my colleagues are excellent at working with my team to help our clients navigate the issues.

7. Are you noticing more restructuring experts moving to private credit funds that need internal capabilities?

We are seeing a greater demand among private credit funds for internal resource, yes, primarily as a consequence of the uptick in work mentioned before. They can come from the restructuring teams within large financial institutions and/or the advisory teams within accounting and restructuring firms.

Investors in private credit funds are asking ever more difficult questions around their capability should a given financing fall into distress, and they are looking to ensure that they have a good answer to that challenge.

8. In which sectors are you currently seeing increasing levels of distress?

Not much has changed in recent years, in terms of the areas where there has been the greatest activity: retail, restaurants, hospitality, travel (anything involving discretionary expenditure) and construction have all suffered for quite a long while for various reasons.

We are also starting to see more happening in certain regulated sectors, particularly where a business model happens to be in conflict with the perspective of a regulator.

9. You chair the firm's Trainee Solicitor Committee — what one skill do you wish every new trainee possessed on day one?

On top of all the skills that we’ve demanded from candidates forever, including learning agility, a work ethic, an ability to work well in a team, communication skills and a high level of technical legal ability, in modern times I think the key new skill to have is being good at creating the right “prompt” when utilising AI.

I’m far from expert, but even I can tell that you get more out of a system if you put a higher quality question into it. Lawyers of the future will need that skill in abundance.

Check out our full collection of 9Questions interviews here.