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After Petrofac’s bombshell, what’s next for UK restructurings?

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News and Analysis

After Petrofac’s bombshell, what’s next for UK restructurings?

  1. Dan Alderson
  2. +Danish Mehboob
4 min read

9fin will host a webinar discussing Petrofac judgment and its impact on Tuesday, 8 July at 11am BST. Please register here.

The UK Court of Appeal's landmark judgment in the Petrofac restructuring has jolted the market into reassessing what it really takes to get a plan sanctioned under Part 26A. In upholding one of two appeal grounds raised by dissenting creditors Samsung and Saipem, the ruling rewires expectations around fairness, new money, and evidence.

You can find 9fin’s legal analysis of the Petrofac judgment here.

Several legal advisors told 9fin that Petrofac marks an “inflection point” for UK restructurings. The judgment's implications go far beyond Petrofac's own fate, touching future cases where value allocation, new financing, and creditor dissent come into play.

What’s really fair?

For years, practitioners believed that if a plan satisfied the ‘no worse off’ test and other statutory criteria, it would likely be approved. That belief has now been upended.

Katrina Buckley, partner and global co-head of restructuring at A&O Shearman, said that you just can't assume that if creditors are out of the money, they should get nothing at all. You have to show why your proposed allocation of the benefits of the restructuring is fair, and that's an evidential burden on the company.

The Court of Appeal didn’t prescribe a strict framework but emphasised that fairness is a discretionary test, requiring careful justification and transparency. That discretion now firmly includes scrutiny of the terms of new money, where courts are increasingly unwilling to take the high costs of obtaining new financing at face value.

“It’s also clear now you’re going to need evidence as to the pricing of the new money, either expert evidence or market testing,” a second restructuring partner said. “If it's over market, you have to treat it as a restructuring benefit and justify its allocation.”

The court's scepticism extended to work fees too, which was not formally challenged in the case, but drew critical commentary from the judges. “They clearly hate them,” the partner added.

Reassessing value and alternatives

Valuation has shifted from a fight over quantum to a debate over distribution. Petrofac, and other recent cases, have focused on whether allocation of value among creditor classes is equitable.

“We’re now looking at it from the opposite end, where plan companies are having to justify why those recovering the most out of the value preserved or generated by the restructuring deserve that allocation,” Christopher Poel, senior knowledge lawyer at A&O in London, said.

Buckley added that the Court of Appeal considered that Petrofac failed to focus on what the post-restructuring balance sheet looked like and what financing terms the company could realistically obtain in that new reality.

The ruling also sharpened the court's expectations around a company’s articulation of its relevant alternative, which is the scenario creditors would face if the plan were not sanctioned. That alternative must be both credible and concrete.

“Your relevant alternative has to be clearly identifiable. It has to be quantifiable. It has to be something that the creditors can look at and the court can look at,” Elisabeth Baltay, a partner at Proskauer, said. She added that merely asserting a more favourable plan for certain creditors doesn’t make it a real alternative when a majority of creditors would not support it.

Market impact, strategic rethink

These clarifications arrive just as other contested plans, which are dependent on the Petrofac outcome, await judgment — most recently Madagascar Oil and Waldorf Production.

9fin covered here: Madagascar Oil’s sanction hearing and Waldorf’s sanction hearing.

The second restructuring partner described both cases as “racy”. “There’s a real prospect that one or both fail,” they said, especially in light of the Petrofac judgment.

Waldorf has already requested the High Court for the option to submit post-sanction hearing materials addressing the Petrofac decision, 9fin sources confirmed yesterday (3 July).

Dorian Lowell, head of restructuring at Gleacher Shacklock, said the Petrofac judgment could prove pivotal in the High Court's assessment of Madagascar Oil’s plan, particularly around BMK’s role as both shareholder and new money provider for the company.

Lowell said that the court will need to consider whether BMK’s retention of equity and intercompany loans on top of a 20% PIK rate is a fair allocation relative to the new money.

He added that fairness assessments post-Petrofac require clear, day-one valuation analysis, and a breakdown of returns distinguishing between those earned in a creditor’s capacity as a lender of new money and as an existing creditor.

Yet even as courts demand more evidence in restructuring plans, they remain careful not to draw red lines. “There’s significant uncertainty about what constitutes fair allocation because we don’t have a framework for figuring out what it is,” the second restructuring partner said.

Rather than setting hard restrictions, the Court of Appeal focused on curbing excess. Clare Cottle, partner at Proskauer, said the judgment signals a willingness to rein in overreaching terms, rather than prohibit certain restructuring tools outright.

Nonetheless, A&O’s Poel said that the courts are taking an increasingly close look at what’s on the table and holding plan companies to task.

The question is whether something goes too far, not whether it’s allowed in principle. But the court isn’t going to define where that line is, according to Proskauer‘s Baltay.

The judgment may lead to a market recalibration rather than a reduction in UK restructurings. “Everyone’s going to get their expert reports, do their market testing, and tighten things up,” Cottle said.

“However, London may eventually, if this trend gains truly significant momentum, lose some of its hereto unchallenged advantage as the restructuring venue of choice,” Cottle added.

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