The Group
Nostrum Oil & Gas PLC (the “Company”) is an English-incorporated company, with shares listed on the Main Market of the London Stock Exchange. It is the ultimate parent company of a corporate group (the “Group”) which operates an oil and gas business in Kazakhstan, with the Group’s sole source of revenue being an oil and gas field in Kazakhstan (the Chinarevskoye Field). The Group has encountered issues in recent times as production at the Chinarevskoye Field has been falling since 2017, leading to a significant write-down of the Group’s oil and gas reserves as the reserves have proven to be no longer technically or economically viable. The Group therefore began discussions with its creditors and its major shareholder as to the terms of a financial restructuring (the “Restructuring”) in May 2020.
The Existing Notes
The Group’s existing debt arises under two series of notes, both unsecured and listed on the Irish stock exchange, in a total principal amount of approximately USD 1.125bn (the “Existing Notes”). Interest has not been paid on the Existing Notes since 2020, and one series of the Existing Notes was due to be repaid in July 2022 (with the other falling due in 2025). Various forbearance agreements have been entered into between the Group and the holders of the Existing Notes (the “Existing Noteholders”) in respect of the Group’s failure to make these payments. Two Russian financial institutions, each subject to direct or indirect sanctions in the UK, EU, US and Guernsey, hold 7.1% of the Existing Notes (such institutions being the “Sanctions Disqualified Persons”).
The Existing Notes were originally issued by Nostrum Oil & Gas Finance B.V. (incorporated in the Netherlands) pursuant to New York law-governed indentures. With a view to being able to avail itself of an English law scheme of arrangement, the Group (with the consent of the requisite threshold of Existing Noteholders) amended the terms of the Existing Notes to: (a) accede the Company as a co-issuer of the Existing Notes (thereby making the Company jointly liable thereunder); (b) amend the governing law of the Existing Notes to English law; and (c) amend the jurisdiction provisions so as to confer jurisdiction on the English courts in relation to proceedings commenced by an obligor of the Existing Notes.
Terms of the Scheme
The Scheme proposed by the Company has the following features:
- Immediate moratorium on enforcement action by the Existing Noteholders (the “Scheme Creditors”), in order to provide the Group with a “stable platform” to obtain the licences required to implement the Restructuring (see below). The moratorium will remain in place until the earlier of: (i) the date on which the Restructuring is completed; and (ii) 16 December 2022, but can be terminated by a majority in value of the Scheme Creditors.
- Each Scheme Creditor (including the Sanctions Disqualified Persons) is entitled to receive a pro rata allocation of new English law-governed notes as follows:
- USD 250m new senior secured notes, bearing cash pay interest at 5% per annum and maturing on 30 June 2026 (the “New SSNs”). The New SSNs will be guaranteed by members of the Group and will benefit from first-ranking security over the Group’s assets; and
- USD 300m new senior unsecured notes, bearing cash pay interest at 1% per annum and PIK interest at 13% per annum, and maturing on 30 September 2026 (the “New SUNs”). The New SUNs will be guaranteed by members of the Group but will not benefit from security other than second-ranking security over certain bank accounts of the Group.
- Each Scheme Creditor (including the Sanctions Disqualified Persons) is entitled to receive a pro rata allocation of new shares issued by the Company, which will represent 88.89% of the fully-diluted share capital of the Company (the “New Shares”).
- Each holder of New SUNs will receive a pro rata allocation of new warrants issued by the Company, which will allow such holders to increase their shareholding in the Company to 90% (the “New Warrants” and, together with the New SSNs, the New SUNs and the New Shares, the “Scheme Consideration”) .
- The Existing Notes will be discharged in full.
Under the Scheme, the Scheme Creditors are expected to recover between 29.4% and 40% of the amounts presently due under the Existing Notes. In contrast, Grant Thornton’s comparator analysis showed that the Scheme Creditors would receive 16% in a planned insolvency or 10.6% in an unplanned insolvency. In the convening judgment, Meade J was clear that this comparison was “appropriate and credible”.
The Sanctions Disqualified Persons
The fact that the Sanctions Disqualified Persons are subject to direct or indirect sanctions in the UK, EU, US and Guernsey means that they (and, in some cases, others) are prohibited from dealing with the Existing Notes absent licences from the relevant authorities. This has resulted in a number of interesting features of the Scheme:
- Scheme voting:
- US sanctions legislation prohibits US persons from voting on the Scheme and receiving Scheme Consideration as a result of the Sanctions Disqualified Persons’ involvement in the structure. A licence from the US Office of Foreign Assets Control within the US Department of Treasury (the “OFAC Licence”) was therefore required before the meeting of Scheme Creditors to vote on the terms of the Scheme could be held, and even before notice of that meeting could be given to the Scheme Creditors.
- At convening stage, Meade J considered whether the Sanctions Disqualified Persons could be included in the same class as the other Scheme Creditors in a situation where the Sanctions Disqualified Persons are not able to receive any Scheme Consideration whilst sanctioned. David Allison QC (as Leading Counsel for the Company) submitted that this fact did not fracture the class on the basis that there was a fundamental distinction between: (a) a scheme conferring different rights on different groups of creditors (which would fracture the class); and (b) a scheme conferring the same rights on all creditors but with certain creditors being unable to enjoy those rights by virtue of “some personal characteristic that they possess” (which should not fracture the class). Meade J accepted this submission and agreed that this fact did not have an impact on the class composition analysis.
- The Sanctions Disqualified Persons were prohibited from voting on the Scheme. In considering at sanction stage whether the Scheme complied with relevant statute and whether the creditor class was fairly represented, Mellor J considered whether this prohibition had any impact. It was relevant that the Sanctions Disqualified Persons had signed the lock-up agreement in respect of the restructuring (in December 2021 before the applicable sanctions were imposed) and that, even if they had been permitted to vote on the Scheme and had voted against it, the required statutory majorities would still have been obtained. It was also relevant that turnout at the creditors’ meeting was high (85.11% by value) and that 147 of the 148 Scheme Creditors who voted on the Scheme voted in favour. Mellor J’s view therefore was that the statute had been complied with and the creditors’ meeting was “plainly representative of the class as a whole”.
- Scheme fairness: In considering whether to sanction a scheme of arrangement, the court looks at whether the scheme is one that an intelligent and honest man, acting in respect of his interests, might reasonably approve. Under the Scheme, the Sanctions Disqualified Persons are not able to receive the Scheme Consideration (including the lock-up fee) for as long as they remain subject to sanctions. Instead, the Scheme Consideration will be held on bare trust for the Sanctions Disqualified Persons (the “Holding Period Trust”), with an ability for such persons to claim the Scheme Consideration from the trust within 60 days of their no longer being subject to sanctions.
At sanction stage, Mellor J considered the treatment of the Sanctions Disqualified Persons under the Scheme. It was relevant that, as David Allison QC had submitted, the Holding Period Trust structure was an example of a concept that has been used in a number of schemes where a noteholder is unable to receive scheme consideration for regulatory reasons. It was also relevant that the trust structure did not put the Sanctions Disqualified Persons at any greater disadvantage than they already faced under the relevant sanctions legislation. Mellor J was therefore satisfied that the Holding Period Trust was a “fair and proper way” to deal with the Sanctions Disqualified Persons.
- Scheme implementation: In addition to the OFAC Licence, implementation of the Restructuring may require licences from the sanctions authorities in the UK, the Netherlands and Guernsey; such licences are required as the Restructuring will result in dealing with the Existing Notes, which are assets held by Sanctions Disqualified Persons. It is therefore an express condition precedent to implementation of the Restructuring that such licences are obtained, and the Scheme includes a moratorium on enforcement action to allow the Group time to obtain these.
Conclusion
The English court’s sanction of a scheme of arrangement where certain of the scheme creditors are subject to sanctions resulting from the war in Ukraine is a helpful development for debtors with sanctioned institutions in their capital structure, and indicates that the existence of sanctioned entities within the debt may not be an impediment to a successful restructuring where the relevant licences have been obtained. It will be interesting to see whether the outcome is any different in a scenario where sanctioned creditors are not supportive of the relevant restructuring or seek to challenge the scheme in some form.
Authored by Naomi Parmar.
