Evolution of Australian restructuring: catch the falling blade

We have come a long way from punishing debtors with prison. Over the past decade or so, the trade-off between fixing penalty on unlucky defaulting debtors (while increasing the penalties on any misconduct of debtor and promoter) and the encouragement of entrepreneurial zeal to grow economic wealth has seen a lot of debate, planning and law development put into framing laws to facilitate business renewal, restructuring support and turnaround planning and results. Safe harbour reforms to protect directors trying to trade out of difficult circumstances with proper plans are an important change in this culture.

Where is Australian restructuring in its evolution from unplanned enforcement-like strategies to restructuring and turnaround philosophies? There are four important trends which point the way to its future form.

Leveraged financial instruments opening new opportunities

The leveraged financial instruments favoured by alternative investors (such as private equity, hedge funds) when purchasing private and public enterprises over the past decade are starting to reveal some interesting restructuring opportunities to facilitate informal restructures and turnaround.

Finding liquidity gaps

Issuers and equity sponsors are increasingly engaging experienced legal and financial advisors to identify liquidity gaps within leveraged instruments – lender liability management (LLM) strategies are not always aggressive and do not need to result in litigation, the latter not always helpful to a distressed enterprise.

LLM planning begins with a review of contractual permissions around plant + asset build up via new asset leverage. Each situation is fact-specific, depending on whether cash restriction around approved purposes or pre-agreed spend limits must or may not need to meet financial covenant tests, especially interest coverage ratios and debt service ratios. These may be tested months after business performance drift becomes evident in management accounts or daily cash cycles.

If advisors identify “buckets” or permissions to engage “up-tiering”, “drop-down”, “double dip” or similar strategies, liquidity may be introduced into distressed situations with new forms of debt. While these remain relatively aggressive strategies, other permissions may offer alternate ways to improve liquidity over a revenue-fall period (for example, “stacking”, “reclassification”, sale and lease backs, new asset backed lending, receivables financing and other “cash management” strategies).

Similarly, strategies within covenant-lite and covenant-loose instruments often develop around the terms of equity cure periods, resets of EBITDA calculations (many leveraged products contain bizarre carve-outs), tighter financial accounting practices, better information exchanges, stronger reporting and monitoring results against forecasts, with inducements when milestones are met and further restrictions around cash when actual results underperform against forecasts.

A good LLM strategy is one that enables the debtor to engage a turnaround plan expected to lead to better business outcomes. These may range from closure of poorly performing business units, workforce planning, renegotiations with counterparties, sale and merger transactions, new investment, deleveraging or some other form of distressed driven control transaction – each situation differs.

As a result, to raise liquidity, Issuers/Sponsors are increasingly focusing on new debt basket restrictions around asset leases, P+E build up, re-allocation of risks with customers to release bonded cash and permitted asset sale arrangements.

Outcome Statements

Sophisticated lenders are also increasingly relying on "Outcome Statements" prepared by putative controllers (identifying "likely loss" scenarios on an appointment) to guide negotiations with sponsors and new refinancers. While senior debt holders are generally reluctant to accept financial write-offs/compositions (often because these trigger reporting obligations and "market value" testing of credit portfolios), many private capital funds have far more flexibility and willingness to enter into different arrangements if lenders believe in the restructuring or turnaround story.

To provide one example, in one recent situation, senior lenders rolled a portion of senior positions into longer termed equity-like instruments. In return for ceding seniority, lenders received partial paydowns from incoming financiers, agreed waterfalls around future asset plans and some altered economics. The outcome was creative and ensured better outcomes than anticipated in an enforcement.

Making the decisions

There's also a shift from more traditional steering and coordination committees (SCC) in negotiating confidential information flows from the issuer/debtor and in negotiating restructuring proposals. With the growth of credit issuance, especially Nordic bonds, TLBs and some forms of syndicated credit, across a range of holders, lender "ad hoc committees" (AHC) and restructuring support agreements are increasingly replacing them.

The AHC may then assist in the consent solicitation process with fellow senior lenders and in facilitating new primed debt into the company to facilitate some near-term transactions such as signing off on a restructuring plan, shutdowns or litigation. While SCCs are typically led by working capital lenders and/or credit arrangers, the AHC seeks information and a seat at the table through negative control, for example, the capacity to provide a blocking stake to restructures. AHCs typically retain legal and financial advisors, the costs of whom are paid by the issuer/debtor under security protection/cost provisions within financial instruments.

Cross-border capital structures needing cross-border solutions

Australian enterprises with complicated capital structures involving US lenders may be guided to undertake deleveraging transactions through a concurrent US Chapter 11 and Australian process. One of the advantages of Schemes over Australian DOCAs, for example, is that they can also be used to effect third party releases, in conjunction with a Chapter 15 recognition process in the US. Genesis Care, Jervois Global and Exactech each are part of a trickle trend of Australian companies undertaking primary restructures via US Chapter 11 Bankruptcy Act processes.

Jervois Global, an Australian ASX-listed company with operating facilities in the US, Norway and developing projects in Brazil and Canada, negotiated a standstill and then new capital and deleveraging arrangements with its US-based lender, which insisted on all transactions being implemented via a US-style pre-packaged process. The filing, which was negotiated over the Christmas 2024 period, ran for two months with orders being made in March 2025. The transactions approved by the US Court were then executed in Australia via a Voluntary Administration/DOCA process which effectuated in May 2025.

In the implementation of the Australian aspects of another Chapter 11, Exactech applied Article 20 Model Law recognition principles and sought Australian orders recognising the Chapter 11 orders by way of a concurrent process. This is a way to preserve the wide moratoriums under the US Bankruptcy Code, although it leaves a gap for local Australian senior lenders to enforce security rights not expressly compromised, or restructured, in the US proceedings. In contrast, the DOCA used in Jervois enabled the company to address some of the peculiarities of the US system (which allows certain non-consenting creditors to opt out of compromises on certain terms) and to achieve a high degree of certainty in the release and indemnity features of the company's arrangement with its senior and other lenders. The US-style process does encourage active negotiations between the tripartite of senior lenders, junior creditors and the company. This reduces the disruptor risk inherent in some forms of DOCA structuring.

Some restructures, especially those with incumbent private equity funds, can be pragmatically resolved with a “keys back” approach to negotiations, although care should be exercised when considering, for example, GenesisCare, Camp Australia and other high-profile “debt for equity” precedents. The practical reality is that an existing sponsor will demand something for those "keys", with the ask ranging from costs recovery, insurance, long-term earn-outs/sub participation or economic instrument rights and, in more extreme cases, some form of payment for equity transfers (typically, 5-15% of post-restructure equity).

Both structures have pros and cons likely to be further explored in future restructures. This will not become a go-to strategy given the cost of US Chapter 11 processes. There are also some practical problems for directors, as indemnities and releases are suspended until the end of the process rather than the start of the process (which means directors take on class action risk in executing on a Chapter 11, not knowing if that process will be sanctioned). Otherwise, section 444GA (administration) and "distressed disposal" (receivership) options, as well as Schemes, remain open processes to facilitate equity transfers to deleveraging creditors.

Private capital as the engine of innovation

We've already seen that private capital has been important in finding new solutions to complex cross-border insolvencies and restructuring with "keys back". This is not its only contribution, of course – its innovations in restructurings offer more final solutions than what we may have seen in simpler “amend and extend” transactions.

In recent deals, sponsors have offered everything from equity cushions through to pari passu rollover of rights and subordination. We have not seen such altruism come without some quid pro quo, sometimes in the form of amend and extensions, amortisation or coupon deferral or compensation compositions, or just in the form of agreed fees. Sponsors' run-off time clocks allow enterprise liquidity to reduce (calling on directors to take risk via safe harbour protections), utilise offshore relationships with head office financiers and take creative negotiating positions. Lenders and issuers who do well with some of the larger equity sponsors are those who build collaborative plans and keep a unified approach. Star and Healthscope are, so far at least, examples of where a strong and united lender side approach has dealt equity sponsors into supportive positions. Of course, unlike Whyalla, there was no Government on side to change the law nor, as in Rex, to swap out the sponsor.

Private capital is also facilitating the evolution of debtor-in-possession (or "dip")-type financing, with a growing willingness of senior lenders to accept rescue finance on a super senior basis – for example, accepting that "last money in is first money out", and for new money, in the form of primed super senior to be re-designated for some growth part of the restructuring plan. The lender provides time to execute on such plans, providing the liquidity to do so in return for strong economics matched to some repayment event.

Interesting and untested possibilities emerging in Australian restructuring

Many distressed, special situations and opportunistic funds in the leveraged loan market focus on sacred provisions, distressed disposal regimes and lender liability issues. Uptier priming, “drop downs”, “exit planning” and other “positioning enhancement techniques” or "lender management" (“lender-on-lender violence”) techniques, can come into play when dealing with some forms of financing instruments, especially within structurally disaggregated enterprises. The jury is still out on the extent to which these can or will be used in Australian law-governed debt documents.

Uptiering

Uptiering is a technique that avoids pro rata repayment requirements in common security instruments, relying on permitted dealing restriction carve-outs. While the particular way in which the up-tier was undertaken in Serta Simmons was overturned on appeal, Mittel, decided by a different Court on the same day, upheld an uptiering transaction. Interestingly, Mittel involved non-cash consideration, so has some application in situations involving financial instruments containing distressed disposal provisions. We are presently undertaking such a matter.

Serta and a majority of its lenders argued that a "market purchase" exception enabled an exchange of existing debt for new super-primed debt. The Appeal Court decided that, on the facts, the purchase had not been "open" nor "market" but was a private transaction. Hence, while the concept of uptiering remains, lenders and sponsors need to closely follow the form of the instrument for the exchange to be upheld. According to recent Harvard data, some 85% of post-Serta financial instruments prohibit these forms of transactions. That’s to say, the prohibition applies to a specific form of "market" transaction, though our view is that workarounds are in play as we write.

Dropdowns

The "dropdown" aggressively targets contractual financial instrument permissions to transfer collateral to unrestricted subsidiaries (often set up for that sole purpose), not bound by loan covenants. Once assets, such as technology rights, other intellectual property, key maintenance or serving rights or some other ancillary right are transferred, the covenant entity can carry on business, using this collateral to secure new debt. "No-IP transfer" clauses however are becoming standard, leaving the future of dropdowns unclear.

Double-DIP

Most properly drawn financial instruments block this fairly simply form of transaction, where a new SPV is set up to borrow from a new lender, using a guarantee of the parent (a covenant restricted entity) to provide the "first DIP" security (the guarantee). The SPV then borrows funds from the first DIP lender, lending those funds to the parent, creating a second asset in the form of the intercompany loan owed by the parent to the SPV (the "second DIP"). Certain parent liabilities are then created which, while subordinate within most senior lending facilities, can be problematic in any restructuring. Another version of this strategy is for new or existing financiers to fund some critical asset sale, turnaround implementation plan, sale and leaseback of a fulcrum asset, finance of critical path litigation or some other pre-approved (via the lending group) new finance. This is typically super-primed, so it must retired as part of any restructuring arrangement and thus handing the primed lenders strong positions in restructuring negotiations.

Leasing exceptions

A leasing exception has some similarities with the "Nieman Two Step", where new lenders consider liquidity options arising from the financing of permitted assets, for instance plant and equipment needed to perform customer contracts. Sometimes, these new assets can be the subject of asset backed lends, which then means critical assets for continuing the business lie outside the senior security packet.

The last year has seen lenders taking a sharper focus on amendment provisions (some of which require only 50% majority) to make significant amendments to loan documentation.

DOCA

Deeds of Company Arrangement are attractive tools in Australian restructuring contexts owing to their flexibility and adaptability. Australian courts however are scrutinising DOCAs more rigorously, particularly where they appear to sidestep legitimate creditor claims. This is a whole new topic, for the next From Red to Black – stay tuned!

Australia’s evolving restructuring landscape

The Australian restructuring landscape has undergone significant change in the past decade, and, with the increasing participation of alternate debt providers as sources of both new and rescue liquidity, it will continue to do so.

Alternate debt providers behave differently to traditional Australian banks and have often had experience with creative liability management techniques used in restructuring transactions in the US and Europe. Though the jury is still out on the extent to which these can or will be used in Australian law-governed debt documents, these funds introduce new levels of unpredictability and dynamism which will increasingly impact Australia workout situations. Healthscope and some other recent distressed credits will no doubt start to reveal new techniques and approaches in coming months.

On the other side of the coin, safe harbour reforms have had a stabilising impact, giving directors space to focus on achieving a consensual restructuring (and avoiding the value-destruction associated with a formal insolvency process) rather than be distracted by the spectre of personal liability. ASIC’s recent practical guidance on what a “best practice” safe harbour process looks like in practical terms is a welcome development in this regard.

While everyone seeks an easy return on investment, sometimes more creative strategies are required to protect credit values. Each situation differs, each strategy can become complicated and each solution may need to engage with competing strategies. This article delves, ever so shallowly, into some of the emerging techniques, approaches, analytics and outcomes that may apply to your situation. As with all specialty situations, better outcomes are best achieved by engaging those with the networks, market standing and experience to protect the credit.

Getting it right, with the right team, should ensure the falling blade never cuts to blood.

_Disclaimer

_{Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.}