Argentina’s out-of-court restructuring proceedings (APE) after 20 years

By Tomás M Araya (BOMCHIL)

The legal framework

In Argentina, companies in distress seeking to restructure their financial obligations have the option to pursue: 

1. an out-of-court workout, that – as any contract – would produce effects exclusively among the signing parties;  
2. an acuerdo preventivo extrajudicial (APE), a hybrid procedure foreseen in Articles 69 to 76 of the Argentine Bankruptcy Law N° 24,522 (the “ABL”) that despite its contractual nature can – upon court approval – extends its terms to non-signing parties; and  
3. a reorganization proceeding (“concurso preventivo”), a full and lengthy court proceeding extensively regulated in the ABL, in which a receiver is appointed to supervise the company´s management. For a restructuring plan to be approved by the court, the same double majority is required for both the APE´s and the concurso preventivo’s restructuring plans: more than 50% of the creditors (headcount) representing at least 2/3 of the unsecured liabilities (capital). 

The APE became attractive in 2002, when Argentina – in the middle of a severe social, economic, and political crisis – amended the ABL[1] to incorporate relevant changes to the already existing but rarely used APE. Indeed, such amendments radically modified the structure of the APE, by turning it from a pure contractual instrument into a hybrid instrument, which allowed it to keep its contractual and flexible nature but also to get – upon court approval – the best of the non-contractual world, that is the extension of its terms to non-consenting creditors without the need of entering into a full “concurso preventivo” proceeding, and therefore avoiding the negative stigma of bankruptcy. 

In fact, one very important feature of the APE is that it does not require that the company recognizes being insolvent, as it may also be used in a situation of economical or financial distressed prior to insolvency. Notwithstanding this, debtors in Argentina fail to tackle financial distressed in due time, which makes more difficult to restructure viable business efficiently.

A review of the APE’s effectiveness

Over these years, the APE has proved to be an important instrument for large companies in financial distress to adjust their financial liabilities, particularly with debt securities (“obligaciones negociables”) issued under the Negotiable Securities Law N° 23,576 (“LON”)[2], either in Pesos or in U.S. Dollars.

Different from the traditional approach that considers the “concurso preventivo” and the APE ought to be “universal” proceedings (i.e., a proceeding that involves all of the debtor´s obligations), courts have accepted that the APE can be used as a mechanism to adjust some of it (notably, financial obligations), leaving unaffected other obligations of the debtor (i.e. with suppliers, commercial counterparties and employees, among others).

The APE has worked reasonably well in the case of large debtors with excessive financial debt not only actively, but also passively, as an inducement to incentivize participation of creditors, thus facilitating successful debt restructurings. A template of the APE agreement would normally be included as an exhibit with the exchange or consent solicitation documentation, and consenting bondholders – by tendering their bonds – would agree to grant a proxy to sign the APE, if the company decides to ask for court approval of the restructuring plan contained in the APE, provided that the required majorities (2/3 in amount and more than 50% in person) have been obtained.

Moreover, when debtors manage to obtain high level of support (i.e. 95% or plus) in their exchange offers or solicitation of consents, companies have even decided not to proceed with the APE and only conclude the agreement as an out-of-court workout, leaving unaffected the rights of non-consenting bondholders. 

In the case of non-listed companies with commercial liabilities or bank debt – without the scrutiny of the capital market laws and obligation to disclose material facts that may prejudice the trade of listed securities – the normal interaction to deal with the financial crisis has normally led the company to postpone the use of the APE to overcome the distressed scenario. 

Further, the instrument has showed its faults and led to certain abuses on its application by small and medium enterprise (SMEs) debtors, mostly due to its limited regulation and lack of control and supervision.  

On the other hand, in the case of large companies in distress with debt securities issued domestically and in foreign markets (normally pursuant to Rule 144-A[3] and Regulation S[4] of the Securities Act), the interaction between the securities laws of both the United States and Argentina has worked generally well to minimize the chances of abuse by the debtor.

Necessary reforms to enhance the APE

It is generally suggested by the professional and academic community that the ABL should be amended in the short term to catch up with the most updated bankruptcy laws of the world[5]. Some of the proposed amendments, amongst many others, refer to: 

• The fact that currently in Argentina when a large company enters financial distress and the relevant parties fail to reach an agreement on how to restructure, the passing of time heavily worsens the company’s financial situation and creditors’ only option is to file for a bankruptcy liquidation petition (“quiebra”) of the debtor, which forces the debtor to file for “concurso preventivo”, which has proven to be an inefficient restructuring tool for large companies. To tackle this issue, the law should incentive debtors to initiate out-of-court negotiations at an early stage and grant a stay once the debtor and a relevant percentage of creditors (e.g., 50% in capital) have reached a preliminary agreement on a proposed restructuring plan.
• The ABL should also authorize creditors (and not only debtors) to present restructuring plans upon a distressed situation of a company. Currently, the possibility for creditors to present restructuring plans is limited to a very exceptional scenario (Section 48 of the ABL) that comes into effect once the debtor´s exclusivity period has elapsed and the required creditors majorities have not been obtained, which normally takes years as from the filing date [6]. Therefore, any creditor should be entitled to propose a restructuring plan, present it to the other creditors and if the required majorities are obtained, require court homologation.
• Likewise, the ABL should expressly recognize that in the case of the APE the debtor would be entitled to classify the creditors in classes and that the required majorities should be calculated by each class in the case of consenting plans.
• Further, the ABL should urgently recognize a super priority to the “fresh money”, as well as to the “interim” financing. This recognition should apply in all reorganization proceedings (APE and “concurso preventivo”) as well as in bankruptcy liquidation (“quiebra”) provided certain requirements are fulfilled.
• In the same line, the ABL should allow the reorganization of the business by an expedite sale of its assets during the initial phase of the reorganization proceeding, under court supervision. The paradigm that the sale of assets should mainly take place during the liquidation phase (“quiebra”) has long been abandoned in the jurisdictions that have the most updated bankruptcies laws, which follows UNCITRAL and World Bank recommendations. Currently, it is essential to provide the affected parties (company, management, shareholders, creditors) all possible tools to achieve the most efficient restructuring in the earliest possible time. And a transparent and competitive sale of assets at an early stage should play a relevant role in the restructuring system, alongside with the hybrid proceedings (APE) and the full reorganization proceedings (“concurso preventivo”).
• Finally, in case of listed companies in distress, it is important that the Argentine governmental regulator (Comisión Nacional de Valores, CNV) passes an exception to the obligation to launch a mandatory tender offer (“oferta pública obligatoria”) once a change of control has occurred in a listed company as a result of a restructuring plan approved by the court (APE or concurso preventivo proceeding) in which the creditors have accepted to swap their credits for new shares. Currently, this exception is not recognized under the Argentine Capital Markets Law nor the CNV’s regulations, therefore making more difficult to implement a restructuring plan for listed companies in distress.

Conclusions

In conclusion, the APE has been an important tool for distressed Argentine companies over more than twenty years. Despite its flaws, the APE is reasonably well equipped for large companies in financial distress with bonds listed in the markets and adequate financial statements. It is time now to pass certain reforms that would incentivize its use by this type of companies, particularly in a pre-emptive way.

* This article was first published in INSOL’s I-Read November 2023 Edition.

[1] Law N° 25,589, published in the Official Gazette on May 16, 2002.

[2] https://www.argentina.gob.ar/sites/default/files/law_no._23.576.pdf

[3] Rule 144-A allows private resales of securities to qualified institutional buyers, which are buyers that invest at least $100 million in securities of issuers that are not affiliated with the entity. See 17 CFR § 230.144A - Private resales of securities to institutions. | Electronic Code of Federal Regulations (e-CFR) | US Law | LII / Legal Information Institute (cornell.edu).

[4] Regulation S consists of five rules: a General Statement (Rule 901); Definitions (Rule 902); an Issuer Safe Harbor (Rule 903); a Resale Safe Harbor (Rule 904); and Resale Limitations (Rule 905). See https://www.law.cornell.edu/cfr/text/17/230.901

[5] The recent EU Directive on restructuring and insolvency 2019/1023 of 20 June 2019 (https://eurlex.europa.eu/eli/dir/2019/1023/oj) could serve as a guide for such purpose, particularly for large companies in distress.

[6] Basically, Sect. 48 of the ABL opens a “second round” proceeding during which any third party (including the debtor) is entitled to propose a new plan to the admitted creditors. If the new plan obtains the required majorities, then it has the right to receive the equity interests of the company, with a payment to the equity holders in case of a positive value of the equity.