Announcement on Outline Terms for Initial Distribution of Interest - 29 March 2017

The Joint Administrators are pleased to set out below an update in respect of plans for a significant first interim distribution in respect of entitlements to statutory interest. 

This proposal is entirely separate and is not conditional on the other announcement of today’s date concerning the proposed settlement of the Waterfall III proceedings.  

The Joint Administrators would like to receive creditor feedback concerning these outline terms. In summary, these terms, if approved, will provide a framework for senior creditors to benefit from a material interim distribution of statutory interest notwithstanding the continuing Waterfall I and II proceedings.

A general update on progress in the Administration will be made in our creditors’ webinar scheduled for 27 April 2017 and in our Seventeenth Progress Report (for the period 15 September 2016 to 14 March 2017) which will be published in April.  If appropriate, we will make reference to creditors’ feedback (if any) during the webinar.

Outline terms for an interim interest distribution delivered through a CVA

The Joint Administrators have been progressing a proposal to make a significant first interim payment of creditors’ basic entitlements to Post-Administration Interest by means of a Company Voluntary Arrangement (“CVA”) and plan to formally put a proposal to creditors after the handing down of the Supreme Court judgment on Waterfall I, assuming that judgment finds the Subordinated Debt to be subordinated in the same way that the Appeal Court did.

In the meantime, creditors are provided below with a summary of the proposal.

Using a CVA, the Joint Administrators would propose to distribute approximately £4.5bn from LBIE’s realised Surplus funds to unsecured creditors in respect of their entitlements to statutory interest. 

The distribution to unsecured creditors would be subject to the following headline terms.

• All unsecured creditors would be entitled to vote on the proposal and therefore as a precondition to formally making the CVA proposal, the Joint Administrators would require binding commitments from all the Respondents to Waterfall II proceedings to vote in favour of it.
• The CVA would facilitate the payment of an amount of statutory interest (ie a Minimum Interest Claim) in priority to all other entitlements to statutory interest. Payment of further statutory interest entitlements (ie an Additional Interest Claim) would be dependent on the outcome of the various Waterfall proceedings.

(i) The Minimum Interest Claim would be calculated as follows:

(a) statutory interest accrued from the date of administration until date (or dates) of payment;

(b) applicable rate of 8% simple; and

(c) this interest accrues on the basis that when the admitted claim was paid by the Joint Administrators, its principal was paid before interest.

(ii) Whilst the High Court judgment in Tranche A of Waterfall II held that statutory interest accrues from the date of administration and not the date of termination of the relevant contract, given that the judgment is subject to appeal, statutory interest accrued from the date of administration to the effective termination date will be held in reserve pending the final resolution of this issue (by the Courts or otherwise).

(iii) Any Additional Interest Claim would be subordinated to the Minimum Interest Claim and would represent all other entitlements to statutory interest in excess of the Minimum Interest Claim dependent on the resolution of the Waterfall proceedings (by the Courts or otherwise) of all matters relating to the entitlement and calculation of statutory interest including:

(a) the contractual entitlements to interest at a rate higher than the statutory rate of 8% under ISDA master agreements; and

(b) the application of the Bower v Marris principle to statutory interest.  

• Distributions of Minimum Interest would be made in accordance with the terms of the CVA.  No distributions of Additional Interest Claims would be made under the CVA.   
• The CVA would not affect any rights a creditor of LBIE may have in respect of non-provable claims.  Creditors would however need to agree their Minimum Interest Claim as would be calculated in due course by the Joint Administrators.
• In order to become binding the CVA would need to be approved by the following:
  • 75% in value of unsecured creditors voting at the CVA meeting; plus
  • 75% in value of creditors with entitlements to contractual interest under ISDA Master agreements; and
  • A majority in number of all creditors voting at the CVA meeting.
• It is anticipated that votes would be calculated by reference to the value of creditors' surplus entitlements, subject to a prescribed calculation methodology. 

With the appeal in relation to withholding tax currently pending, the Joint Administrators are in discussion with HMRC about a temporary solution that would not in itself delay the distribution of interest.  These plans and discussions are ongoing but, out of an abundance of caution, this could result in the reserving or depositing of in the region of 20% of a creditor’s Minimum Interest Claim distribution, representing its hypothetical exposure to withholding tax (and overdue interest), regardless of the creditor’s own tax status.

The Joint Administrators plan to make this proposal because it would facilitate a significant interim distribution of statutory interest entitlements whilst maintaining a substantial reserve for Additional Interest.  No compromises would need to be made at this stage in respect of higher rate interest claims albeit payment of higher rate interest claims (if any) and entitlements under the principle of Bower v Marris (if applicable) would have been subordinated to the basic 8% per annum rate. 

It should be noted however, that if current judgments with respect to the matters referred to above are reversed, it is possible that the reserve for Additional Interest would be insufficient to pay Additional Interest in full. 

For all queries relating to the content of this update, please speak to your existing LBIE contact or send your enquiry to the Communications and Counterparty Management team at unsecuredcreditors@lbia-eu.com.

LBIE and its Joint Administrators, and their respective officers, employees and agents disclaim any liability which may arise from this communication, or any other written or oral information provided in connection herewith, and any errors and/or omissions herein or therein.