Out-Law / Your Daily Need-To-Know

Out-Law Analysis 4 min. read

Nostrum case offers blueprint for sanctions-compliant bondholder restructurings

A recent restructuring of Nostrum Oil & Gas PLC provides a blueprint for others to restructure bondholder arrangements in a way that complies with UK financial sanctions.

It should be easier, and quicker, for others to follow Nostrum’s lead now that a general licence has been issued by the UK’s Office of Financial Sanctions Implementation (OFSI), which provides an exemption from financial sanctions prohibitions in respect of bondholder restructurings.

Bondholder restructurings and sanctions

The UK Russian financial sanctions regime includes a general prohibition of dealing with frozen funds or economic resources belonging to or owned, held or controlled by a ‘designated person’, or making them available to, or for the benefit of, a designated person. 

The list of ‘designated persons’ regularly expands as more individuals and entities get added. The number of individuals and entities added to the UK’s list of designated persons has increased by 355% in the last year, bringing the total number of designated persons to approximately 16,500. However, the number of individuals and entities caught is considerably higher given that they extend to entities owned or controlled by designated persons. A detailed forensic exercise is required to establish who the legal and beneficial owners are of a particular entity to assess if they are caught by financial sanctions prohibitions.

It is clear that a typical bondholder restructuring, effected by a scheme of arrangement for example, will involve ‘dealing’ with the bonds for the purposes of the sanctions legislation, whether that is by cancelling a bond and issuing by way of consideration equity or a new bond, warrants or cash for example, or just by amending certain terms of a bond. 

This was the case highlighted in the recent restructuring of Nostrum Oil & Gas PLC (Nostrum), which proposed a scheme of arrangement in relation to two series of notes with an aggregate principal amount of approximately $1.125 billion. 

The Nostrum case

Nostrum was aware that certain scheme creditors were the direct or indirect target of sanctions in the US, EU and UK which would have prohibited Nostrum and others involved in the structure, such as the trustees, from dealing with the notes. 

Nostrum was only aware of the existence of the sanctioned bondholders because those entities, prior to their designation, had signed a lock-up agreement. Had they not done so, Nostrum may, due to the notes being issued in the typical form of a global note and traded through the relevant clearing system, have been unaware at the time that some of its notes were held by designated persons. This highlights how the sanctions regime could touch on all bondholder restructurings, even if the issuer is not at the time of promoting the restructuring aware that any of the bonds are held by designated persons.

In order to deal with the restrictions under the sanctions regime, Nostrum devised a structure to ensure that all new securities to which designated persons would otherwise be entitled under the scheme should instead be transferred to a trustee to hold in a holding period trust and remain there until such time as the designated persons could provide evidence that they were no longer caught by financial sanctions prohibitions. However, that structure at the time still required a specific licence from the UK’s Office of Financial Sanctions Implementation (OFSI) before it could be implemented. This was because the cancellation of the old notes and the transfer of the new securities and cash into the holding period trust still constituted a ‘dealing’ in the frozen notes.

Application to OFSI for a licence was issued in July 2022. However, given the backlogs at OFSI, licence to deal with the assets in the proposed manner was not provided until January 2023. In that intervening period, Nostrum was unable to complete its financial restructuring, despite the scheme being approved by the requisite proportions of creditors and sanctioned by the court in August 2022.

A new general licence for bondholder restructurings 

OFSI has the power under the Sanctions Act to issue general licences for country sanctions that allow multiple parties to undertake specified activities that would otherwise be prohibited by UK sanctions legislation, without the need for a specific licenceas long as conditions attached to that licence can be met.

On 28 March 2023, perhaps in light of its experience in relation to the Nostrum restructuring, OFSI issued General Licence INT/2023/2824812 under regulation 64 of the Russia (Sanctions) (EU Exit) Regulations 2019 (the bondholder general licence) to allow, subject to certain conditions, transactions related to bond amendments and restructurings involving bondholders who are designated persons.

The terms of the bondholder general licence allow an issuer which considers that it may have bondholders who are designated persons and a UK person – i.e. a UK national or a company incorporated in any part of the UK – to effect a bond restructuring or amendments agreed between itself and its bondholders provided that:

  • no funds or economic resources, or any legal or equitable interests of rights therein, are made available, directly or indirectly to or for the benefit of a designated person; and
  • insofar as a designated person would have been entitled to any such funds or economic resources under the terms of the bond restructuring or amendments, such funds or economic resources are frozen and not made available to that designated person until such time as they are no longer designated.

The effect of this therefore is to allow bondholder restructurings that adopt a similar structure to that implemented in the Nostrum restructuring to proceed with certainty, and without seeking a specific licence from OFSI, provided that they comply with the bondholder general licence, which includes reporting and record keeping requirements. Given the delays that are common at OFSI, and the potentially serious implications of such delays for restructuring processes, this is very welcome news for practitioners and bond issuers alike.

Pinsent Masons advised Nostrum in relation to sanctions issues arising on its restructuring.

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