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Jul 30, 2009

Out of the bunker


Restructuring the Dominican Republic's biggest-ever bond issuance was always going to be a challenge - so step number one was to reconvene the legal teams, finds David Thorley

When Dominican golf and beach resort company Cap Cana decided to restructure US$250 million of bonds issued in 2006 - to date still the country's largest-ever corporate bond issuance - they turned to the guy who structured the initial deal, Simpson Thacher & Bartlett LLP partner Jaime Mercado. He then set about putting the old team back together.

Cap Cana is a luxury resort run by Grupo Abrisa in the east of the country, and the cash was raised to build and develop the project's villas and golf courses.

The deal was notable for its complexity, particularly for the Dominican Republic. Rather than securing bank loans for the build and then refinancing with a bond offering after completion, which was more usual for construction projects, the client and its legal team decided to skip the first stage, requiring a structure characterised by, in Mercado's words, "creativity and complexity."

Likewise, Pedro Gamundi of Squire, Sanders & Dempsey Peña-Prieto Gamundi, who worked for the banks on the first issuance, remembers it as "an extremely complex, sophisticated transaction, with a rather innovative structure."

So when Cap Cana came to restructure those bonds it seemed logical to try to recreate the team that created that extraordinary offering.

Simpson Thacher has worked for Cap Cana since the project's inception in 2001, and Mercado says the primary benefit for the client of reassembling the cast list from the first transaction was "that you have teams that understand the company, the collateral structure and who are familiar with the complexities of the diverse jurisdictions."

"From a cost perspective, that makes the process more streamlined, which tends to reduce legal expenses," he adds.

Gamundi adds, "With this approach Cap Cana and the bond holders avoided what would have been an otherwise long and costly learning curve in finding replacement counsel".

Although the restructuring boasted a good number of the same personnel as had worked on the offering the two counsel lists reveal a good deal of movement of lawyers between firms, and of firms between clients.

Mercado added to his Dominican co-counsel, with Mejía, Armenteros & Abreu retained from issuance to restructuring, while Cabral, Senra & Consultants, a firm formed by two members of Cap Cana's in-house team, also joined the developer's team in renegotiating the bonds. The firms divided the work drafting local contracts, in large part because of the volume of work to be done in a short time frame.

"Cabral Senra is a firm of very recent vintage," says Mercado, adding that its partners, Elaine Senra and Sharon Cabral, "were integral to the issuance, and essential to getting this one done on such an accelerated calendar".

On the banks' side, Gamundi was a constant feature, as was New York lawyer Marc Rossell. In 2006 Rossell was a partner with Thacher Proffitt & Wood LLP, although he relocated to Chadbourne & Parke LLP in March last year. As the nature of the deal changed, so did their client; they represented an ad hoc committee of bondholders this time around.

Rossell says, "Given the timing of the deal and the complexity of the documentation, the bondholders wanted someone who knew the background to the issuance and the documentation."

Citibank acted as trustee to both transactions, receiving counsel from Thacher Proffitt & Wood LLP in the issuance, and in the restructuring from members of the Latin America team that decamped to Sonnenschein Nath & Rosenthal LLP when Thacher collapsed earlier this year.

Dealer manager for the restructuring was the Weston Group, which brought Mayer Brown LLP into the transaction for the first time, while co-trustee Stewart Title hired Greenberg Traurig LLP in the US as well as young Dominican firm Saxum Legal.

Saxum was founded in 2007, though partner Monika Infante worked on the 2006 issuance, representing Bear Stearns as an associate with Squire Sanders.

Troubled luxury

The real estate and tourism sectors look very different in 2009 to the three previous years, however. In late 2007, Cap Cana planned to raise cash through a further US$800 million bond issue, which was stymied by declining conditions in the global capital markets. Since then, those conditions have got sharply worse, meaning tapping the markets was not an option.

Like other companies in the sharply declining sector, Cap Cana got over budget, couldn't meet some costs, and decided the route to take was to ask for different terms from its creditors to ease cash flow issues.

Pedro Gamundi endorses that. "In my view, the restructuring was brilliantly conceived to succeed in an extremely adverse and challenging environment: on the one hand, it allows the company to move forward with the construction and development of the project, and to gain vital time hoping there is a favourable turn in the world's economic conditions; on the other, it still offers an attractive package to international investors in the notes," he says.

Mercado adds that the global economic crisis affected more than just the deal's provenance. "The design of the new bonds that were offered in the transaction had to take account of worst-case scenarios as well as immediate and potential future liquidity concerns."

And having presented a restructuring on terms which he sees as "quite favourable to the bondholders," Mercado speculates, "I think that the crisis also influenced the level of participation by bondholders who might have taken a different view if the economy was in better shape."

It seems to have worked - on 8 May, 95 per cent of the Cap Cana bondholders approached agreed to exchange the 9.625 per cent, seven-year bonds they bought in 2006 for newly issued bonds maturing in 2016 at 10 per cent.

Mercado says the legal issues involved were quite similar to those in the original transaction, with the obvious added requirements of a restructuring: amending the covenants of the original bonds, drawing up the rules of the exchange, and ensuring the new terms comply with US securities laws and Dominican law.

The challenge, he says, was "superimposing a new structure on the existing bonds, which were already legally complicated".

"Making sure that each piece of the new transaction worked correctly was a major consideration, especially when we had to be mindful of the impact that might result on existing bonds," he adds.

From the other side of the table, Gamundi agrees, saying his priority was to "make sure that the rights of the remaining original note holders would be respected, and the holders of new notes and recovery notes were adequately secured".

Rossell says negotiating with creditors was somewhat unusual, explaining, "There weren't really negotiations between the company, its advisers and a recognised committee in a sit-down discussion; it was more a series of one-on-one communications among the company, its advisers, the holders and ourselves".

His main challenge, he says, was "talking to a bondholder group, some of whom wanted to retain their ability to trade, and so didn't want too much information, and some who were willing to take the restructuring and dive more deeply into the details."

"It's always a challenge to work out who's going to be in the first group and who's going to be in the second, and how to communicate information," he explains.

As counsel to the co-trustee, Monika Infante's obvious priority was the guarantees, which comprised mortgages and receivables to be held by her client. "The transaction involved a great deal of logistics to do with recording and releasing mortgages, and the assignment of receivables during the term of the notes," she says.

On the Dominican side, all the lawyers involved seem to have felt the pressure of time, with both Infante and Gamundi recalling having to fit a good deal of analysis and revision into a tight-closing time scale.

In fact, Gamundi reveals that in spite of his firm's involvement in the initial bond issuance and the proposed follow-on in 2007, "our engagement was formalised shortly before the scheduled closing date, and therefore we had to work long, intensive hours, in order to absorb a substantial amount of information and provide the necessary assistance and advice to our clients."

In addition to the pressures of time and the global downturn, another factor is that even in the best of economic conditions, there is little precedent for drafting and testing large, complicated contracts in the Dominican Republic.

Rossell notes, "Like many countries in Latin America, the legal system has not been tested in certain areas - particularly reliable case law and predictability of outcome in a judicial setting - so that when you start to work through some issues such as bankruptcy risks, there are no precedents, and it's difficult to predict how things would turn out."

"In addition, although the laws are there, if you have to find a novel way to structure a transaction and deviate from the standard, it can be challenging," he adds.

Infante echoes his concerns, saying, "These transactions are complex for the local authorities and judiciary, and it is very hard to explain the details to them. Therefore, documents have to be very well drafted in order to avoid misinterpretations."

The kind of problems suffered by the judiciary extend to the wider legal market, she notes: "Very few law firms in the Dominican Republic are trained and experienced in these kind of financial transactions. Parties have to carefully elect their local counsel in order to avoid unnecessary delays or bottlenecks caused by under-trained lawyers."

Although Mercado says the Dominican Republic presents familiar challenges - "emerging economy, political risks, lack of local access to capital" - he also sees another side to this coin. "Interestingly - and I think this goes for all of Latin America, in my view - the effects of the crisis have not been as overwhelming on the local population as it seems to be in the US," he says.

Mercado notes "that this is likely a product of the fact that those economies (and their populations) have had more experience with economic and other crises. It will be interesting to see how the new and evolving economic order will play out in the Dominican Republic and more generally throughout Latin America."

Should Latin America's economies continue to grow from this stronger base, Mercado's client could well see an ever-greater flow of traffic on its fairways.

Counsel to Cap Cana

  • In-house counsel - Wendy Marte
  • US
    • Simpson Thacher & Bartlett LLP
      • Partners Jaime Mercado and Patrick Baron, counsel Kirsten Davis, and associates Benjamin Wolf, Alex de la Cruz and Rodrigo Fernandez
  • Dominican Republic
    • Cabral, Senra & Consultants
      • Partners Sharon Cabral and Elaine Senra
    • Mejía-Armenteros & Abreu
      • Partner Vitelio Mejía-Armenteros

Counsel to an ad hoc committee of Cap Cana's bondholders

  • US
    • Chadbourne & Parke LLP
      • Partner Marc Rossell and associate Nilo Barredo
  • Dominican Republic
    • Squire, Sanders & Dempsey Peña-Prieto Gamundi
      • Partner Pedro O Gamundi and associate Rhina MartinezCounsel to The Weston Group
    • Mayer Brown LLP
      • Partners Peter V Darrow and Todd Bowen

Counsel to Citibank and Co-Trustee

  • Sonnenschein Nath & Rosenthal LLP
    • Partner David Natter

Counsel to Stewart Title

  • US
    • Greenberg Traurig LLP
      • Partner Mark I Michigan
  • Dominican Republic
    • Saxum Legal
      • Partner Monika Infante

Fuente: Latin Lawyer Online

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