Hive Down

A hive down generally involves three key steps:

• establishing a new corporate group with a lower level of debt funding;
• selling the operating group or assets to that new corporate group for an agreed purchase price; and
• the old group using the proceeds of the sale to part-pay down its debt and then being struck off.

A hive down process can make it easier to bring in a new equity investor who doesn’t want to be exposed to the old corporate structure and debt levels.

A new corporate group will own the business going forward. Establishing the capital structure for the new group, including the respective proportions of equity and debt the parties will be entitled to can be fraught with arguments. It will be particularly difficult where the old group has multiple debts, or where there is a disagreement about valuation.

 

Selling the operating companies

There are a number of different ways that the old group can sell the operating company/ies or assets to the new group. Of late, hive downs in New Zealand have tended to involve the security holder enforcing their interest over the operating company/ies and then exercising their power of sale to transfer the assets to the new group. Financing documents often permit the security holder to take this sort of enforcement action on the instructions of a specified proportion of the syndicate (e.g., 66.7%), so the transaction can be implemented without requiring unanimous lender support.

Establishing the purchase price for the transfer can be relatively difficult for a number of reasons, including:

• often restructurings do not test the market to set the market value for the business and, as a result, the various parties to the restructuring need to settle on a value between themselves;
• the valuation can have an impact on the parties’ bargaining power, so interests can be misaligned;
• the directors of the new group will have responsibilities to their company and will want to be comfortable that they are not over-paying;
• the security; and
• the security holder will not want the transaction to be under-value as it will want to be seen to be achieving an appropriate level of recovery for the existing group.

The old company

After a hive down is completed, the old company is generally left without assets, with residual debt and in default under the original finance documents. Also, the directors are likely to have resigned. The companies will be in breach of the Companies Act 1993 for failing to have a director and are therefore likely to be struck off the register by the Registrar or for failing to file annual returns.