Friday Workout

Hurricane Warning, Intralot Exchange Gamble, No Small Beer

By Chris Haffenden | Editor | chris@9fin.com

Restructuring activity remains muted and our watchlist is very light on names, but in the past seven days, developments at Hurricane EnergyIntralot and Stonegate, gave plenty of angles for us at 9fin to investigate further. All could have wider market implications, if you are not in the trio, it is still worth paying attention to what follows in this week’s Friday Workout.

Regular readers will know that we at 9fin have been paying close attention to legal developments, most notably the new UK Restructuring Plan and its emergent case history. 

gategroup caused widespread consternation after Justice Zacaroli decided the UK Restructuring Plan was an insolvency process (the English Scheme is unlikely to be, but no definitive ruling yet); Virgin Active’s UK plan provided guidance on relevant alternative and how to deal with valuation challenges; and DTEK Energy’s Scheme could prove useful on international effectiveness of UK judgments post Brexit

From experience, lawyers will always push the envelope building on each successful deal. 

Following Virgin Active there was concern amongst some restructuring lawyers that the UK Restructuring Plan’s cross class cram down provisions would be used to impose yet more aggressive deals on unsecured creditors. Judges were too easily convinced to side with debtors on comparators and relevant alternatives, with those deemed out-of-the money by debtors having little apparent say. 

But in recent weeks, there has been a clear shift, and some redressing of the balance. 

For Amigo Loansno smiles from Justice Miles who threw out the English Scheme noting the lack of a burning platform, rejecting the binary outcome being posed of imminent administration. Miles may be proved right, over a month later, the guarantor lender still hasn’t filed, recently securing extended performance trigger waivers from its securitised lenders. 

On Monday, we had the first UK Restructuring Plan to be rejected at the Sanction Hearing Stage. It was also the first attempt to use the new process to cram down shareholders. 

Hurricane Warning

Similar to Amigo, UK-based E&P producer, Hurricane Energy claimed another binary outcome - if its UK Restructuring Plan failed to be sanctioned its convertible bondholders would consider immediately appointing an independent liquidator to protect their interests. 

Bondholders were worried that activist investor Crystal Amber with 14% of the shares - opposing the Plan at sanction stage - would replace board members at a 5 July EGM. New board members could pursue costly and risky investment opportunities, reducing cash available to repay the bonds. 

Hurricane has just one operating asset in the North Sea, the Lancaster Area field, which is beset with operating issues. This has led to a significant reduction in provable reserves, with an independent expert report saying it would be no longer economic to extract oil from the first quarter of 2024. 

Crystal Amber submitted evidence saying it would implement alternative investment strategies to drive value, including drilling a new well, injecting water to increase production and exploiting Hurricane’s dormant Lincoln field to extract remaining oil. 

Hurricane’s main asset is $168.5m of cash ($61.8m restricted for decommissioning costs and charter termination fees). It estimates that there would not be enough cash to fully repay the bonds and had agreed a restructuring proposal to extend its £230m convertible bonds due 2022 to December 2024 and reduce the principal amount by £50m. In return the convert holders will receive 95% of the equity. 

Future production is dependent on the extension of a Floating Product Storage Vessel (FPSO) charter from Bluewater which expires in June 2022. Tom Smith QC acting for the company indicated that Hurricane would be unable to negotiate a charter extension absent a restructuring agreement with convertible holders. An option to extend for three-years was not exercised, but Hurricane is currently in negotiations with Bluewater for a shorter extension.

There was a significant intervention following the hearing, with Michael Bonte from Bluewater writing to Crystal Amber on 24 June (referenced in the judgment). He said that he had been listening to feedback from the hearing with interest and wished to correct the impression given as to Bluewater’s position by the Company and the AHC.

“Bluewater is very keen to progress discussions and investigate solutions and proposals to extend the charter of the [FPSO] with any existing, or new, management of the Company.”

Mr Justice Zacaroli  disagreed with Hurricane’s argument that shareholders would be no worse off. “In my judgment, the fact that there is a realistic prospect (based on one, other or a range of the possibilities outlined, including through refinancing any shortfall) that the Company will be able to discharge its obligations to the Bondholders, leaving assets with at least potential for exploitation, is enough to refute the contention that the shareholders will be no better off under the relevant alternative than under the Plan.”

In addition, Zacaroli confirmed that even if he was wrong on the no worse off test for cross class cramdown, he would have used his discretion to block the plan. 

“It is important to balance any potential unfairness to the dissenting class as a result of the speed at which the case has been brought on and the difficulties the dissenting class faces in adducing its own evidence and testing the evidence of the plan proponents, against the genuine urgency of the proceedings.”

Zacaroli said that the company being profitable for at least a year, and the well being economically viable until early 2024 were key considerations against his exercising discretion to sanction. There were reasonable grounds a charter extension could be negotiated, in the interests of all stakeholders.

So, what does this mean for future cases?

The judgment outlines that future upside and other possible steps such as refinancing to address debt repayment will be considered by the courts. If there is not a burning platform, and a restructuring can be deferred to a later stage, junior stakeholders should not be immediately deprived of their interests. They can wait and see if value could return.

Difficulties still remain for sanction hearing challenges, most notably in valuation challenges to relevant alternatives. Having a fully baked and funded alternative remains preferable, but with judges being more vigilant, we suspect that lawyers acting for creditors will be more circumspect in future Plans and will need to provide more evidence on burning platforms.

Turn on, tune in, drop down

Our Once Upon a Prime Webinar - Mitigating the Risk of Subordination via ‘Drop-down’ and ‘Up-tier’ Financing Structures - with ELFA and Schultz Roth Zabel on 17 June proved timely. 

Last summer, McLaren noteholders pushed back and threatened to litigate against the UK Supercar operators ‘J Crew.’ As the webinar outlined, while there are very few J Crew trapdoor provisions in Europe, the so-called J. Crew blockers in docs are often a red herring. 

(Slides and the recording are available on request).

Our known unknowns’ article in January debated how Intralot’s controversial restructuring proposal - which exerted temporal seniority of the 2021 SUNs - could be implemented. In particular how exactly how security over Intralot Inc – part of the restricted group and a guarantor for the 2021 and 2024 SUNs – can be unilaterally granted to 2021 noteholders. Concerns were raised on how Intralot might use existing bond documentation to move assets outside the restricted group in favour for the 2021 notes via a J. Crew. 

On 29 June, after months of inactivity due their inability to secure 90% of 2021 holders to implement the exchange, the “tools available and path to deliver” as outlined by management in early May were unveiled.

The restructuring is Europe’s first drop-down financing, borrowing elements from J Crew.


Copying Bombardier, which used a white knight to buy $260m of additional notes to secure covenant threshold approvals, Intralot used the optional redemption clause to repay €147.6m of the 2021s (59.04%), financed by a redemption facility provided by the 2021 ad hoc group. 

The bonds were repaid and cancelled by issuing an equivalent amount of new 2021 Notes to the providers of the redemption facility. By our calculations, 92.88% of the 2021 Notes are now held by the ad hoc group (82.62% + 59.04% * (100% - 82.62%)), well above the required 90%. 

The resulting 2021 notes are then exchanged into the new 2025 SSNs as originally envisaged. 

To avoid breaching the 2024 Notes’ restrictions on secured / priority debt incurrence, Intralot intends to designate the new US topco and its subsidiaries as Unrestricted Subsidiaries. This would result in the US group no longer being subject to 2024 Notes restrictive covenants, triggering release of the 2024 Notes guarantee from Intralot Inc, issuer of the new 2025 notes.  

The 2024 Notes provide for the following RP and PI baskets which Intralot could use to designate the US group as Unrestricted Subsidiaries:

  • €40m RP general basket

  • €60m PI general basket

  • PI basket for investments in “joint ventures” up to €125 million plus unlimited investments if a 2x FCCR test is met pro forma.

Assuming all three baskets are available to be utilised, Intralot would have at least €225m of capacity for designating the US group as Unrestricted Subsidiaries.

A “joint venture” Permitted Investments basket is used to designate an Unrestricted Subsidiary. Our legal analysts note that the term “joint venture” is not defined under the indenture for the 2024 Notes, and nothing in the covenants explicitly precludes an entity from being both a joint venture and an Unrestricted Subsidiary.

The pari passu €500m 5.25% 2024 SUNs are receiving unequal treatment. 

They do not participate in the exchange for the 2025 SSNs, instead they are offered the opportunity to exchange their notes into a 49% stake in the new US TopCo. The exchange is limited to a maximum of $169.1m and is backstopped by 2021 cross-holders (up to €68.1m). 

Previously, the 2024 noteholders had voiced their opposition to the proposal, threatening potential litigation if the exchange offer went ahead. As our legal analysis notes, there are several ways holders of the 2024 Notes may try to dispute the transaction - Intralot’s assessment of the fair market value of its stake in the US group, and the manufactured “joint venture” construct. 

Another potential argument is that the new Unrestricted Subsidiary constitutes a disposal of “substantially all” assets of the 2024 Notes’ Restricted Group, which would have implications under the Merger and Change of Control covenants. There is no bright-line rule under New York law for what constitutes “substantially all” assets, and court cases have considered a variety of quantitative and qualitative factors in this analysis. 

With the projected EBITDA generation of the US business sizeable relative to the remainder of the Intralot group, bondholders could have a strong argument on substantially all. Intralot Inc generated €54m of EBITDA in FY20, projected to rise to €74m in FY24, compared to €103m at group level. It would suggest a lowish 4-handle multiple for Intralot Inc, for the fair value point. 

There is an argument based on the text of the “Designation of Restricted and Unrestricted Subsidiaries'' covenant that an Unrestricted Subsidiary can only be designated using either Restricted Payment or Permitted Investments capacity (not both), not convincing to us.

Chronicling small beer

Until recently, there was the concept of shared contribution for new money for stressed borrowers. Lenders are prepared to stand another round, if shareholders bought one too. 

The super-hot HY market has changed this dynamic as appetite from special situations funds has allowed fresh money to slide down as easy as a Kernel Table Beer. With over two-thirds of EHY BB-rated, mainstream investors are prepared to say ‘okay, just one more.’ 

But when UK-pubs group Stonegate outlined to bondholders last Friday that it would seek to return to debt markets to fund its £125m to £150m capital expenditure programme, one investor on the conference call had his fill. For him the proposed issue wasn’t just small beer.

Thanking management for taking just one investor question, his own, and the very last, following a stream of friendly bank analysts he didn’t hold back:

“The company is very highly indebted, it has gone to the bond markets to shore up liquidity,” he exclaimed. You are now wanting to come back to the high yield market, to layer more debt or potentially priming us via a sale and leaseback. “It is astonishing to hear management mentioning this. From a creditor and bondholder perspective this should be funded by equity. I am not alone in that observation. The shareholders should be funding this.”

Management responded that they would be guided by market forces and “if this view is shared [by other bondholders] this will limit our options.”

Our calculations suggest that Stonegate does not have the debt capacity under its remaining baskets, so would need a waiver from holders. Option two is a sale/leaseback, which would not require approvals from bondholders nor securitisation lenders. It would, however, reduce the asset backing for the outstanding notes, one of the reasons why holders remained bullish from a credit perspective. 

Stonegate wants to restart its programme of refurbishing its pub estate. According to one analyst the group has identified 940 (28%) of 3,351 Enterprise Inns partnership sites as suitable. At an average cost of £350-400k, it is a total investment need of over £350m. 

We will be watching developments closely and are interested to hear from other holders. 

In brief

Proving that new money appetite is still there for tainted borrowers, German commercial real company Vivion has privately placed a €340m tap of its 3.5% Senior notes due 2025. In January, Bloomberg reported in January, that Vivion was the most shorted credit in Europe with 16% of its bonds on loan, as hedge funds took the other side of its £1.5bn bet on UK Hotels. Perhaps this tap will help to settle any failed trades. 

Two more restructuring transactions completed this week, reducing further our list of live situations.

Vallourec, the French steel tube producer, has completed its debt restructuring. Around €3.5bn of gross debt was reduced by around 50%. Increased spending from oil majors has underpinned the credit, with the pre-restructured bonds performing strongly in recent months. 

OHL announced the implementation of its restructuring on Wednesday. In total there was €105m of debt reduction, with around €500m of planned disposals to reduce leverage further, most notably its 49% stake in the Old War office – which has a book value of €100m and 50% of Canalejas, which has a book value of €200m. There were two options, an exchange for new senior notes at (€880 per €1000 of face value); or for up to 38.25% of the total principal of their notes, a combination of €300 of new shares at €0.74 per share and €680 of new notes.

Carnival continues to take advantage of positive HY undercurrents to work on reducing its interest burden. On 30 June it signed amendments to its $1.9bn 2025 TLB reducing the margin to L+300 bps from 750bps and its €800m tranche to L+375 bps. 

Ferroglobe has launched its exchange offer for its amend and extend transaction, outlined in early February, in which it offers to exchange existing 9.375% senior secured 2022 notes for new SSNs due 2025, with the option to subscribe for super senior notes. The exchange offer expires on 21 July. The super senior subscription deadline is 7 July. 

Comexposium, the French events business locked in a UK court battle with creditors who bemoan a lack of engagement in their Sauvegarde process, is looking to the future. It is going exclusive to acquire 100% of Europa Group, Europe’s ‘leading’ (note to company PRs– what does this mean – the largest, the best, or something else?) healthcare and scientific congress organiser. It adds that it is returning to hosting physical events, with over 100 scheduled by the end of this year. 

What we are reading/watching this week

Despite gloomy predictions for air travel, with many observers not expecting a full recovery until 2023 (if at all), some operators are going against the consensus, most notably Ryanair which has made big orders from Boeing. This week United Airlines also went all in for the recovery, betting on the return of premium air travel.

How not to spend it – the FT talks about the difficulties of accessing your crypto profits– as yet more regulators ban Binance from operating in their jurisdictions. 

Last week, the Workout highlighted the risks of stablecoin to global financial stability, it appears that Fitch were also reading our substack postsAs were Fed Governors

Subscribers will be aware that 9fin is leading the way on ESG analysis for LevFin. This thread from JohannesBorgen about ESG investing outlines some of the problems in weighing all the criteria and the potential role of machine learning in forecasting ESG ratings

Africa’s biggest polluter Eskom – a credit I know well from a past life, has announced plans to raise $10bn to fund its transition from coal. Politically it will be tough, and it will require banks to come up with blended finance solutions to partner with DFIs. 

Read in preparation that the England Football team would once again lose to the Germans on Penalties – the psychology of the penalty shootout: mentally preparing to score, or save

RIP Donald Rumsfield, who this week has gone to meet the known unknown

And finally, British/Scottish (applicable if he is winning or losing) bionic tennis star Andy Murray appears to have a new meme stock sponsor