Friday Workout

Known Unknowns; Reducing Stress in A&E; Swiss Travel Corridor

By Chris Haffenden | Editor |

In recent weeks we’ve highlighted that the strength of the underlying LevFin market – appetite for risk, and its pricing - has significantly reduced the number of restructurings and potential mandates. We’ve seen many stressed refinancing for companies that would normally be forced to restructure and stressed names trading north of 95, leaving little room for opportunistic buyers. 

A good example is Kloeckner Pentaplast. Despite a chequered history, a penchant for non-recurring add-backs and loose docs, it tightened its loan refinancing pricing to sub 500bp this week. Final pricing on the bond component was set at 4.5% for the 5-year SSNs and 6.5% for the 5.5-year SUNs. 

Balta and Ferroglobe announced amend and extend transactions this week. Arguably both would have required larger sponsor contributions and greater demands for bondholders if the market wasn’t so red hot. With Douglas subs jumping last week back into the 90s on refinancing hopes, and Enquest announcing yesterday (4 Feb) that it will refinance most of its debt via an RBL, the pool of special situations trading at a discount is drying up fast. 

Another big mover in recent weeks was Vallourec, with its bonds trading up at 80, well above the implied 50% haircut on their debt. In common with the other names above investors are either betting on future equity value, and/or business improvements to justify par prices and higher recoveries.

As an advisor working on one of the above deals commented, the hot secondary and primary markets have introduced an element of repricing in recent refinancing and A&E transactions. 

Known Unknowns

One of the few names which is trading at a sharp discount, is arguably there for a reason.

Intralot 2024 bondholders face the prospect of the company going ahead with an exchange offer for its 2021s to prime the pari passu senior unsecured notes. But this raises the thorny question of whether a J Crew will be used to implement the plan and what is allowable under the documents. 

As the panelists in our Covenants webinar with ELFA on 22 January noted, often HY documents are deliberately opaque, and will be proactively used by stakeholders in times of distress. The asset sale covenants and availability under the baskets are the first things that they check for wriggle room.

Under the planned exchange offer, the €250m 2021 SUNs would exchange into new €205m secured notes due in 2025. But the plan begs the question on exactly how security over its most valuable division, Intralot Inc – the US business is part of the restricted group and a guarantor for the 2021 and 2024 SUNs – can be unilaterally granted to 2021 noteholders. 

Looking at secured debt capacity under the general permitted liens carve out language, there is just €100m of availability, meaning the company must look elsewhere for the €105m balance. We think that the Permitted Investments Joint-Ventures clause is most likely – which could give at least another €120m of availability. 

The Greece-headquartered lottery business is teasing its plans, with talk of a new restricted group and a joint venture agreement in its public announcements without giving further details.

This week it said it is pressing ahead with its plans for the 2021 exchange, and notably says that it prefers to implement it outside of a scheme of arrangement. Our view is that the scheme route would be seen as an event of default, giving power to the 2024s who can challenge at the sanction stage.

But exactly how the company can move the valuable US business outside the restricted group and strip the 2024s of their Intralot Inc guarantee without their consent is moot.

This week, we took a look at the known unknowns and what is said in the docs. 

(Non-subs please ask us for a copy)

Alleviating Stress in A&E 

Two names prominent on our restructuring watchlist went into A&E this week. Both were trading at significant discounts to par until relatively recently, and arguably needed less triage than we would expect. Their bondholders appear willing to believe their optimistic prognosis. 

Ferroglobe controlling shareholder Grupo Villar Mar will pay a relatively small price to retain control of the manufacturer of silicon metals and alloys. By stumping up $17.5m of an overall equity cheque of $40m the sponsor retains control. The group’s ambitious turnaround plan seeks to boost EBITDA by $180m and has bullish projections on volumes and prices. 

Under the agreement the bonds retain their high 9.375% coupon and also receive an improved security package, a 1% consent fee and 3.75% of the equity in Ferroglobe Plc. The news saw further price improvements for the SUNs which were in the low 40s in August, at 80 at year-end on refinancing hopes, and to 93.5 on 4 February.

Ferroglobe’s end markets such as the automotive sector were affected badly by the pandemic, but its plants in Spain and France remained largely operational. The business is commodity driven and its EBITDA can oscillate wildly. The company cautioned in a November conference call that given the speed and frequency of evolving developments on demand it was difficult to forecast the level of trading activity and cash flow in the next 12-months.  

Flooring company Balta on 2 February announced a trading update and an exchange offer for its existing 2022 Notes. The A&E exercise will term out the company’s debt until 2024, with existing holders of the 2022s to receive additional security, PIK interest, a consent fee, and protections against asset leakage. Balta already has agreement from 52% of Noteholders to the proposed deal. 

If it can’t secure enough consents, there is a plan B, covenants can be stripped and preemptively agree to a series of additional waivers and amendments to permit the transaction via an exit consent. These changes require a simple majority to implement. 

The New Notes are subject to an unusual call schedule of 102% soft call for six months, followed by a par call and then a call at 102% for redemptions after March 2023. Interest will be 7.75% + 1.00% PIK until March 2024 and 7.75% + 3.00% PIK thereafter until maturity. 

The strange call schedule resulted from discussions with holders, the front-end call would help trading prices get back to par, and the back end being an incentive for the company to refinance, said a source close to the transaction. This appears to have worked with the bonds rising three points to 99.30-99.50, the day after the announcement, according to market sources. 

In 2017, the group raised €138m from an IPO of a 42.8% stake with proceeds reducing debt, with Lone Star retaining a controlling 56.5%, and management owning the remaining 0.8%. 

Pipe cleansing 

Vallourecunveiled details of its long-awaited restructuring plan this week, cleansing non-committee members. As reported, negotiations over a 50% haircut and equitization for the France-based steel pipes manufacturer were complicated by differing views on debt and equity splits for the RCF and bonds, ranking pari passu. Further complicating negotiations was a large cross holder group, led by SVPGlobal, with the bonds being led by Apollo.

Post restructuring, Apollo and SVP in combination will own a significant minority of the equity – 34% to 41.6% - the funds have agreed as part of the deal not to act in concert. Exact amounts of equity allocations will depend on the take-up by existing shareholders to a €300m discounted rights issue at €5.66 per share, with €1,331m reserved to converting creditors at €8.09 per share. In addition, commercial banks will receive listed warrants representing 11.7% of diluted share capital at €10.11 per share - a 25% premium to the reserved capital increase for creditors. 

Vallourec’s model forecasts a demand recovery and control of supply from OPEC+ allowing necessary E&P capex to meet demand, but large oil inventories will cap the oil price rebound in 2021, with prices to hit $60 by 2022. It is expecting that drilling activity will restart progressively, with a consolidation of competition and distribution reducing welded pipes capacity. Volumes are expected to recover in 2022, with Middle East and East-Africa and Brazil seen as key markets.  

It projects a dip in sales and EBITDA in 2021 but expects a significant rebound by 2025 with EBITDA more than tripling from 2025 levels. This will reduce leverage from 4.1x post restructuring to 1.2x. 

Swiss Travel Corridor

Gategroup’s UK Restructuring plan could fall at the first test and may not be granted access to the UK. At issue is the Swiss Jurisdiction clause on its CHF 350m bonds, whose maturities the Swiss-based aircraft caterer is seeking to extend under the plan. The Lugano convention has a bankruptcy exemption clause which the company is seeking to utilise, as a workaround. Gategroup says that it is impossible to implement an extension of the bonds, as they would fail to gain a quorum of 66% of holders present given that most is held by retail holders. 

Lawyers acting for the company admit that the artificiality of the construct of using a deed poll and an indemnity to create the UK as centre of main interest, but argue this is out of necessity, relying on Lehman Necessity Principles as precedent. But they must also convince Justice Zacaroli that the new UK process was intended to be treated as an insolvency procedure, thereby triggering the exclusion clause. 

But Justice Zacaroli is concerned about the wider issues and implications. By allowing the plan to go ahead it could have unintended consequences. As a result, he made it clear that a judgment would take some time. The company in turn has said it needs an indication by 12 February, to allow time for classes meetings and have a plan sanctioned by 26 March ahead of regulatory approvals at the end of the month. If the plan fails it says it will run out of cash in May and be forced into liquidation. 

As we have flagged in recent weeks, recognition of UK processes post Brexit is problematic in many jurisdictions after the EU Recast Judgments Recognition was not replaced on 31 December 2020. This week to assist, the UK Government issued guidelines for several jurisdictions, admitting that parallel processes may be needed in some circumstances.

Pulled out of the RBL 

Another stressed candidate has found a refinancing solution this week. Enquest, the North Sea E&P producer announced the acquisition of Golden Eagle, a mid-stream operator for an initial consideration of $325m, with a further $50m contingent payment in 2023. The deal should be completed no later than September. 

Enquest is using this as an opportunity to refinance its outstanding senior credit facility, via a new reserve-based lending facility (RBL) via its lead banks BNP and DNB. 

Most Enquest assets are near end of life, so Golden Eagle helps to lengthen the weighted average life to enable an RBL facility, suggested one distressed analyst. But existing bondholders hoping to be incorporated into the refinancing and taken out early, were disappointed by management saying these would stay in place, he added. 

Return of the NAC 

One restructuring candidate, which is set to return is Nordic Aviation Capital, the troubled aircraft leasing company. As Laura Thompson’s article this week outlined it is expected to need further forbearance from lenders as deferred amortisation and interest payments loom. 

NAC has a high exposure to some of the most distressed aircraft assets whose rates have collapsed, meaning LTV ratios are elevated. With the entire fleet granted as security under the previous agreement, the aircraft lessor may need more substantive support from its sponsor EQT to keep creditors onside.

Ahead of an anticipated restructuring, NAC private placement bondholders recently appointed Houlihan Lokey and Akin Gump as advisors, with the company relying on previous advisors: Rothschild & Co, Clifford Chance and McCann Fitzgerald.

Pain in Spain, falls mainly on the planes

As we outlined in our Spanish insolvency primer. SEPI, the Spanish Government fund set up to support strategic companies, will demand a seat and the table and is focused on governance issues. 

Air Europa found out this to its cost this week, with a €100m tranche of support withheld after it refused to appoint a chief executive nominee from SEPI. 

Elsewhere, politics continue to weigh on high-profile situations such as Duro Felguera, whose rescue plan – which includes a SEPI loan – failed to be announced this Tuesday, as suggested by the local press. Abengoa is struggling to get its restructuring over the line and could come up against deadlines for directors to file, if a solution isn’t found, suggested a local advisor. 

Celsa is awaiting news on its SEPI loan and equity application, which should arrive soon, said the advisor. The steelmaker is set to renew restructuring talks with its creditors, after a Madrid court recently reversed a previous decision to delay payments and conversion rights under ‘rebus sic stantibus’ to unilaterally change the terms of its financial contracts. It is appealing. 

In brief

Prosafe said it continues to defer payments to lenders while talks with lenders continue over finding a sustainable financial solution, which it says will involve a significant equitization and minimal or zero recovery to its shareholders. 

Europcar announced that the Paris Commercial court had approved its restructuring plan under Sauvegarde, with the US court recognition being scheduled for 4 February.

PGS has confirmed its English Scheme of Arrangement was sanctioned on 2 February for its amend and extend proposal. 

Hertz Holdings Netherlands sanction hearing has been delayed from today until 18 February. The issuer says that this is to coincide with the bifurcation process in the US which has been challenged by US Trustee, as reported. 

Steinhoff International Holdings NV English scheme of arrangement was sanctioned earlier today, by Justice Adam Johnson. He recognised the right of challenge by Conservatoirum to the Scheme but added “in summary my reason is that as matters stand before me, the asserted unfairness is too remote and inchoate to operate as a basis for my declining to sanction the present Scheme.”