Party City Seeks to Exchange Unsecured Notes for 1L Notes at Existing Issuer, 2L Notes at New Unsub and Equity; Intends to Raise $100M of 1L Notes at New Unsub

Relevant Documents:
8-K
Press Release
Presentation

This morning, Party City announced entry into a transaction support agreement with an ad hoc group of holders of the company’s 6.125% senior notes due 2023 and 6.625% senior notes due 2026. According to the company, the group holds “more than 52% of the aggregate principal amount” of the notes.

Through the TSA, Party City expects to commence an exchange offer in June, swapping its $350 million of 6.125% senior notes due 2023 and $500 million of 6.625% senior notes due 2026 into a package of new securities including 19.9% of Party City’s common stock, $185 million of first lien notes at the existing issuer of the company’s current credit facilities and $100 million of second lien notes issued by a newly formed unrestricted subsidiary of Party City Holdings and co-issued by Anagram International, Party City’s Minnesota-based foil balloon business, which will be a subsidiary of the newly formed unrestricted subsidiary.

According to TRACE, the 2023 notes exchanged hands at 5.75% of par as of May 21 (last trade in size), and the 2026 notes exchanged hands at 4% of par as of May 27.

The TSA also contemplates a $50 million backstopped rights offering of new notes, a $50 million private placement of new notes and a consent solicitation, each as further detailed below. According to the TSA, the initial backstop parties to the rights offering are Cetus Capital and Neuberger Berman. Barings LLC has committed to purchasing $40 million of the $50 million private placement.

The closing of the transactions contemplated by the TSA is conditioned on the satisfaction or waiver of certain conditions precedent, including finalizing all definitive documents and achieving certain participation thresholds. Specifically, the TSA requires the tender of a minimum of 98%, or $833 million, of the outstanding aggregate principal amount of 6.125% senior notes due 2023 and 6.625% senior notes due 2026 by eligible holders as of the expiration date of the exchange offer. These thresholds may be lowered by the company with consent of the consenting noteholders.

In addition to the details of the TSA, this morning’s 8-K included a presentation previously provided to bondholders.

Exchange Offer

Through the exchange offer the company would exchange the $350 million in 2023 notes and $500 million in 2026 notes for:
 

• 19.9% of outstanding common shares of Party City;
   
• $100 million of 10% senior second lien notes due 2026 issued out of a newly formed unrestricted subsidiary;
   
• $185 million of variable rate first lien notes due 2025 issued by Party City Holdings Inc., or Holdings, which is where the existing credit facilities sit.

The new unrestricted subsidiary, a direct wholly owned subsidiary of Holdings, will be the issuer of the 2026 second lien notes, and Anagram International Inc. will be the co-issuer.

The specific language regarding the new issuer, according to the transaction term sheet attached to the RSA, is as follows: “With respect to the New Money First Lien Issuer Notes and the Second Lien Issuer Exchange Notes (each as defined below), a direct wholly owned subsidiary of Holdings formed as a limited liability company will be the issuer and Anagram International, Inc., an existing Minnesota corporation and a wholly owned subsidiary of such issuer, will be the co-issuer (collectively, the ‘Issuer’). The Issuer to become an unrestricted subsidiary under the Senior Credit Facilities (as defined below) and the Existing Indentures substantially concurrently with the consummation of the Exchange Offer ... and other transactions described hereunder.”

Additionally, holders of the existing notes who validly tender their existing notes in the exchange offer will have the right to purchase a pro rata portion of $50 million of the proposed $100 million of new 15% senior first lien notes due 2025 to be issued by the unrestricted subsidiary. The other $50 million would be issued through a private placement. Throughout its disclosures the company refers to these new 15% first lien notes as the “New Money First Lien Issuer Notes” and refers to the first lien notes issued in the exchange as the “First Lien Party City Exchange Notes.” The proposed $100 million of new-money first lien issuer notes would increase to $110 million, with $5 million of consideration provided to the backstop parties and another $5 million of consideration provided to the private placement parties, each as described below.

Rights Offering and Private Placement

Before the transaction is launched, certain of the consenting noteholders have agreed to enter into a backstop agreement with Party City to buy $41.5 million of new-money first lien issuer notes. As noted above, the initial backstop parties are listed in the TSA as Cetus Capital and Neuberger Berman. The company, issuer and consenting noteholders will work together in good faith to sign up additional backstop parties to increase the backstop commitment to $50 million of the new-money first lien issuer notes, according to the 8-K.

As consideration for the backstop commitments, the company said it has agreed to pay each of the backstop parties its pro rata share of an aggregate premium of $5 million paid in new-money first lien issuer notes and its pro rata share of an aggregate premium of $5 million paid in additional first lien Party City exchange notes.

As noted above, all noteholders that participate in the exchange will receive rights to purchase their pro rata share of the backstopped $50 million in new-money first lien issuer notes.

Separate from the backstopped rights offering, on May 28, the company and Barings LLC entered into a private placement commitment agreement through which Barings has committed to purchase $40 million of new-money first lien issuer notes in a private transaction. The company, along with the issuer, consenting noteholders and the private placement party, will sign up additional private placement parties to increase commitments to $50 million of new-money first lien issuer notes before the transactions launch, according to the 8-K. Party City will pay the private placement party and other participating parties their pro rata share of an aggregate premium of $5 million, paid in new-money first lien issuer notes.

The private placement party may terminate the agreement in the event of any material modification or amendment of the TSA that the private placement party has not consented to and/or if the exchange offer and consent solicitation have not been commenced on or before June 29, unless extended and/or if the transactions have not been consummated on or before Aug. 3, unless extended.

Consent Solicitation

The proposed amendments to the indentures governing Party City’s existing notes will:
 

• Allow for the issuance of the new-money first lien issuer notes, the second lien issuer exchange notes and the first lien Party City exchange notes.
   
• Allow for issuance of shares.
   
• Eliminate substantially all of the restrictive covenants and certain events of default as well as related provisions in the existing indentures.
   
• Waive any related cross-defaults under the existing indentures.
   
• Release any guarantees provided by guarantors, or groups of guarantors, under the existing indentures.
   
• Prohibit the designation of any future guarantors under the existing indentures.
   
• Waive any requirement for the use of excess asset sale proceeds to repurchase existing notes under the provisions of the asset sales covenants in the existing indentures.

Intra-Company Agreements

The TSA also requires the execution of certain “Intra-Company Agreements” among Anagram and Party City or certain of its affiliates, with the form of the agreements acceptable to the required consenting noteholders and the initial backstop parties:
 

• A services agreement for the provision of corporate services by Party City or its affiliates to Anagram;
   
• A product purchase agreement for the purchases of products from Anagram by Party City or its affiliates; and
   
• An intellectual property license agreement between Party City, its affiliates and Anagram.

Cleansing Materials Presentation

Summary quarterly projections for fiscal 2020 and annual fiscal 2021 projections for the company are shown below:
 
Summary third-party sales growth forecasts are shown below:
 
Summary annual projections for Anagram are shown below:
 
Anagram sells to both Party City and third parties. The company breaks out Anagram’s sales by channel:
 
According to the presentation, Anagram’s global market share was 55% in 2017.

Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal counsel, and Moelis & Co. LLC is serving as financial advisor to Party City. Milbank LLP is serving as legal counsel, and Houlihan Lokey Capital Inc. is serving as financial advisor to the consenting noteholders.