Relevant Document:Intercreditor Agreement
The restructuring of U.K. retailer Matalan proposed by its first lien lenders will be implemented consensually, sources told Reorg. The first lien group will utilize the distressed disposal provisions (clause 14.2) contained in the intercreditor agreement, or ICA, to implement the transaction, which is due to close tomorrow, Jan. 26, sources said.
These clauses allow the security agent to release liabilities, guarantees and security provided the relevant criteria for a distressed disposal are met and any value protection safeguards are satisfied. Consequently, they are important contractual tools in helping to facilitate successful restructurings.
The group’s senior bondholders are resorting to their “fall back” option of taking over the group after second lien holders withdrew from the sales process and other bids fell short of expectations, as
reported.
The second lien noteholders are not expected to challenge the proposed restructuring since a number of funds are cross-holders in both the first and second lien debt, and the M&A process indicates that the value breaks in the first lien debt, sources said.
The distressed disposal provisions are likely to be used to release Matalan’s £101 million 9.5% second lien notes, which will be wiped out under the terms of the restructuring. Such a transaction would not need consent from the second lien noteholders.
Generally, a distressed disposal is the sale of any property subject to transaction security which is effected (i) at the request of the relevant instructing group where such security has become enforceable, (ii) by enforcement of transaction security, or (iii) after the acceleration of debt under a finance document or the enforcement of transaction security, by a debtor to a non-group member.
If the disposal falls under one of the three limbs above, the security agent will be authorized under the ICA to:
- Release the security and any claim over the asset being sold;
- On a share sale (i) release the entity whose shares are being sold and its subsidiaries from all or part of their borrowing or guarantee liabilities, and the transaction security such entities have granted over any of their assets and (ii) transfer any liabilities of the entity being sold or its subsidiaries to a third party.
The ICA sets out the creditor groups and related value requirements pertaining to which creditors are entitled to provide enforcement instructions, known as the “Instructing Group”. Under these ICA provisions, the Instructing Group is more than 66 2/3% of the
senior lenders and hedge counterparties and more than 50% of the first lien noteholders, with the instructions from the Instructing Group of first lien noteholders prevailing, unless certain conditions apply.
As
reported, under the proposed restructuring plan £200 million of the group’s £350 million 6.75% senior secured notes due 2023 will be reinstated, implying a 43% debt cut. Matalan’s £101 million 9.5% second lien notes will be wiped out. The reinstated senior secured notes will have a five-year tenor and pay 10% cash interest although the company can PIK the interest in the first two years if its pro forma cash balance drops below £50 million.
The group’s £60 million super senior term loan provided by Bantry Bay together with an £1.8 million exit fee will be refinanced with £61.8 million of new super senior notes with a four-year tenor paying 10% cash interest. This tranche can be increased by £25 million (tranche 2) in the first six months following the restructuring if pro forma liquidity drops below £50 million.
The new money will be raised via £75 million of priority notes with a 4.5-year tenor paying SONIA+ 550 bps cash interest, which will rank below the new super senior notes but ahead of the reinstated senior secured notes.
The deal means that the re-instated senior secured notes face significant priming risk. In addition to the new £75 million priority and potential £25 million super senior notes, Matalan will be able to incur an additional £20 million of the new super senior notes and an additional £20 million of the new priority notes, sources cautioned.
The senior secured noteholders will receive 52.5% of the re-organised equity of the company under the transaction. The remainder will be split among the new money providers, with 20% of the equity going to the providers of the new priority notes, 15% to the creditors backstopping the new priority notes, 7% to the creditors backstopping the new super senior notes and 5.5% to creditors backstopping the potential increase (tranche 2), as reported.
Clifford Chance is advising the company alongside Teneo, while the senior secured noteholders are represented by Kirkland & Ellis and Perella Weinberg Partners.
- Andrew Ross, Chetna Mistry, Connor Lovell