Investment fund Kyma Capital reiterated that Codere’s financial restructuring proposal gives value to the ad hoc committee to the detriment of other company’s noteholders, during a call held this afternoon. The call was hosted by Kyma Chief Investment Officer Akshay Shah and was attended by a number of holders of the 2021 dollar and eurobonds issued by Codere Finance 2 (Luxembourg) SA. Jenner & Block are advising Kyma on this matter. Continue reading for the EMEA Core Credit by Reorg team's update on Codere's propsosed financial restructuring, and request a trial to follow more financial restructurings across the region.
Kyma said that it started communicating with the company on July 14, the day after the transaction was announced
. The fund claims that the company has now started recharacterizing its transaction in light of some of the concerns raised by Kyma.
At the end of the call, Kyma invited Codere’s bondholders to reach out to them if there is any interest in joining their effort to pursue a negotiated outcome which offers a fairer deal to all creditors.
, Codere is proposing a single-class scheme, comprising all of its holders of its existing notes.
Kyma has three main concerns about the transaction:
- That the new money is not being offered to all existing noteholders;
- That the new money is being used to justify fees and benefits to the ad hoc committee, which are disproportionate; and
- That the proposal is contrary to regulatory guidance in the context of the Covid-19 pandemic.
The fund stated that these concerns coalesce into two distinct legal issues: i) class issues; and ii) fairness issues. It expects that, as is typical with schemes, the convening hearing on Sept. 3 will focus on class issues, and stated that it will raise its concerns in relation to such issues then. Kyma further stated that it expects the focus at the Sep. 29 sanction hearing to be on fairness issues, and will address issues falling into this scope then.
In relation to class issues, Kyma’s view is that the company’s single-class argument will be difficult to sustain, and that if the company can avoid court scrutiny of its transaction, it will do so. Kyma claimed that it sent the company a summary of its commercial and legal findings on Aug. 24, and that following the receipt of Kyma’s letter, the company has reopened its consent process for locking-up to the transaction. The deadline for acceding to the lockup agreement now expires the business day before the sanction hearing on Sept. 29, Kyma said.
In light of this, in order to avoid scrutiny, Kyma’s expectation is that the company will proceed with one of two options, each of which Kyma sees as having its own challenges:
- Option 1: The company could try to get at least 90% noteholder consent so that it can implement the restructuring contractually under the amendment provisions in the existing notes indenture.
- Option 2: The company could proceed with a two-class scheme instead, with i) one class comprising the ad hoc committee members, and ii) one class comprising all other noteholders. Kyma’s view is that there remain fairness concerns if this route were to be pursued, which they will address at the appropriate time.
In relation to the lockup agreement, Kyma’s view is that a noteholder which accedes to the agreement signs away their independent rights and allows the ad hoc committee to “drag” them into the eventual form of transaction, which is still changing to a large extent.
In its Aug. 6 practice statement letter
for the scheme, Codere states that it is aware that Kyma has suggested that there should be two voting classes for the purposes of the scheme. Codere states that it is not of that view, and gives the following reasons for this:
- Scheme creditors have materially same rights against the company: If the scheme and transaction are not implemented, the scheme company, Codere Finance (the issuer of the existing notes) and Codere Newco SAU (among others, the RCF borrower), and some or all other obligors and group members, would likely enter into insolvency proceedings. Therefore, the appropriate comparator to the scheme is an insolvency, where the existing notes are unlikely to be repaid in full. The existing euro- and dollar-denominated existing notes rank pari passu with each other and benefit from the same security and guarantees. Therefore, in an insolvency, the scheme creditors would have materially the same or similar rights against the obligors and would receive the same level of recovery in proportion to their existing holdings.
- Interest rates: As the likely alternative to the scheme is an insolvency, the difference in interest rates under the euro-denominated existing notes (6.75% p.a.) and the dollar-denominated existing notes (7.625% p.a.) would likely be inconsequential because the existing notes would be accelerated and only accrued interest at the date of insolvency would be provable.
- Rights compromised in materially same way: The proposed amendments to the existing notes will affect each scheme creditors’ rights in substantially the same way.
- New Notes: All scheme creditors will be given the same rights i) to purchase their pro rata share of the new notes, and ii) to commit to purchase more than their pro rata share of the new notes.
- Backstop arrangements: Although some of the scheme creditors are backstop providers, they are not offered any additional rights under the scheme compared to other scheme creditors - under the allocation mechanics for the new notes (see below), it is possible that all scheme creditors (including the backstop providers) may only be entitled to purchase their pro rata share of the new notes. The fee being paid to backstop providers in exchange for backstopping the new notes (see above) is a commercial one for the provision of a commercial service, is de minimis and would not have a material effect on whether a scheme creditor would support the scheme.
- Lockup agreement: All scheme creditors were given the same right to accede to the original and revised lockup agreements, and scheme creditors who are party to the lockup agreement are treated under the scheme in the same way as scheme creditors who are not party to the lockup agreement (other than potentially in respect of the early bird consent fee and/or the consent fee - see below).
- Early-bird consent fee and consent fee: All scheme creditors were given the same right to accede to the original and revised lockup agreements before the relevant deadlines to avail themselves of these consent fees. The material take-up of these consent fees, by a vast majority of the holders of the existing notes, demonstrates that the offer of such fees encouraged support for the scheme and transaction in the short timeframe required. The level of the consent fees is in any event de minimis and would not have a material effect on whether a scheme creditor would support the scheme.
- Interim Notes: While the opportunity to purchase the Interim Notes was not offered to all holders of the existing notes (due to the urgency of the funding need and the compressed timeframe), the issuance and purchase of the Interim Notes was independent of the scheme and was not dependent on the scheme becoming effective.
- Work fee: The payment of the work fee in July occurred outside the proposed scheme and is independent of it. It represents commercial consideration for the provision of a commercial service and the risk undertaken by members of the AHC. In addition, the fee is de minimis and not material.
- Ad hoc committee advisers’ fees: While the group has agreed to pay the fees of advisers to the ad hoc committee in connection with the transaction, these fees represent commercial consideration and an obligation necessarily incurred by the group to be able to pursue the transaction. The fees will be paid to the relevant advisors and the ad hoc committee will derive no financial benefit from their payment.
For a summary table of the respective positions of Codere (based on its practice statement letter) and Kyma (based on its Aug. 26 release) on some of the key topics, see below:
Codere’s proposed restructuring terms are as follows:
Super Senior Notes
€250 million of new super senior notes due Sept. 30, 2023 have been or will be issued by Codere Finance 2 (Luxembourg) SA in two tranches:
- The first tranche of €85 million (Interim Notes) was issued on July 29, 2020 and was purchased by certain members of the AHC. The Interim Notes will accrue cash pay interest at 12.75% p.a. until the completion of the transaction, and thereafter, will accrue cash pay interest at 10.75% p.a.
- A second tranche of €165 million (new notes) will accrue cash pay interest at 10.75% p.a.. Each scheme creditor will be given the opportunity to purchase its pro rata share of the new notes by reference to its holding of the existing notes as at a particular record date. Each scheme creditor can also commit to purchase more or less than its pro rata share of the new notes, and a process will be undertaken by the information agent to allocate new notes to each scheme creditor which elects to participate in this issuance.
, the new notes will be backstopped by certain members of the ad hoc group, which represents about 55% of the existing notes, subject to the completion of the transaction. The group will pay a backstop fee to the backstop providers, equal to 2.5% of €165 million (i.e. the aggregate principal amount backstopped) for these arrangements.
The Interim Notes and the new notes will share the same security and guarantee package as the existing notes. Following the discharge of the RCF with the proceeds of the new notes (see below), the Interim Notes and the new notes will: i) rank equally in right of payment with the group’s €50 million super senior surety bond facility agreement (SBF), which is governed by Spanish law, and ii) rank super senior in respect of the enforcement of security alongside the SBF and ahead of the existing notes.
Amendments to the existing notes
The following amendments to the existing notes are proposed:
- The maturity of the existing notes will be extended from Nov. 1, 2021 to Nov. 1, 2023.
- The interest rate of each series of existing notes will be increased. The euro-denominated notes will include a mandatory 4.5% p.a. cash-pay component with a further 5% cash-pay or 6.25% p.a. PIK component at the company’s election. The dollar-denominated notes will include a mandatory 4.5% cash-pay component with a further 5.875% p.a. cash-pay or 7.125% p.a. PIK component at the company’s election.
- The covenants in the indenture for the existing notes will be amended to: i) allow for additional super senior capacity for the incurrence of the Interim Notes and the new notes (see above); ii) include an absolute restriction on any dividends, payments or other value transfers to any direct or indirect shareholder other than by virtue of their holding of any existing notes, Interim Notes or new notes; and iii) include a new liquidity covenant requiring €40 million cash and undrawn committed financing, which will be tested monthly unless the consolidated net leverage ratio is below 3x or the credit rating of the existing notes is at B-/B3 or higher.
The proceeds of the new notes will be used to repay and fully discharge Codere’s existing €95 million super senior RCF.
Payment of certain fees
The following fees are available to holders of existing notes in connection with the transaction:
- An early-bird consent fee of their pro rata share of 0.5% of the principal amount of the existing notes for holders of existing notes which acceded to the original lockup agreement and the revised lockup agreement prior to certain deadlines; and
- A consent fee of their pro rata share 0.5% of the principal amount of the existing notes for holders of existing notes which accede to the revised lockup agreement prior to a particular deadline. The original deadline was July 27, 2020, but as reported, this has been extended to 4pm on the business day immediately prior to the sanction hearing (which is expected to be held on Sept. 29, 2020).