Thu 02/18/2021 04:00 AM
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Relevant Document:
Amended Indenture 2023 SSNs

Reorg reported last week that Codere has started negotiations for a new round of debt talks as the group’s liquidity comes under pressure. Codere said it expects to have €40 million to €50 million of liquidity at the end of March and April 2021 after coupon payments on its 2023 senior secured notes and 2023 super senior secured notes. However, the group normally needs €25 million to €30 million of cash to run its operations and has to meet a €40 million monthly liquidity covenant under the 2023 SSNs, so its liquidity is under immense pressure. Continue reading for the EMEA Covenants team's analysis of  Codere's debt negotiations, and request a trial to access legal analyses of many more debt situations in the region.

Reorg analysis, based on the amended and restated indenture of the 2023 SSNs after the restructuring last year, suggests that the group had the capacity to raise the following priming debt to boost its liquidity:

  • €100 million of additional super senior secured notes (subject to obtaining the relevant consents); and



  • €30 million of structurally senior debt of non-guarantor restricted subsidiaries or €30 million of effectively senior debt secured on non-collateral assets.


Codere confirmed to Reorg that the capacity to issue €100 million of additional super senior secured notes requires a simple majority consent from the holders of the existing €250 million super senior secured notes.

Our analysis is based on the provisions in the amended and restated indenture for the 2023 SSNs, dated Oct. 30, 2020. We understand that the super senior secured notes have the same baskets, however the documentation governing the super senior secured notes is not available for review.

Codere completed a restructuring last year via a scheme of arrangement and the associated refinancing extended the debt maturities of its $300 million 10.375% cash/11.625% PIK SSNs and €500 million 9.5% cash/10.75% PIK SSNs for two years (from 2021 to 2023), hiked up interest rates, and introduced €250 million of new super senior secured notes due 2023 at a 10.75% interest rate into the capital structure. The existing €95 million super senior RCF was fully repaid using proceeds from the super senior secured notes.

As part of the refinancing, the rate on the group’s €500 million senior secured notes increased to include a mandatory 4.5% cash-pay component alongside a further 5% cash-pay or 6.25% PIK component. The rate on the $300 million senior secured notes was increased to include a mandatory 4.5% cash-pay component alongside a further 5.875% cash-pay or 7.125% PIK component. Further amendments to the interest terms would require consent of holders of 90% of each series of outstanding 2023 SSNs affected.

In order to preserve liquidity the group plans to PIK part of the interest on its 2023 SSNs until the end of 2021 or until the market has normalized. Even after PIKing part of its interest, the group would have to pay at least €13.4 million of interest on its super senior secured notes on March 31 and about €17 million on its 2023 SSNs on April 30.

Pursuant to the group’s restructuring last year, Codere is currently required to maintain a minimum monthly liquidity covenant of €40 million in cash, cash equivalents and undrawn borrowings, unless consolidated net leverage ratio is below 3x or the credit rating of the 2023 SSNs is at B-/B3 or higher. As these notes are currently rated CCC/Caa3 and the consolidated net leverage ratio is above the 3x threshold, this minimum liquidity covenant will apply.

The capital structure pro forma for the restructuring is below:










































































































































































Codere S.A. - Pro Forma as of 10/31/2020


09/30/2020

EBITDA Multiple

(EUR in Millions)

Amount

Maturity

Rate

Book


Non Gaurantor Opco Debt

70.0



Total Non Guarantor Opco Debt

70.0

0.6x

Other OpCo Debt (excl. Capital Leases)

14.1



OpCo Capital Leases

5.0



€95M Super Senior RCF 1

-

Nov-01-2020

EURIBOR + 4.000%

€85M New Super Senior Notes

85.0

Sep-30-2023

10.750%

€165 New Super Senior Notes 2

165.0

Sep-20-2023

10.750%

Total Other Opco, Super Senior Debt

269.1

3.1x

€500M Senior Secured Notes 3

500.0

Nov-01-2023


$300M Senior Secured Notes 4

275.5

Nov-01-2023


Total Senior Secured Notes

775.5

10.1x

Capitalization of Operating Leases

195.0



Total Capitalized Leases

195.0

11.9x

Total Debt

1,309.6

11.9x

Less: Cash and Equivalents

(147.9)

Net Debt

1,161.7

10.5x

Operating Metrics

LTM Reported EBITDA

110.5


Liquidity

Plus: Cash and Equivalents

147.9

Total Liquidity

147.9

Credit Metrics

Gross Leverage

11.9x

Net Leverage

10.5x

Notes:
LTM EBITDA and Capitalized lease figures were not disclosed for the end of October thus Sept. 30 levels were used.
1. RCF was fully repaid from the €165M of additional new super senior notes.
2. Effective interest rate of 10.75%. The proceeds from this tranche to be used to refinance Codere’s existing €95 million super senior RCF and to provide further liquidity.
3. Maturity of these notes was extended to Nov 1, 2023 from Nov 1, 2021 and rate was increased to include a mandatory 4.5% cash-pay component alongside a further 5% cash-pay or 6.25% PIK component after the scheme of arrangement.
4. Maturity of these notes was extended to Nov 1, 2023 from Nov 1, 2021 and rate was increased to include a mandatory 4.5% cash-pay component alongside a further 5.875% cash-pay or 7.125% PIK component after the scheme of arrangement.
Pro Forma: Capitalization is pro forma for the completion of restructuring as of October 31. The group has a €40 million liquidity covenant which is tested monthly.



Super Senior Debt

Following the restructuring, the debt covenant permits the credit facilities basket (section 4.06 (b) (i) of the amended and restated indenture) to be secured on a super senior basis. The credit facilities basket is available to Codere Finance 2 (Luxembourg) SA and any guarantor and includes:

  1. €350 million of super senior secured notes, while such notes are outstanding, and €250 million thereafter;

  2. €75 million of surety bonds facilities and letter of credit obligations; and

  3. Uncapped, non-speculative, hedging related to the above mentioned debt.


Codere therefore has €100 million of capacity under the credit facilities basket to incur additional super senior secured notes, as €250 million of super senior secured notes have been incurred already. There is no disclosure from Codere about the usage of the €75 million surety bond facilities and letter of credit obligations basket.

Structurally Senior Debt

The debt covenant in the 2023 SSNs limits the amount of general purpose debt that can be incurred by a non-guarantor restricted subsidiary on a structurally senior basis to:

  1. €75 million of the €95 million local debt basket; and

  2. The €25 million general debt basket.


As of Sept. 30, 2020 Codere already had €70 million of non-guarantor debt outstanding. Assuming that this was incurred under the €75 million local debt basket, there would be €5 million of headroom under the €75 million local debt basket that could be incurred by non-guarantor subsidairies. In the group’s third-quarter investor call, management confirmed its €25 million general basket was unused.

Based on the above, a maximum of €30 million of debt capacity would be available for non-guarantor restricted subsidiaries to increase liquidity.

Other general purpose debt baskets that are customarily available for companies to tap for liquidity needs - being the 2.25x fixed charge coverage ratio debt basket, the credit facilities basket (described above) and the contribution debt basket in this case - are not available to non-guarantor restricted subsidiaries under the amended and restated indenture for the 2023 SSNs.

The protection against structurally senior debt is enhanced by the inclusion of a guarantor coverage test. Under this test, from July 1, 2021, each wholly owned material subsidiary is required to be a guarantor and guarantors must account for at least 65% of the consolidated cash flow of the restricted group. Specific Mexican and Uruguayan subsidiaries (even if material) will not become guarantors and their cash flow will not be included in the guarantor coverage test.

All debt of a non-guarantor restricted subsidiary can be secured on its assets.

Raising Priming Debt Through Unrestricted Subsidiary

Positively, given the existence of unrestricted subsidiaries, the restricted payments covenant in the amended and restated indenture has a “J Crew blocker” provision. This provision prohibits the transfer of material assets (including intellectual property) to an unrestricted subsidiary for the primary purpose of raising debt. In addition, a restricted subsidiary cannot be designated unrestricted for the purpose of raising or exchanging debt (except that such an unrestricted subsidiary could incur debt of up to 20% of the cash it receives from a third party in exchange for equity).

Note that the above J Crew blocker provision permits material assets from a restricted subsidiary to be transferred to an unrestricted subsidiary if they are related to the anticipated business activities to be conducted by the unrestricted subsidiary (as determined by Codere in good faith). This is a potential loophole that could be exploited but, on balance, given the primary purpose of any such transfer may not be raising debt, it would seem unlikely that Codere will try to raise debt by using a contentious J Crew maneuvre.

Effectively Senior Debt

The 2023 SSNs and the super senior secured notes - together with the surety bonds facilities, letter of credit obligations and certain hedging obligations - are secured on certain assets (the collateral). The rest of the assets owned by the restricted group for the 2023 SSNs would be non-collateral assets and would be available for raising effectively senior debt (to the extent they are unencumbered).

The general debt baskets that can be secured on non-collateral assets, and that can be used for liquidity purposes, are:

  1. Debt of non-guarantor restricted subsidiaries up to €75 million of the €95 million local debt general basket, under which €5 million of headroom may be available (as mentioned above);

  2. Debt under the €25 million general debt basket can be secured by the €25 million general permitted liens basket.


In sum, €30 million of capacity is available for raising effectively senior debt which is secured on assets that do not secure the 2023 SSNs, or €30 million for raising structurally senior non-guarantor debt.

Collateral-Dilutive Debt

Other than the credit facilities basket, which can be secured on a super priority basis, any debt basket can be secured on the collateral on a pari basis with the 2023 SSNs, as long as the consolidated secured debt leverage ratio (on a pro forma basis) is less than the ratio on the date of the amended and restated indenture (Oct. 30, 2020).

Reorg has calculated the consolidated secured debt leverage ratio as of Oct. 30, 2020, (using Sept. 30, 2020, EBITDA) to be 21.96x. The numerator of this ratio includes the super senior secured notes and the 2023 SSNs (being all debt secured equally or super senior on the collateral) divided by consolidated cash flow (we use the Sept. 30, 2020, last-12-months’ pre-IFRS 16 2020 EBITDA of €46.7 million as a proxy).

The amended and restated indenture does not describe what assets form part of the collateral for the 2023 SSNs. Such details are contained in the security agreements, which are not available for review. Note that the lockup agreement dated July 21, 2020, which Reorg has seen, mentions that the 2023 SSNs may be secured on additional assets (over and above the assets securing them prior to the restructuring) as part of the arrangements.

The debt incurrence and permitted liens baskets are below:

The organization chart after the 2020 restructuring is below:

(Click HERE to expand.)

-- Shweta Rao, Noor U Sehur
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