Tue 10/10/2023 07:00 AM
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Reorg is launching a global quarterly report highlighting liability management exercises, or LME, used by stressed creditors to partially refinance capital structures. The report summarizes “aggressive” transactions completed by U.S. and European borrowers that, among other results, raise cash, extend maturities or reduce outstanding principal. Transactions typically result in participating stakeholders improving their ranking relative to nonparticipating creditors.

This quarter, Reorg highlights LME transactions from Trinseo, Frontier Communications, Lycra and Ideal Standard. The report concludes with a table summarizing all aggressive U.S. LME transactions covered by Reorg in the third quarter of 2023.

To date, aggressive LME involving, for example, uptiering and drop-downs have been common in the U.S. market while very limited in the European market. These types of LME do not go without challenge in the United States. In fact, the paths of these transactions can be highly litigious, and it is through the U.S. courts that the limits of these strategies are being tested.

Read Reorg’s RX 101 on liability management exercises and creditor-on-creditor violence HERE.

European companies are reluctant to pursue controversial LMEs because of reputation risk. Sponsors might face worse financing conditions in the future, especially in the European market, which is smaller and provides fewer options for financing. Directors’ duties regimes in Europe can see directors personally liable for transactions while an entity is in the zone of insolvency.

In addition, judges in Europe seem less willing to bless structures that push the envelope. Uptiering transactions are more difficult to implement in Europe as the lender consent requirements for amending priorities of debt are typically higher than in the U.S. Priming transactions such as drop-downs are also difficult to structure operationally, so they might make more sense in large capital structures where there is a specific asset or business that can be financed.

Trinseo: In early September, U.S.-based chemical company Trinseo announced the terms of a $1.077 billion financing transaction with a lender group including Oaktree, Angelo Gordon and Apollo with proceeds to be used to pay off its 2024 term loans in full and fund a partial redemption of approximately three-quarters of its senior notes due 2025. The new financing included a number of interesting features including a “pari-plus” double dip, a drop-down of assets into an unrestricted subsidiary and a PIK-interest toggle.

Frontier Communications: In August, U.S.-based telecommunications company Frontier Communications closed a $1.586 billion securitization transaction for a bankruptcy-remote special-purpose entity, or SPE, that holds its Dallas-area fiber and cable assets. CFO Scott Beasley described it as a “landmark deal,” and it could have implications for other firms in the cable/telecom space, possibly serving as a template for future transactions.

Lycra: In late July, U.S.-based spandex maker Lycra unwound its “quasi drop-down,” which provided investors in its new €300 million 2025 senior secured PIK notes a lien on certain intellectual property with a value of approximately $75 million. The company announced that it, certain shareholders, the holders of the new 2025 notes and other creditors had entered into a standstill agreement through Aug. 31, seeking to enter into certain transactions that Reorg believes means the new notes will no longer be the beneficiary of the IP security and guarantees in the drop-down transaction. This would have been only the second drop-down transaction Reorg has seen in the European market after Greek gaming company Intralot in early 2021.

Ideal Standard: In September, utilizing a carrot-and-stick approach, Belgian manufacturer of sanitary ware and fittings products Ideal Standard was able to garner support from over 99% of the holders of €325 million in notes for its pre-sale restructuring including accepting a number of amendments to the controlling agreement. If only a simple majority of consents was achieved, then the nonconsenting holders would have been stripped of all the covenants and would have been uptiered by the consenting holders.

Trinseo Utilizes Asset Drop-Down to Help Effectuate a Double Dip
Transaction: A pari-plus double-dip loan facilitated by an asset drop-down of the Americas Styrenics business
Size: $1.1 billion
Parties: Oaktree, Angelo Gordon, Apollo

On Sept. 8, U.S.-based chemical company Trinseo disclosed the details of its new financing, which secured $1.045 billion in net cash proceeds from a $1.077 billion new term loan facility. The proceeds were used to refinance its term loans due 2024 in full and to fund the partial redemption of roughly three-quarters of its senior notes due 2025. The new financing creates double-dip claims for the new lender group, which includes Oaktree, Angelo Gordon and Apollo.

An illustration of the transaction is shown below:
(Click HERE to enlarge.)

Trinseo’s financing incorporates multiple interesting liquidity management devices including the aforementioned double-dip structure as well as a drop-down of assets to an unrestricted subsidiary to help facilitate the double dip.

Trinseo LLC, a guarantor under the existing credit agreement, transferred the Americas Styrenics business out of the existing credit group to Trinseo NA Finance SPV LLC, an unrestricted subsidiary that is also a co-borrower of the new-money loan.

Moving this valuable asset, which is being shopped for sale, to the unrestricted subsidiary co-borrower provides substantial value to the new lender group. Upon the sale of the styrenics joint venture, the company must use 100% of the net proceeds to pay down the new-money term loan and must also pay a prepayment premium within the first three years of the loan term. The prepayment and premium terms also apply to the receipt of certain cash dividends from Americas Styrenics as laid out in the nonpublic joint venture agreement.

In addition to a first lien on the valuable styrenics business, the new lenders also benefit from a partial double-dip structure. The borrowers under the new loan are entities that are not restricted by the existing credit agreement - one is not a subsidiary of Trinseo Holdings and the other is designated as unrestricted - with the proceeds they receive onlent to the existing credit agreement borrowers pursuant to an intercompany loan.

Importantly, this intercompany loan has been structured as an incremental and refinancing loan under the existing credit agreement, making it pari passu to the existing credit agreement debt in every way. The new lenders have a first lien on the intercompany note, which creates the first “dip.”

The second partial dip comes from the various guarantors of the new loan, which include the parent entity of each new borrower. In addition, the new loan benefits from a “limited guarantee” by “certain Affiliates” of the new-money borrowers. Trinseo has not yet provided any additional information as to the nature of the limited guarantee or who the guarantors are, but the fact that they are limited suggests that they are restricted subsidiaries within the existing credit group.

Additional information as to the specific details of the new money loan, the Americas Styrenics business dropped down in the transaction, and a covenant analysis of the existing loan documents can be found HERE, while slides from Reorg’s webinar discussing Trinseo’s double-dip transaction can be found HERE with a replay of the webinar available HERE.

Frontier Securitizes Dallas-Area Fiber Assets in What May Prove to Be a Template Transaction
Transaction: Securitization of Dallas-area fiber assets and customer contracts
Size: $1.586 billion
Parties: Goldman Sachs (lead), Barclays, Morgan Stanley

On Aug. 9, U.S.-based telecommunications company Frontier announced that it had closed a securitization transaction whereby it issued $1.586 billion of fiber revenue notes secured by its various Dallas-area assets that had been contributed to a bankruptcy-remote SPE. The fiber and copper passings and associated contracts being contributed to the SPE, as of December 2022, included approximately 286,000 customers, or 17% of Frontier’s total fiber customers at that time, and 621,000 fiber passings, according to an offering memorandum reviewed by Reorg. Frontier said that it expects to draw a management fee related to the assets, which will be funded by the collections associated with these customers.

The assets contributed to the SPE generated an average revenue per consumer user of $66.85 in the first quarter of 2023, while in the fourth quarter, the assets contributed almost $470 million in revenue, including $232 million in fiber revenue representing 8% and 19% of the company’s total and fiber revenue, respectively. The company’s fiber penetration rate in the affected markets was 46% at the end of 2022, which materially exceeded Frontier’s total companywide fiber penetration rate of 32.6%.

To effectuate the transaction, Frontier created three new bankruptcy-remote SPEs: Frontier Dallas TX Fiber 1 LLC, Frontier Issuer LLC and Frontier SPE Guarantor LLC. Frontier Dallas TX Fiber 1 LLC is the owner of the assets and a wholly owned subsidiary of Frontier Issuer LLC, which is itself a subsidiary of Frontier SPE Guarantor LLC. Frontier Communications Holdings LLC is the manager and indirect owner of the three SPEs and is an indirect subsidiary of Frontier Communications Parent Inc.

Frontier noted in its press release that “[c]ertain of Frontier’s operating subsidiaries will be engaged on an arms’ length basis as manager to continue operating the securitized network and serving its customers” (emphasis added). Holdings is the borrower under Frontier’s credit agreement, which suggests that the management fee and any equity proceeds can or will be upstreamed into the existing structure.

As part of the transaction, Holdings (or another entity if so designated) is set to receive a management fee based on a combination of the number of video and broadband customers at the end of each period, the number of new gross broadband subscriber adds and the number of locations passed with fiber. The company disclosed that based on $469.4 million of fourth-quarter 2022 annualized revenue, the management fee would have totaled $220.6 million, resulting in $248.8 million of “annualized run rate revenue,” which the company uses to calculate the debt service coverage ratio under the securitization’s indenture.

This securitization encompassed several steps. First, the company formed the three new bankruptcy-remote entities and designated them as unrestricted subsidiaries; second, Frontier transferred the applicable assets to the new entities; and third, the new entities entered into the securitization facility and the management agreement with Holdings.
(Click HERE to enlarge.)

Additional information on the specifics of the Frontier transaction, including an analysis of Frontier's relevant covenants, can be found HERE, a replay of Reorg’s webinar on the topic can be found HERE, and a discussion of the potential for Lumen Technologies, a peer also building a fiber-to-the-home network, to do a “Frontier-like” transaction is HERE.

Lycra Opts Against Pursuing Quasi-Drop-Down Transaction
Transaction: Issuance first lien PIK debt, which initially included a since-canceled J. Crew-style drop-down
Size: €300 million
Parties: Certain Lycra creditors

On May 1, Spandex maker Lycra refinanced its outstanding €250 million 5.375% senior secured notes due 2023, which were maturing on that day, through the issuance of €300 million of 16% senior secured PIK notes due 2025. The new 2025 notes rank pari passu with Lycra’s other first lien debt, including its existing $690 million 7.5% senior secured notes due 2025, and the new 2025 notes and the existing 2025 notes have the same guarantors and share the same collateral, at least initially.

This followed a refinancing in March of Lycra’s $100 million super RCF with a PIK-toggle super senior term loan maturing in 2025.

However, after the issue of the new 2025 notes, in a variation of a J. Crew-style drop-down transaction, certain intellectual property with a valuation of approximately $75 million was to be contributed to certain wholly owned subsidiaries, which would be designated as unrestricted subsidiaries and would guarantee the new 2025 notes and pledge their assets as security for the new 2025 notes (but not the existing 2025 notes). As a result, the new 2025 notes would be structurally and effectively senior to the existing 2025 notes to the extent of the value of the IP. Reorg’s analysis of the transaction can be found HERE.

A simplified structure diagram illustrating the additional guarantee and security that the new 2025 notes would have benefit from (and that the existing 2025 notes will not benefit from) is set out below:
(Click HERE to enlarge.)

This would have been only the second drop-down transaction that we have seen in Europe (the first being Intralot), but on July 28 Lycra entered into a standstill and lockup agreement with certain shareholders and creditors - including the lenders under its super senior term loan dated March 1, the lenders under its $27.6 million shareholder loan and the holders of the new 2025 notes, the existing 2025 notes - the effect of which was to cancel the drop-down.

Among other things, the standstill and lockup agreement provides that:
  • The new 2025 notes will be amended to undo the requirement for the drop-down transaction;
  • The existing 2025 notes will be given additional protections to keep a lockdown from happening in the future; and
  • The new 2025 notes and the super senior term loan will be amended to allow scheduled payments under the shareholder loan.

However, the new notes that would have benefited from the IP security were granted a senior priority in the payment waterfall in the amount of $120 million and €5 million of the new 2025 notes to be repurchased at par (these were issued only a couple of months prior at an OID of 20) as a part of the agreement. As a part of the unwind, the documentation was also amended to prohibit future drop-down transactions as well as to allow repayment of shareholder loans. As such, while the IP security is no longer available to the 2025 creditors, it was used as an effective bargaining chip.

Following this U-turn, drop-down transactions remain a relatively rare beast outside the United States. However, an LME that is done with the support of all of a company’s creditors, rather than pitting one group against another, is more likely to succeed, so eliminating the drop-down (which benefited just the new 2025 notes) in favor of a structure that had a bit of something for everyone was probably a better and more durable solution.

Ideal Standard’s Carrot-and-Stick Approach Helps Secure Strong Vote for Restructuring
Transaction: Restructuring of senior secured notes to facilitate a sale to Villeroy & Boch
Size: €325 million
Parties: 99.25% of eligible holders of the security

On Aug. 15, Ideal Standard, a Belgian manufacturer of bathroom ceramic items and fittings, launched a three-pronged attack to restructure its existing 6.375% €325 million senior secured notes due 2026 to facilitate a sale of the company to Villeroy & Boch, a German peer company.

The company’s capital structure as of June 30 is below:
Ideal Standard International SA
EBITDA Multiple
(EUR in Millions)
Mkt. Val.
BGN-Demon. Finance Lease 1
€25M Bulgarian Overdraft Facility due 2022 2
EURIBOR + 2.050%
USD/EGP-Denom. Bilateral Facilities (“MENA Facilities”) 3
Factoring Arrangements 4
€25M PIK Toggle Secured Parent Loan due 2024 5
Total Non-Guarantor OpCo Debt
€15M Super Senior RCF due 2026
EURIBOR + 3.500%
Total Super Senior RCF
€325M Senior Secured Notes due 2026
Total Senior Secured Notes
IFRS 16 Lease Liabilities
Total Lease Liabilities
Total Debt
Less: Cash and Equivalents
Net Debt
Operating Metrics
LTM Revenue
RCF Commitments
Less: Drawn
Plus: Cash and Equivalents
Total Liquidity
Credit Metrics
Gross Leverage
Net Leverage

LTM Reported EBITDA is the company provided pro forma adj. EBITDA, which includes pro forma adjustments for productivity and procurement savings. LTM Reorg EBITDA is the non-pro-forma adj. EBITDA and the leverage ratio in this capital structure is calculated using this figure. The group may also have available liquidity under the MENA facilities, but the undrawn portion is not disclosed, hence is not accounted in other liquidity. The capital structure excludes €2.1 billion preferred equity certificates, issued in April 2021 as part of a restructuring and with mandatory redemption on April 28, 2041. It also excludes a €1.275 billion loan from parent maturing on Aug. 1, 2027, and a €198.4 million subordinated loan from parent maturing in 2040. The interests on these two loans from parent are accruing.
1. Relates to sales and lease back transactions in Bulgaria.
2. Agreed between Ideal Standard Vidima AD and DSK Bank AD in December 2021 for a period of 12 months renewable under certain conditions, and in December 2022 it was extended by one year to December 2023. Secured by certain assets of Ideal Standard Vidima AD.
3. Reflects the drawing of the Egyptian local credit lines. The facilities are typically available for a year or less but have been renewed on multiple occasions. Generally, these facilities bear a floating rate of interest.
4. Includes an Italian factoring facility for a maximum of €18 million, of which €0.1 million drawn, UK factoring facility for a maximum of £20 million, of which the equivalent of €9.3 million drawn, a factoring covering France, Germany, Belgium and the Netherlands for a maximum of €30 million, of which €300,000 drawn. Mix of recourse and nonrecourse.
5. Provided by certain affiliated lenders. The facility matures on Dec. 21, 2024, if not repaid earlier and is secured by certain assets that do not secure other such senior facilities. The interest is PIK at the option of the borrower until Dec. 31, 2023. The borrower is Ideal Standard s.r.o., which is not a guarantor of the group's RCF and SSNs.

The first prong involved an offer to exchange the notes for new senior secured notes. The second prong involved a related consent solicitation to amend the terms of the existing notes, which depended on the consent thresholds achieved.

If a simple majority of consents (50%) was achieved, then the nontendering holders would have been stripped of all the covenants and would have been uptiered by the tendering holders. But if 90% consent was achieved, then the nontendering holders would be back in the fold with those who tendered, and the existing notes would have been amended to have substantially the same terms as the new notes.

The new notes, however, are subject to a special mandatory redemption if an M&A event occurs, rather than noteholders having a put right at 101% under the change-of-control covenant (“90% proposed amendments”).

The third prong involves support from holders of the existing notes for a U.K. scheme of arrangement to implement the “90% proposed amendments” in the consent solicitation. The scheme solicitation was essentially a fallback option to achieve the same outcome if consents of at least 75% are received. When the solicitation was launched, Ideal Standard already had the support of 76.4% of the outstanding notes, so it seemed very likely that the “90% proposed amendments” would have gone through in one form or another, and there was little benefit for the remaining holders to try to negotiate a better deal.

As a matter of fact, an impressive 99.25% of eligible holders finally voted in favor of the “90% proposed amendments,” and the following day, on Sept. 18, Ideal Standard announced its disposal to Villeroy & Boch for €600 million.

Bondholders who did not tender into the exchange offer and consent solicitation and those who tendered after the early consent deadline are subject to redemption at 72, a 28% haircut. Bondholders who tendered before the early consent deadline will have their haircut reduced to 18% and will have an equity kicker that they share with the sponsors, Anchorage Capital Group and CVC Credit, after the sponsors get a priority return on their investment.

How much of the purchase price will flow to the bondholders who tendered before the early consent deadline is unclear, but if €207.8 million goes to the Cayman limited partnership through which tendering bondholders will share the sale proceeds with the sponsors, we estimate that they should recover the 18% haircut they took on their notes. Ideal Standard’s existing notes were quoted at 52, according to Solve Advisors on July 24, the day before Ideal Standard announced it had entered into a transaction support agreement with 76.4% of eligible holders. The price rose 10 points after the announcement.

Ideal Standard’s recent history has been dominated by financial and operational restructurings. Its sellers are Anchorage Capital (80% ownership) and CVC Credit Partners (20% ownership); they took control of the company in prior restructurings that involved debt-to-equity swaps. Since 2017, Ideal Standard has implemented several operational changes to improve profitability, consisting of closing production sites in high-production-cost countries and rationalizing the total number of stock-keeping units, or SKUs, among other measures.

But the subdued demand hampered improvements in profitability and cash generation. Reorg concluded several analyses on Ideal Standard, flagging potential liquidity gaps. In January, Ideal Standard received a €25 million PIK-toggle parent loan to plug the gap, and we believe the sponsors have had enough. At least the sponsors seemed to have found the right strategic buyer, and the valuation was agreed at 8.1x EBITDA, which is higher than transaction and trading comparables but justified by synergies potential. See Reorg’s valuation analysis HERE.

The exchange offer and consent solicitation represented a carrot-and-stick approach that gave upside for bondholders who were willing to participate and downside for those who were reluctant to. Lots of companies have used similar mechanisms in restructurings but without achieving the 99.25% participation that Ideal Standard got here. A lot of those focused more on maximizing the downside for nonparticipating holders, and hopefully Ideal Standard will be remembered as an example of the benefits that can be achieved if you are willing to share some of the upside.

Q3 US Liability Management Transactions

Other third-quarter out-of-court liability management transactions are summarized in the chart below:
US Q3 2023 Liability Management Transactions
Type Date Company Principal ($MM) Notes
Uptier 19-Jul Carvana 5,153 Unsecureds → 1L, @ 76c
Double-Dip 20-Jul Rayonier Advanced Materials 250 1.6-dip 250M loan backed by $150M pari passu loan
Uptier 25-Jul Anywhere Real Estate 800 Unsecured → 2L, led by Angelo Gordon @ 80c
Make-Whole 10-Aug Cano Health 165 Make whole could total up to 20%
Extension 6-Sep Cornerstone Chemical 447 Extended interest grace period to 361 days from 30 days
Double-Dip 8-Sep Trinseo 1,077 American Styrenics moved to unrestricted sub
Asset Dropdown
Double-Dip 15-Sep Wheel Pros 1,289 Unsecured → 1L/2L, also $235M enhanced FILO
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