Fri 02/12/2021 13:58 PM
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GTT Communications and its creditors are considering a prepackaged chapter 11 filing to restructure the internet service provider’s debt, according to sources. Discussions are still at a preliminary stage and formal negotiations have not started, the sources cautioned. Continue reading as our Americas Core Credit team analyzes the GTT Communications debt restructuring and Request a Trial for access to the linked documents as well as our analysis and reporting on hundreds of other stressed, distressed and performing credits.

The company is expected to pay down its $1.7 billion U.S. L+275 bps term loan due 2025 and the $951.5 million EMEA L+325 bps term loan due 2025 with the proceeds from the proposed $2 billion sale of the company’s fiber network and data center infrastructure assets to I Squared Capital, the sources said. Pursuant to an amendment entered into last year in connection with the company’s priming term loan, net cash proceeds from the asset sale that remain after the priming term loan has been fully repaid that are not attributable to the U.S. borrower and its U.S. subsidiaries must be applied as follows, according to Americas Covenants by Reorg:

  • First, to fully prepay the 2020 EMEA incremental term loans;

  • Second, with net cash proceeds in an amount sufficient to fully prepay the EMEA term loans that are not 2020 EMEA incremental term loans, apply 75% of such amount to repay EMEA term loans that are not 2020 EMEA incremental term loans and 25% of such amounts to repay the U.S. term loans; and

  • Third, repay the U.S. term loans with any remaining net cash proceeds.

Net cash proceeds from the sale of the infrastructure business assets that are attributable to the U.S. borrower and its U.S. subsidiaries must be used to prepay the U.S. term loans.

Some of the EMEA lenders who did not participate in the incremental term loans had objected to the proposed amendments as these lenders held the view that they would be fully repaid at par with the sale proceeds ahead of the U.S. lenders outside of a bankruptcy, two of the sources said. However, holders of GTT’s U.S. loans contend that the EMEA lenders would be pari passu with them in a bankruptcy under a pre-agreed collateral sharing agreement, they added.

If implemented, the asset sale is expected to precede the bankruptcy proceedings, the sources added. Pursuant to the purchase agreement, the acquisition is expected to close during the first half of this year, and the buyer has the right to unilaterally terminate the acquisition if an insolvency event occurs with respect to GTT.

In a potential chapter 11, the term lenders would receive take-back paper in exchange for the remainder of their holdings and potentially a portion of the reorganized equity, the sources said. Holders of the $575 million 7.875% unsecured notes due 2024 would take the vast majority of the reorganized equity, the sources added. GTT could also raise additional capital through a rights offering funded by the noteholders, they said. The notes last traded in size at 26.25 on Feb. 11, according to TRACE.

Talks to reach an agreement on GTT’s balance sheet restructuring have progressed slowly recently, the sources noted. The parties had also explored the option of converting the outstanding term loans post-paydown with the sale proceeds into new first lien paper with the unsecured notes due 2024 being exchanged for new second lien notes, potentially with PIK features, the sources said.

Implementing the restructuring via a chapter 11 process makes the most sense for GTT, as it would allow the company to retain the buyer for the infrastructure assets, the sources said, also citing the difficulty in getting the requisite consents, particularly from the EMEA lenders, for an out-of-court transaction. The EMEA lenders face the biggest downside among GTT’s creditors in a bankruptcy as their advantage of receiving prepayments ahead of the U.S. lenders is at risk in chapter 11, they added.

Prices on the EMEA and U.S. term loans are moving closer: The U.S. term loan was quoted today at 80/80.5, according to a trading desk. Meanwhile, the EMEA terms loans were quoted at 86.75/87.5 today, compared with the low 90s in mid-January, according to Solve Advisors.

A prepackaged chapter 11 filing assumes that the bondholders would be willing to give up their juicy coupon payments and yield in exchange for the implied risk/economics of owning equity in GTT, two sources said. “Bondholders will need to believe in the turnaround story of GTT and also be comfortable with the terms for the stub lenders, but this is as good an outcome as it gets for the bondholders,” one of the sources said. As a business, GTT is likely to still be highly leveraged and cash burn remains a concern, which is why it will need more new money, the sources said.

A key condition for accessing the second $175 million portion of the priming $275 million delayed-draw bridge facility is that the company must have provided a plan by Jan. 31 regarding tax strategy and implementation of a balance sheet recapitalization that is reasonably acceptable to certain ad hoc groups of lenders. While GTT has not formally announced anything, it is expected to make a disclosure in the next few days, the sources said. The current forbearance agreements related to late earnings reports between the company and its creditors expire on March 31.

GTT Communications did not respond to a request for comment.

--Harvard Zhang, Adelene Lee
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