Wed 02/17/2021 12:28 PM
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Relevant Document:
Secured Notes OM

Suning Holdings, the owner of Italian football club FC Internazionale Milano, or Inter Milan, is seeking about €150 million in emergency financing by the end of June in order to run the Italian club’s operations and pay the remaining installments on previously agreed transfer fees for players, sources close told Reorg. To this end, Suning contacted several hedge funds proposing they refinance Inter Media’s €375 million senior secured notes, which are due Dec. 31, 2022, and they provide new money, according to sources. Continue reading for our EMEA Core Credit team's analysis of  Inter Milan's emergency financing, and request a trial for access to our analysis and reporting on hundreds of other stressed, distressed and performing credits.

Suning, one of the largest retailers in China, faces a heavy debt burden in the Asian country as well as strict restrictions over its foreign investments due to government controls, sources said. Aside from majority shareholder Suning, which reportedly bought about 70% of Inter Milan for €270 million in June 2016, fund Lion Capital owns a 31.1% stake in the club.

Questions remain about who would be willing to provide the €150 million new money if it is incurred as debt, how any such debt would be structured and what would be its collateral. Most of Inter Milan’s assets serve as collateral for the Inter Media’s €375 million of senior secured notes, which are trading at about 97.

Further, incurrence of potentially secured debt at the level of the group’s media company, Inter Media and Communication SpA, is likely to require the consent of the 2022 noteholders. Alternatively, if the debt is incurred by Inter Milan, that group’s €50 million revolving credit facility may have debt incurrence covenants which would need to be bypassed, potentially using a restructuring tool, such as a scheme.

An alternative deal for Inter Milan could be an M&A operation. Suning has been in talks with BC Partners over potential investment, according to Italian daily IlSole24Ore. The talks have temporarily stopped after a valuation could not be agreed. BC Partners values the club at €750 million, whereas Suning Holding believes the club is worth more than €900 million.

The club is still speaking with BC Partners and other potential investors such as Ares Management and Fortress Investment Group, according to an article by the Financial Times. EQT and Arctos are also reported to be monitoring the situation. Options range from an outright acquisition of the club to the purchase of a minority stake. Suning is advised by Goldman Sachs on the M&A process.

Inter Milan reported a loss of €102.4 million in the 12 months to June 30, 2020, compared with a loss of €48.4 million one year earlier. Cash at hand and on bank amounted to €88.5 million compared with €54.6 million at June 2019.

On the other hand, Inter’s media company, Inter Media and Communication SpA, reported an adjusted revenue increase of 4.1% year over year to €94.2 million in the three months ended Sept. 30. Cash available for debt service decreased by €32.8 million, or 38.6%, year over year in the first quarter to €52.2 million, driven by a €33 million reduction in cash inflows.

Inter Media’s capital structure is below:

















































































































Inter Media and Communication S.p.A.


09/30/2020

EBITDA Multiple

(EUR in Millions)

Amount

Maturity

Rate

Book


€300M Senior Secured Notes due 2022 1

285.4

Dec-31-2022

4.875%

€75M Senior Secured Notes due 2022

75.0

Dec-31-2022

4.875%

Total Inter Media and Communication Senior Secured Debt

360.4

1.6x

Total Debt

360.4

1.6x

Less: Cash and Equivalents

(22.4)

Less: Other Net Debt Adjustments

(26.4)

Net Debt

311.5

1.4x

Operating Metrics

LTM Reorg EBITDA

220.2


Liquidity

Other Liquidity

26.4

Plus: Cash and Equivalents

22.4

Total Liquidity

48.9

Credit Metrics

Gross Leverage

1.6x

Net Leverage

1.4x


Notes:
Capital structure excludes the RCF that sits in F.C. Internazionale Milano S.p.A. The Inter RCF sits above the restricted group, and will be secured by first priority security granted by Inter over ticket revenues (including season tickets and match day tickets) which shall be paid into an account over which Inter will grant security (and provide certain control rights to the RCF Security Agent) under the relevant transaction security documents. LTM Reorg EBITDA is the company's reported cash available for debt service. Other net debt adjustments are the amounts held in the debt service account to fulfill the obligations of the notes.
1. Amount held as of March 31 to due lack of disclosure.Collateral for the notes includes a pledge over the entire corporate share capital of the issuer, a pledge over the accounts of the issuer, a pledge over revenue received from UEFA, a security assignment of the rights and receivables under the Intercompany Loan Agreements, the License Agreement, the Playing and Staging Agreement and the Services Agreement. There is also a security assignment of the rights and receivables arising under the Existing Direct Media Contracts, the Existing Indirect Media Rights Arrangements and the Existing Sponsorship Agreements (including the Naming Rights and Sponsorship Agreement only for the portion relating to the training kit naming rights and any performance-related bonus), an undertaking to provide a security assignment of rights and receivables arising under the Future Indirect Media Rights Arrangements, the Future Direct Media Contracts and the Future Sponsorship Agreements; and a pledge over the Issuer’s material intellectual property rights



Debt Incurrence at Inter Milan Level

The group could attempt to raise the €150 million cash at either the Inter Milan or Inter Media level.

If the cash is raised at the Internazionale Milano level, the group will have to comply with any restrictions on indebtedness included in the €50 million revolving credit facility which has first priority security over proceeds from ticket sales.

The €50 million revolving credit facility, governed by English law and described in the 2022 notes OM, requires the consent of 80% of lenders for amendments to its provisions, including its debt incurrence covenants (and unanimous consent for amendments to “money terms”). We assume that the facility does not contain any “baked in” capacity for the incurrence of the €150 million new money.

If the group intends to incur the €150 million new cash at this level, it could erode the contractually prescribed amendment consent thresholds in the facility, using an English law scheme of arrangement. The tool allows a debtor to amend the terms of its debt documentation with the consent of just 75% by value (and 50% by number) of affected scheme creditors. The group could create a new basket for debt incurrence.

Once certain jurisdiction and fairness hurdles are passed, a scheme can be sanctioned by the English court and will be binding on all creditors in the affected class of creditor, be they bank lenders or noteholders and whether they consented or not.

The scheme process, although efficient, is not without cost and requires the involvement of law firms, financial advisors and barristers, generally taking between four to six weeks to implement. It can also require amendments to governing law provisions and accession of English law-incorporated obligors to aid with passing jurisdictional hurdles, as well as foreign law advice as to international recognition; all of which add further costs.

However, the scheme process could be used to create a new super senior basket for debt incurrence at the Inter Milan level.

Debt Incurrence at Inter Media Level

The restrictions on the further incurrence of debt in Inter Media’s €375 million 2022 notes mean that solving the group’s reported need for a further €150 million in cash is complicated, if undertaken at the Inter Media level.

It is unlikely that any new provider of cash is going to provide it on a junior or unsecured basis. Therefore, unless the group can structure the incurrence of new debt to be secured and fit in with the 2022 notes existing debt incurrence baskets, the group will need to amend the notes’ covenants to create new capacity for incurrence of the €150 million.

It is possible that the group could attempt to address the impending maturity of the 2022 notes and include a maturity extension date at the same time as creating the new capacity.

The group is most likely to do this consensually, using a consent solicitation which would require the consent of:

  • 50% of noteholders to amend the debt incurrence covenants to create a new €150 million debt basket; and



  • 75% to amend the “money terms” of the notes, being among other things, principal, maturity and interest payment mechanism.


A consensual amendment will tend to be cheaper, faster and by reputation better for a debtor than a coercive process and noteholders could be incentivized to vote in favor of the proposed amendments with a consent fee.

Notably, the risk factors in the 2022 notes explains that under Italian Law, the approval of an extraordinary resolution amending the terms and conditions of the notes typically requires the consent of just 50% of outstanding notes. It is further explained that although the provisions of the 2022 notes have increased the 50% requirement to 75% for amendments to money terms, that requirement is untested under Italian law. This means it may be challenged and subsequently the majority voting threshold for money terms may be reduced from 75% to 50%.

The alternative option, is implementing the deal non-consensually, using an English law scheme of arrangement tool to effect the amendments for example is unlikely. This is because the tool would also require the consent of 75% by value (and 50% by number) of noteholders as well as being more expensive and slower.

It is uncertain whether the group intends to incur the new money as super senior to the notes or on a pari basis. Existing noteholders are unlikely to allow the 2022 notes to be primed either temporally or contractually, without any significant upside.

Therefore, commercially, the terms on which the new money is incurred is likely to be negotiated with the 2022 notes.

Reorg’s analysis on companies which have issued new super senior debt in the last 18 months can be found HERE.

--Luca Rossi, Shan Qureshi
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