Relevant Document:July 19 Minority Noteholder Letter
Reorg Research has obtained the
previously disclosed letter sent by Paul Weiss on behalf of 45% of the Safeway 7.25% debentures due 2031 to the trustee under the notes, with a copy sent to counsel for Safeway as issuer of the debentures. In an
8-K Monday,
Albertsons disclosed a response to the letter from itself and Safeway, with the reply denying allegations made by the minority noteholder group. The company did not include the July 19 Paul Weiss letter in its 8-K.
The July 19 letter from Lawrence Wee of Paul Weiss contends that an event of default has occurred under those notes and requests the trustee to issue a notice of default. In the letter, Wee says that holders’ counsel is “willing to meet immediately with Safeway and its advisors to discuss and reach a fair resolution of the concerns addressed in this letter.” The company’s Monday-disclosed July 23 response to the noteholder letter states that Safeway is “willing to meet with counsel for the Minority Holders, as proposed in the Wee Letter, to further discuss this issue.” The company reply also noted, however, that “Safeway reserves all of its rights and remedies in connection with the Debentures and the Minority Holders’ apparent efforts to contrive an Event of Default in order to extract an undeserved windfall by impliedly threatening to interfere with the contemplated Rite Aid transaction and its related financing.”
In the noteholders’ July 19 letter, Wee states that the Safeway default stems from its breach of the negative covenant in
section 4.7 of the indenture, which places limitations on Safeway’s ability to incur liens to secure indebtedness. Wee says that in 2015, Safeway breached section 4.7 by incurring liens securing an ABL and a term loan facility that were not permitted liens as defined in the indenture. Section 4.7 prohibits Safeway from incurring liens on assets other than permitted assets as defined in the indenture unless the debentures are equally and ratably secured by the liens and Safeway did not secure the 2031 debentures equally and ratably after incurring the aforementioned liens on the ABL and term loan facility, Wee says.
The minority noteholders’ counsel states in the letter that Safeway’s position appears to be that the liens created in 2015 were in fact permitted liens as defined in the indenture, because those liens “supposedly secured Safeway’s Indebtedness under the Bank Credit Agreement or under an initial or subsequent renewal, extension, refinancing, replacement, or refunding of the Bank Credit Agreement.”
The minority noteholder group, however, argues that the liens created in 2015 arise from agreements that served different purposes from the bank credit agreement. The bank credit agreement was a revolving credit facility functioning as a backup to Safeway’s commercial paper program, according to the letter. In contrast, Wee continues, Safeway incurred the 2015 liens in connection with about $7.3 billion in borrowings used to finance another entity’s purchase of Safeway and another entity’s payment of its existing debt. Furthermore, Wee states, Safeway’s new owner “forced” Safeway to accept the liens incurred in 2015 for the “exclusive benefit of that new owner and its other subsidiaries which are not subsidiaries of Safeway but are sister companies.”
The letter makes several claims asserting its argument that the Safeway 2031 notes are in default:
- “Section 4.7 of the Indenture limits Safeway’s ability to incur Liens on its assets securing its indebtedness.”
- “The Albertsons Credit Agreements are markedly different in function, structure and size from the Safeway 1997 Bank Credit Agreement, so the Albertsons Credit Agreements are not a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Safeway 1997 Bank Credit Agreement.”
- “The benefits of the Indebtedness incurred under the Albertsons Credit Agreements do not inure to Safeway or its subsidiaries, so the Albertsons Credit Agreements are not a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Safeway 1997 Bank Credit Agreement.”
- “Because the Albertsons Credit Agreements are not a renewal, extension, refinancing, replacement or refunding or an amendment, restatement, successor, supplement or other modification of the Bank Credit Agreement in effect at the time the Debentures were issued, the incurrence by Safeway of the 2015 Liens on its assets violate Section 4.7 of the Indenture.”
The letter concludes that the holders of the 2031 notes “expect that Safeway and its affiliates will not take any actions (including the incurrence of additional secured indebtedness) that may be to the detriment of the holders … [F]urthermore, the holders reserve the right to seek all remedies … including expectation damages equal to the redemption price set forth in the Indenture.”