Pro-Gest Works on Proposal Featuring 2024 Notes A&E, Noncore Asset Sales, Potential New Money; Formal Restructuring Talks With AHG Yet to Start

Relevant Documents:
€250M SUNs Due 2024 - OM
Reorg Asset Sale Analysis

Italian paper and packaging group Pro-Gest is working on a proposal to address its capital structure featuring an amend and extend of the company’s 3.25% €250 million unsecured notes, due 2024, the sale of noncore assets and the potential provision of new money, sources told Reorg. It’s still unclear who might be the provider of this potential new money - whether it is the ad hoc bondholder group, which has already shown its willingness to invest in the business, the company’s shareholder, or an external party, sources added.

Formal debt talks with the company’s ad hoc bond bondholder group have not yet started, sources said.

The A&E is expected to represent an improvement for the company’s bondholders, and could therefore possibly feature a different security package, an enforcement point in the capital structure and/or a higher interest, as Reorg reported in December.

Talks with investment funds such as Pillarstone have not yielded anything concrete yet, sources said.

As reported, Pro-Gest founder, Bruno Zago, met personally with the Italian turnaround fund Pillarstone to discuss a possible deal involving the provision of new money from the fund in exchange for an equity stake and some governance rights in the company. However, these initial talks were informal and were not agreed to by the company’s advisors.

Pro-Gest’s ad hoc bondholder group, or AHG, holding over 50% of the unsecured bonds and including funds DWS and Cheyne Capital, is working with Houlihan Lokey and Linklaters. The 3.25% 2024 notes are quoted around 48/52, according to Solve Advisors, a level that is still considered too high by several opportunistic funds interested in the notes.

Carlyle, which holds €200 million in aggregate of secured debt due December 2025, and is advised by Rothschild, Milbank and Gattai, at the moment seems unwilling to drive a potential restructuring process that may end in taking over the paper and packaging manufacturer, according to sources. For an overview of Pro-Gest’s refinancing and/or restructuring options, click HERE.

In November 2023, Bloomberg reported that the ad hoc bondholder group showed its interest in providing new money to the company. Some speculated that these bondholders could also buy out Carlyle’s secured debt position, an effort that would require a considerable disbursement of cash.

Pro-Gest’s capital structure features €350 million of debt at the level of its operating companies, which include €200 million of secured notes issued to Carlyle and credit lines from local banks. In addition to the operating company debt, there are €250 million worth of senior notes due 2024 at the holdco level. These notes are unsecured and guaranteed by five subsidiaries of the issuer Pro-Gest SpA: Cartiera di Carbonera SpA, Tolentino Srl, Cartitalia Srl, Cartonstrong Italia Srl and Trevikart Srl.

Reorg has reviewed the final offering memorandum of the 2024 notes. Under the terms of such notes, general amendments require consent from a majority of the holders of the notes. In order to make money term amendments, consent from at least 75% of the outstanding notes is required. This includes changes to principal, term, interest, the release of security and guarantees as well as default/event of default waivers relating to nonpayment of principal, interest, premium or additional amounts. Consequently, the AHG holding 50% of the 2024 notes would be able to make certain amendments (or grant certain waivers) under the note terms, however, the group would not be able make key “money” changes to the bond, for example undertaking a “light touch” amend-and-extend exercise, without increasing the percentage of the notes it holds.

Previous Refi Attempts

Before the summer, Pro-Gest’s advisor Goldman Sachs held extensive negotiations with wall-crossed investors with regard to a potential secured refinancing of the capital structure. Investment funds including Bain Capital showed interest in the deal. However, sources said that Goldman Sachs did not manage to attract enough investors and convince existing ones to play their part in the refinancing transaction.

The group had previously stated that it intended to do a deal with bondholders subsequent to the sale of its new Mantova plant - a state-of-the-art containerboard facility - which took up most of its capital expenditure from 2017 onward. However, management then communicated that they had no bids to evaluate for the plant, due to the current depressed Italian market for paper packaging, and as such, the company now intends to tackle the maturity wall before a potential sale of the mill.

Management’s recent U-turn on strategy, which implied abandoning plans to sell its main assets and opting instead for disposing of noncore units, did not come as a surprise to the market. But sources familiar with the matter said that the decision came too late, leaving little room to maneuver for shareholders and management.

Sources noted that selling in current market conditions would imply accepting a hefty discount for those assets – Mantova and Maranello – which are considered Pro-Gest’s crown jewels. While putting such disposals on hold makes sense, the sources added that the company has wasted time and is now under increased pressure to tackle its debt maturities.

Pro-Gest’s liquidity position is thin. Cash and cash equivalents currently stands at €40 million (as of November, as disclosed by management), with the group reliant on uncommitted lines from Italian banks that could be switched off at any moment. With levered free cash flow at negative €65.7 million in the LTM ended Sept. 30, 2023, Pro-Gest is in a precarious position regarding liquidity.

The group’s LTM cash interest paid is €34 million on a currently depressed adjusted EBITDA of €62 million, resulting in cash interest coverage of 1.8x, with net leverage at 8.8x. Including €28 million of EBITDA normalization adjustments applied by management, the net leverage figure drops to 6.1x.

In December 2023, S&P downgraded Pro-Gest to CCC and underscored the company’s “poor track record of positive adjusted free operating cash flow.” The ratings agency sees a heightened risk of a distressed debt restructuring or a missed interest payment in the next 12 months.