Fri 07/17/2020 08:20 AM
Over the last couple of months, while lockdown measures were in place and many companies were facing liquidity issues, several groups resorted to the issuance of new super senior debt to create a breathing space, as discussed in our Navigating Uncertainty series. In incurring such new debt, issuers were obliged to either comply with the existing debt incurrence provisions of their debt documentation or amend them, either consensually or by using a restructuring process.

The introduction of new super senior debt was, on occasion, part of a larger restructuring process, with certain issuer groups taking the opportunity to amend and extend their existing borrowing obligations. Where issuer groups had remaining super senior debt capacity baked into their debt documentation, debt incurrence required no amendments or existing creditor consent. However, where there was no such capacity, the use of a consent solicitation or a restructuring tool to garner creditor support for appropriate amendments was required.

This article focuses on issuers that have retained their capital structure, but added new super senior debt.

Typically, under high-yield notes, consent of a simple majority of noteholders by value is required to amend “non-money terms,” such as the amendments required to the debt incurrence covenant to allow for new super senior debt. Amendments to money terms however, such as the amendment of interest costs or payment dates, require a 90% consent threshold to be passed. The introduction of new or increased super senior borrowing capacity under a note’s indenture does not happen within a vacuum - amendments or consents under a group’s intercreditor agreement as well as consent of existing super senior lenders may be required. Such additional consent thresholds can be as high as 100%, although we have seen cases, such as that of U.K. retailer Matalan, with intercreditor agreements requiring just a majority consent for some changes.

Where issuers have been unable to reach either: i) a 90% money term consent threshold; or ii) a 100% bank/intercreditor agreement consent threshold to allow new super senior debt incurrence, some have turned to the English law scheme of arrangement process. 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.

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 lender or noteholder, 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 even further costs.

With the 90% consent hurdle in notes’ documentation creating additional logistical hurdles and financial strains (on what is likely to be an already cash-strapped issuer) - perhaps future issuers and noteholders could consider reducing the 90% consent hurdle to 75% with respect to certain money terms. In practical terms, the current choice is between 90% and 75%-plus-additional-time-and-issuer-costs, after all.

It is however noted that:

  • Noteholders are given, on occasion, fees for their consent, so this could be a reason for keeping the threshold high, though not all processes feature them;



  • In some notes, the relevant consent threshold is already 75% for the release of guarantees and collateral;



  • Should, in practice, an issuer receive consent from just 75% of scheme creditors to amend a 90% “money term” provision, the English Court, when considering whether to sanction, will look very carefully at whether the scheme is fair, given it is attempting to impair rights of non consenting creditors; and



  • Often the scheme process is used not where there are dissenting creditors, but where it has proved logistically impracticable to locate and draw consent from all creditors.


A summary of the most recent issuers to introduce new super senior debt into their capital structure during the Covid-19 crisis is below.
Codere

Codere’s new debt restructuring deal, which as of mid-July has been approved by about 57.5% of its 2021 noteholders who have entered into a lockup agreement, includes €250 million of new super senior notes to refinance the existing €95 million revolving credit facility and to provide liquidity. The restructuring also includes a two-year extension to the 2021 notes as well as amendments to the notes' interest rate and covenants.

The group intends to implement the amendments using a consent solicitation, for which the required threshold is 90%, as there are amendments to the notes’ money terms. If the requisite threshold cannot be achieved, the group proposes to use an English scheme of arrangement.

Although the terms of the RCF will not be amended by the notes’ consent solicitation or any notes’ scheme, lenders’ consent will be required for the amendments to the group’s intercreditor agreement. The consent level required from RCF levels and the amendments to the intercreditor agreement is unknown, but could be unanimous.

The deal is expected to be completed ahead of the next interest payment for the 2021 notes on Oct. 31. If the company is to use a scheme process, it will need to appear twice before the English court and ensure sufficient notice is given to scheme creditors.

Pizza Express

One of the first companies to resort to the super senior debt solution in the lockdown was U.K. casual dining chain Pizza Express. On March 18, Pizza Express announced it had signed a binding agreement with HPS Investment Partners for the provision of a three-year £70 million single currency super senior term loan facility, with proceeds to be used to repay Pizza Express’ £20 million RCF and £10 million super senior term facility with Hony Capital, as well as for general corporate and working capital requirements. On April 30, Pizza Express utilized the £70 million facility available under the agreement in full.

Under the terms of its 2022 senior secured notes, the issuer had super senior debt capacity of the greater of £70 million and 75% of consolidated EBITDA baked in at issuance. The group therefore did not have to reach out to its noteholders for any consent to amend the notes covenants to avail itself of the £70 million of super senior liquidity funding.

At the moment, the group’s noteholders are negotiating a debt-for-equity swap that would reduce the group’s £465 million senior secured debt due 2021 to about £200 million in exchange for a majority stake in the business. Some of the holders in the SSN committee have agreed to provide between £50 million and £100 million in new money as a super senior loan and will get a larger share of the equity in exchange.

Separate to the new money, Pizza Express is also soliciting consent from holders of its notes to approve amendments and waivers to the indenture to postpone publication of its annual and quarterly reports, which were supposed to be delivered within 120 days after the end of the fiscal year and 60 days after the end of the quarter, respectively. The consent solicitation has been extended on five different occasions, with the latest deadline set for Aug. 3.

Group EBITDA was down 11.4% to £71 million, with EBITDA margin declining 190 basis points to 12.9%, the company said in its first-quarter results on May 1. The decline was driven by sector-wide cost pressures relating to labor and property costs. EBITDA margin in the U.K. and Ireland was 130 bps lower at 16.5% and International EBITDA margin was down 350 bps to negative 2.3%.
Selecta

Swiss vending machine company Selecta said on March 26 it had entered into a €50 million single currency term loan liquidity facility agreement with entities related to its sponsor KKR for general corporate and working capital requirements.

Selecta’s 2024 senior secured notes allowed €50 million of additional super senior debt capacity over its €150 million super senior RCF. As a consequence, Selecta exhausted its super senior debt capacity. Again, like Pizza Express, consent of noteholders was not required, given that baked-in capacity was used.

With severe erosion of 2020 EBITDA leading to further issues at the company, a group of senior secured bondholders have mandated Perella Weinberg as its financial advisor and Latham & Watkins as its legal advisor for debt negotiations. Selecta previously mandated PJT and Kirkland & Ellis as financial and legal advisors ahead of potential debt restructuring negotiations.

On May 25, the company posted a first-quarter 12.3% year-over-year revenue decline to €358.1 million on the back of the Covid-19 pandemic. Adjusted EBITDA decreased 75.9% year over year to €16.5 million on a pre-IFRS 16 basis and reported EBITDA fell 73% to €13.3 million as cost-cutting measures were unable to fully offset revenue reductions.

Swissport

On June 4, Swiss airport ground-handling group Swissport received the required consent from a majority of its 2024 senior secured holders and from 100% of its credit lenders to incur up to €380 million in new super senior debt. The group did not have any capacity at all baked into its senior secured notes for incurring super senior debt and therefore had to reach out to creditors for consent to create a new class of super senior debt.

The senior secured noteholders consented to the amendments that would allow the incurrence of the new super senior debt by way of consent solicitation, requiring just a simple majority. The group’s credit agreements and parts of the intercreditor agreement required unanimous approval to be amended, so a scheme of arrangement was used and successfully passed on June 24.

The group’s senior unsecured creditors were not consulted with respect to the amendments, and have contended that their rights under the group’s intercreditor agreement remain unchanged.

Travelodge

On April 22, U.K. hotel chain Travelodge said it had obtained a new super senior £60 million RCF with affiliates of its shareholders. The agreement contains various conditions precedent to funding, including a requirement to obtain a rent payment agreement with landlords of the group. On June 3, the group launched its company voluntary announcement, or CVA, requesting a £144 million reduction in rent until Dec. 31, 2021, which has been successful.

Travelodge’s 2025 senior secured floating rate notes permit super senior debt to be incurred to the greater of £122 million and 100% of LTM EBITDA. When the notes were issued, there was immediately £52 million of headroom on top of the £40 million revolver and £30 million L/C facility to incur super senior debt. LTM-reported EBITDA as of December 2019 was £129.1 million. It is possible that “LTM EBITDA” as defined in the offering memorandum for the senior secured notes is higher than the reported EBITDA because of addbacks and other permitted adjustments. The group did not reach out to its noteholders for consent to incur the additional super senior indebtedness.

On June 16, the group increased the excess EBITDA that will be paid to landlords to 66.6% from 50% and negotiated interest concessions under its shareholder loans among other amendments to its CVA. In a letter circulated to landlords, the company said the changes would “benefit landlords and give greater certainty to the proposal.”

Matalan

In May, U.K. retailer Matalan launched a consent solicitation in order to permit the incurrence of further super senior debt. The group has both first lien and second lien notes, due 2023 and 2024. The group’s consent solicitation was sent only to its first lien lenders and contained a 0.5% consent fee, and was successful. The solicitation required majority consent to effect the amendments to the first lien notes and to certain waivers under the group’s intercreditor agreement.

Separately, the group is using a scheme of arrangement to amend the interest payment mechanism of its second lien notes, as reported. The scheme will require at least 75% consent of second lien noteholders.

The group baked super senior capacity into its notes, which contained a £60 million basket for credit facilities at issuance, of which £50 million was used by an existing RCF. The consent solicitation was therefore used to increase the credit basket to £100 million to allow the incurrence of the increased £50 million of super senior indebtedness.

The new £50 million debt included a £25 million RCF from the Coronavirus Large Business Interruption Loan Scheme (CLBILS) funded by two of the company’s banks. The other £25 million will be issued in new notes, to be purchased by a group of 2023 first lien noteholders. Once in place, the proceeds from any enforcement of the group’s collateral will be required to be applied to repay indebtedness outstanding under the existing £50 million RCF, the CLBILS facility and the £25 million new notes on a super senior priority basis in priority to the first and second lien notes.

The group is expected to undertake certain sale and leaseback transactions of its head office to prepay parts of the new funding, following their implementation.

Celsa, Travelex

Other companies are also looking at the possibility of issuing super senior debt, such as Spanish steel company Celsa. In May, Celsa was granted an injunction to temporarily postpone a €35 million interest payment due May 4 and about €100 million interest due on Nov. 4 to the same months of 2021. A Madrid court allowed the precautionary suspension of interest and principal payments until 2021.

The company obtained a loan of up to €51 million from banks, backed by Spain’s Covid-19 guarantee line scheme. The loan will strengthen the company’s liquidity and may be extended by an additional €24 million tranche if necessary. It is unclear where the new money will feature in the company’s debt structure. It may come as super senior debt, as reported.

At the beginning of July, the U.K. government also announced an emergency loan to Celsa Steel (UK) Ltd, a subsidiary of Spanish steelmaker, to allow the company to continue trading. As reported, the size of the state-backed loan is believed to be about £30 million.

U.K. foreign exchange group Travelex’s ad hoc senior secured noteholders’ committee is also looking at “multiple avenues” to complete the restructuring of the foreign exchange business, financial advisor PJT said on a call to discuss the group’s proposed restructuring on July 14. While the group would prefer to hit the 90% threshold to allow for lower costs and a quicker transaction, it will consider a scheme of arrangement if this level is not reached, PJT added, without disclosing the current level reached.

As of July 7, Travelex reached an agreement with at least 66.7% of its senior secured noteholders and all of its RCF lenders on the terms of a restructuring. Should the scheme route be taken, 75% consent by value would be required.

In the restructuring, the group’s €360 million SSNs will be fully equitized and the new money providers will control the new group. Of the group’s £90 million RCF, £59.6 million will be reinstated, consisting of a £50 million super senior reinstated term loan and a new £9.6 million super senior guarantee facility.

Debt Explained’s legal analysts can conduct a priming debt capacity analysis on any senior facilities agreement in your portfolio. To get in touch, please contact us at questions@reorg.com.

-- Shan Qureshi, Daphne Frik
This article is an example of the content you may receive if you subscribe to a product of Reorg Research, Inc. or one of its affiliates (collectively, “Reorg”). The information contained herein should not be construed as legal, investment, accounting or other professional services advice on any subject. Reorg, its affiliates, officers, directors, partners and employees expressly disclaim all liability in respect to actions taken or not taken based on any or all the contents of this publication. Copyright © 2020 Reorg Research, Inc. All rights reserved.
Thank you for signing up
for Reorg on the Record!