Travelodge
Travelodge Could Be First UK Group to Use New Super Scheme as it Seeks to Compromise 2025 Notes, Implement Landlord Rent Reduction
Thu 05/28/2020 14:01 PM
Relevant Item:
2025 Notes OM
Travelodge could use the U.K. government’s proposed cross-class cramdown restructuring plan, CDRP or “super scheme,” to implement a rent reduction and amend the terms of its senior secured floating rate 2025 notes.
The group has so far not announced any proposed compromises to the SSNs, but with the hotel group facing severe cash flow issues as a consequence of the Covid-19 pandemic, an SSN interest payment amendment or haircut could be the next option proposed by the group. The £440 million SSNs, along with the group’s existing £40 million revolving credit facility, have interest costs of about £28 million per year.
Travelodge is asking its landlords to forego between £103 million to £146 million in rent, or about 2.4% to 3.3% of the total of more than £4 billion in rent due over the remainder of the leases. The group announced in its successful consent solicitation this month that it will use a company voluntary arrangement (CVA) or the super scheme to implement the new rent payment agreement with landlords, if they do not consent to it. The group requested in its consent solicitation that the notes be amended so that neither a CVA or CDRP will cause an event of default.
The usual implementation tool used to non-consensually amend the terms of debt documentation in the U.K is a scheme of arrangement under the 2006 Companies Act. Travelodge has highlighted possible use of the CDRP to amend leasing arrangements and this piece considers how the process could be used by Travelodge to also impair its SSNs. The CDRP, alongside a new moratorium process, is likely to pass into law in the coming weeks, having both been proposed in 2018 and included in the new Corporate Insolvency and Governance Bill published on May 20.
The CDRP, as drafted, contains a cross-class cramdown feature in respect of voting on a restructuring plan, which is not included in the existing scheme process. This means that in the existing scheme process, where a certain creditor class has a right to vote on the plan and they vote against it, the whole process cannot go ahead. The CDRP is drafted to allow a dissenting class to be “crammed-down” and does not let them block the process.
Travelodge’s SSNs are trading around 70. The next interest payment is due on July 15, and is payable quarterly on the 15th of the first month of each quarter. The quarterly coupon payment is only about £6 million.
Reorg estimates that, absent meaningful recovery this year, the group will run out of liquidity by early in the fourth quarter if hotels are allowed to reopen by early summer and it achieves £103 million in rent reductions. Liquidity will run out later in the quarter if a £146 million rent reduction and a late-summer reopening happens. In both scenarios, the group will have sufficient liquidity to pay its October coupon, the last one in the current financial year. As the group’s coupon payment is so low on a quarterly basis, it has the means to take short-term cash preserving measures to meet its coupon payments, for example by reducing capex or other cash outflows temporarily, even if it burns through cash faster than our current estimate. Our assumption does not incorporate any working capital inflow later on in the year, nor any meaningful outflow due to the overall lack of activity.
The new £60 million super senior credit facility, provided by affiliates of its shareholders and entered into in April, requires the group to obtain a rent payment agreement with its landlords as a condition precedent to funding. It is understood that following the drawdown of this super senior facility, the group will have no remaining super senior capacity under its SSNs.
Should the group run out of liquidity and incur a payment default that is not remedied within a 30-day grace period, 30% of SSN holders may accelerate on the notes. The SSNs benefit from a security package, including a share pledge of the issuer of the SSNs and all material assets of the guarantors. Further, the RCF contains a consolidated net leverage ratio not to exceed an agreed level when the facility is more than 40% drawn.
The group, at the time of the issuance of the SSNs last year, was owned by GoldenTree Asset Management, Avenue Capital and a Goldman Sachs entity. It appears to be too early to consider a share pledge enforcement strategy by the noteholders. The shareholders, by providing the new £60 million super senior facility, have shown a willingness to invest in the group to avoid liquidity issues, subject to landlords taking a haircut.
The group could seek to introduce the following amendments to its SSNs, prior to a potential default:
SSN Amendment
A simple way the group could free up cash would be to request an amendment of the SSNs to allow it to skip interest payments later in the year.
The SSNs could be amended so that interest is subject to a general payment in kind mechanism, or PIK toggle. The PIK could be subject to a ratchet that rises and falls based on the company’s liquidity or that is linked to the Covid-19 crisis and government-imposed restrictions.
Under a PIK coupon, while there may be no requirement to pay cash interest in the interim period prior to maturity, interest would still continue to accrue with a larger aggregate amount (of both capital and interest) being payable on maturity. Consequently, the group’s debt profile would not be sufficiently restructured. Importantly, the group may have to have existing debt capacity under its SSNs in order to incur such PIK liabilities or would have to amend the terms of its notes.
It is uncertain whether the holders of the SSNs would be receptive to such a deal, though they could be incentivized with consent fees. The deal does not affect the ownership of the group, so is not likely to encounter resistance from the shareholders.
Implementation
In terms of implementation of an amendment, a consent solicitation could be used, with 90% being the relevant SSN consent threshold as money terms are being addressed.
Alternatively, it is possible that the group could use an English law scheme of arrangement or the CDRP. Schemes require the consent of 75% by value and 50% by number of creditors in a class. The table below compares the features of the CDRP, with the existing scheme process.
The CDRP will be modeled broadly on the existing English scheme of arrangement with some important changes referred to below:
2025 Notes OM
Travelodge could use the U.K. government’s proposed cross-class cramdown restructuring plan, CDRP or “super scheme,” to implement a rent reduction and amend the terms of its senior secured floating rate 2025 notes.
The group has so far not announced any proposed compromises to the SSNs, but with the hotel group facing severe cash flow issues as a consequence of the Covid-19 pandemic, an SSN interest payment amendment or haircut could be the next option proposed by the group. The £440 million SSNs, along with the group’s existing £40 million revolving credit facility, have interest costs of about £28 million per year.
Travelodge is asking its landlords to forego between £103 million to £146 million in rent, or about 2.4% to 3.3% of the total of more than £4 billion in rent due over the remainder of the leases. The group announced in its successful consent solicitation this month that it will use a company voluntary arrangement (CVA) or the super scheme to implement the new rent payment agreement with landlords, if they do not consent to it. The group requested in its consent solicitation that the notes be amended so that neither a CVA or CDRP will cause an event of default.
The usual implementation tool used to non-consensually amend the terms of debt documentation in the U.K is a scheme of arrangement under the 2006 Companies Act. Travelodge has highlighted possible use of the CDRP to amend leasing arrangements and this piece considers how the process could be used by Travelodge to also impair its SSNs. The CDRP, alongside a new moratorium process, is likely to pass into law in the coming weeks, having both been proposed in 2018 and included in the new Corporate Insolvency and Governance Bill published on May 20.
The CDRP, as drafted, contains a cross-class cramdown feature in respect of voting on a restructuring plan, which is not included in the existing scheme process. This means that in the existing scheme process, where a certain creditor class has a right to vote on the plan and they vote against it, the whole process cannot go ahead. The CDRP is drafted to allow a dissenting class to be “crammed-down” and does not let them block the process.
Travelodge’s SSNs are trading around 70. The next interest payment is due on July 15, and is payable quarterly on the 15th of the first month of each quarter. The quarterly coupon payment is only about £6 million.
Reorg estimates that, absent meaningful recovery this year, the group will run out of liquidity by early in the fourth quarter if hotels are allowed to reopen by early summer and it achieves £103 million in rent reductions. Liquidity will run out later in the quarter if a £146 million rent reduction and a late-summer reopening happens. In both scenarios, the group will have sufficient liquidity to pay its October coupon, the last one in the current financial year. As the group’s coupon payment is so low on a quarterly basis, it has the means to take short-term cash preserving measures to meet its coupon payments, for example by reducing capex or other cash outflows temporarily, even if it burns through cash faster than our current estimate. Our assumption does not incorporate any working capital inflow later on in the year, nor any meaningful outflow due to the overall lack of activity.
The new £60 million super senior credit facility, provided by affiliates of its shareholders and entered into in April, requires the group to obtain a rent payment agreement with its landlords as a condition precedent to funding. It is understood that following the drawdown of this super senior facility, the group will have no remaining super senior capacity under its SSNs.
Should the group run out of liquidity and incur a payment default that is not remedied within a 30-day grace period, 30% of SSN holders may accelerate on the notes. The SSNs benefit from a security package, including a share pledge of the issuer of the SSNs and all material assets of the guarantors. Further, the RCF contains a consolidated net leverage ratio not to exceed an agreed level when the facility is more than 40% drawn.
The group, at the time of the issuance of the SSNs last year, was owned by GoldenTree Asset Management, Avenue Capital and a Goldman Sachs entity. It appears to be too early to consider a share pledge enforcement strategy by the noteholders. The shareholders, by providing the new £60 million super senior facility, have shown a willingness to invest in the group to avoid liquidity issues, subject to landlords taking a haircut.
The group could seek to introduce the following amendments to its SSNs, prior to a potential default:
SSN Amendment
A simple way the group could free up cash would be to request an amendment of the SSNs to allow it to skip interest payments later in the year.
The SSNs could be amended so that interest is subject to a general payment in kind mechanism, or PIK toggle. The PIK could be subject to a ratchet that rises and falls based on the company’s liquidity or that is linked to the Covid-19 crisis and government-imposed restrictions.
Under a PIK coupon, while there may be no requirement to pay cash interest in the interim period prior to maturity, interest would still continue to accrue with a larger aggregate amount (of both capital and interest) being payable on maturity. Consequently, the group’s debt profile would not be sufficiently restructured. Importantly, the group may have to have existing debt capacity under its SSNs in order to incur such PIK liabilities or would have to amend the terms of its notes.
It is uncertain whether the holders of the SSNs would be receptive to such a deal, though they could be incentivized with consent fees. The deal does not affect the ownership of the group, so is not likely to encounter resistance from the shareholders.
Implementation
In terms of implementation of an amendment, a consent solicitation could be used, with 90% being the relevant SSN consent threshold as money terms are being addressed.
Alternatively, it is possible that the group could use an English law scheme of arrangement or the CDRP. Schemes require the consent of 75% by value and 50% by number of creditors in a class. The table below compares the features of the CDRP, with the existing scheme process.
The CDRP will be modeled broadly on the existing English scheme of arrangement with some important changes referred to below:
- The voting threshold under the plan will be 75% by value in each class to vote in favor (the same as under the existing English scheme regime), however there will be no numerosity test.
- A new connected party test will be introduced being more than half of the total value of unconnected creditors (in each class) to vote in favor. This is similar to the existing test for company voluntary arrangements (drawn from section 249 of the Insolvency Act 1986 (IA)).
- The plan will allow cross-class cramdown of dissenting creditors so that if one creditor class votes in favor of the plan and the absolute priority rule is followed, the court can sanction the plan.
- The court will be able to sanction the plan if (i) doing so is necessary to achieve the aims of the restructuring and (ii) it is just and equitable to do so in all the circumstances to the extent the absolute priority rule is not met. This is a variation to the rule in U.S. chapter 11 proceedings. A “next best alternative for creditors” test will be used in order to assess whether the absolute priority rule has been met. In order to provide additional protection, at least one impaired creditor class must approve the plan.
- The proposals will not extend as far as allowing “super priority” rescue financing as is common in US chapter 11 proceedings.
- At a first hearing, the court will examine the classes of creditors and shareholders as defined by the company. Creditors and shareholders may challenge class formation if they think the company’s classes do not accurately reflect the rights and interests of different classes. If satisfied, the court will confirm that a vote on the proposal may be conducted on a specified date ahead of a second hearing.
- A second hearing will then be required if the requisite voting thresholds have been met and the rules for imposing a cross-class cramdown have been complied with. The court will consider whether the necessary requirements have been met and will make a decision to confirm the restructuring plan and make it binding on affected creditors and shareholders.
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 © 2024 Reorg Research, Inc. All rights reserved.