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Max Frumes

Larry Feldman

James Wallick

Alvaria just completed a priming capital raise with existing lenders that represents yet another innovation in the world of liability management. Some are calling it the ‘At Home plus J. Crew’ or the ‘double-dip plus’, after the predecessor transactions that paved the way for it.

The result: a sponsor-backed company with constrained liquidity was able to raise nearly $80m in new capital and get a discount from its existing lenders, reducing its debt by $50m to $870m total and decreasing cash-pay on much of its debt for several years.

After two consent deadlines, the last of which was on 29 March, all the company’s lenders participated in the exchange offer that made this possible.

Alvaria, a call center company backed by Abry Partners, didn’t have any near-term maturities, the typical trigger for a restructuring. But it did have pressing liquidity needs, and limited options to raise cheap capital, according to 9fin sources.

As it evaluated its options, the company and its sponsor retained the experienced LME tandem of Kirkland & Ellis and PJT Partners to negotiate with an ad hoc group of lenders, who themselves were represented by Paul Hastings. The lenders comprised a mix of par holders, like CLOs, as well as some opportunistic credit hedge funds, according to sources.

Alvaria had a credit agreement with lien and payment subordination protections that were worded as a so-called sacred right, so there was no ability for a majority of lenders to simply move their existing debt or provide new debt that would come ahead of existing secured debt maturities (as was done in Serta Simmons and other standard ‘uptier’ transactions).

Given the Serta protections (the loan was issued in 2021, after Serta’s uptiering transaction) any lien-priming would have required 100% lender approval. The company could have done a drop-down with some assets and pledged those to raise third-party money, but that would have increased leverage and didn’t provide enough runway.

So Kirkland and PJT cooked up a new recipe to negotiate with lenders.

The famous J. Crew transaction, back in 2016, initially involved stripping some of the clothing retailer’s most valuable IP away from existing lenders by tapping various forms of permitted investments capacity, and then pledging that IP as collateral to raise new money (with various twists and turns along the way).

The innovation of 2023 by home furnishing retailer At Home, completed less than a year ago, involved the creation of a non-guarantor restricted subsidiary that could issue debt and would benefit from two claims: one on a new intercompany loan, and a second secured by the company’s assets that were themselves pari passu with existing debt. At the time, this was likely the first intentional ‘double-dip’ transaction.

Ultimately, Alvaria and its advisors got around the company’s lien and payment subordination protections by creating a non-guarantor Cayman restricted subsidiary where they dropped the IP using a combination of restricted payments and permitted investments capacity. Then, that Cayman sub issued new debt with an exclusive claim on that IP and a pari claim on all the other assets and obligors.

Thus far, this series of moves primes by structural subordination, rather than lien or payment subordination, and so is not prohibited by standard Serta protection.

Finally, an intercompany loan was created to send proceeds to the OpCo, opening the door to a potential ‘double-dip’ argument; indeed, combined with the exclusive claim on the IP, it could even be considered a ‘triple-dip’ or ‘double-dip plus’.

This Alvaria transaction could also be distinguished from so-called ‘pari-plus’ deals like Sabre, where the new-money guarantee is made by an unrestricted subsidiary.

The Alvaria transaction represented a challenge on a number of fronts, not least because the company ultimately needed at least 50% of both the first liens and the second liens to consent in order to create incremental debt capacity to issued additional secured debt.

Without that level of consent, this transaction would have been impossible.

The ad hoc group of existing lenders provided $78m in first-out loans split evenly in a TLA and TLB between CLOs and non-CLOs, respectively

The revolver was extended by a year and became second-out debt

First liens exchanged into a mix of partial PIK second-out and third-out loans at between 90 and 97.5 cents on the dollar depending on whether they were steering committee ad hoc, non-steering committee ad hoc, non-ad hoc consenting in the first round, or non-ad hoc consenting second round (non-consenting first round)

Second liens exchanged into a mix of third-out and fourth-out cash-paying loans, all at 80

No maturity extension was offered on the new term loans, which are all still due May 2028, and the documents were tightened up extensively to protect creditors from further such transactions

In the first round, Alvaria — which issued debt out of Atlas Midco — completed an initial private debt exchange with lenders holding 87% of its first lien loans and 77% of its second liens.

After completing the first phase, the company then launched a second phase to allow non-participants a chance to come in at less favorable terms; ultimately, 100% of lenders agreed to exchange.

The ratios for what consideration each lender was given across the first through fourth-out facilities were also varied, based on who was first and most involved.

First lien holders chose to PIK half their interest for three years, and had the following exchange ratios:

The best outcome was a group that exchanged 100% of their first liens into second-out

The next tier — those that agreed to consent before the initial deadline — exchanged their first lien paper into just over 50% of second-out and just under 50% third-out

The last tier — those that consented in the second round after the initial transaction close — were able to exchange their first liens into 30% second-out and 70% third-out

Second lien holders did get cash-pay, but they also decreased their rate from SOFR+900bps to SOFR+700bps:

The top tier exchanged their second liens into 80% third-out 20% fourth-out

The next group exchanged their second liens into 50% third-out and 50% fourth-out

We have reproduced Alvaria’s pro forma capital structure below, based on information from 9fin sources and S&P.

Kirkland, Paul Hastings, Abry and Alvaria have not responded to requests for comment. PJT declined to comment.

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Alvaria coins new LME innovation — ‘At Home plus J. Crew’

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