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The majority of Arvos’ lenders have backed its restructuring plan ahead of the lock up agreement deadline tomorrow (26 January), according to a source close to the company and a market participant.

So far the group has received votes in favour of the deal from over 95% of its TLB lenders, over 80% of its letter of credit (LC) lenders and over 75% of its RCF lenders, according to the source close to the company.

The group has €446m of debt coming due in the next 18 months, consisting of a €28m RCF maturing in May 2024 and a €414m equivalent TLB maturing in August 2024. The group also has a €112m guarantee or letter of credit facility. The TLB is quoted at 36.25-mid, according to 9fin’s data. 

The industrial equipment and service provider is planning to implement the deal through an English scheme of arrangement, as reported below. The group is contemplating having a convening hearing on 20 February 2024 and the sanction hearing on 18 March 2024. It is hoping to close the transaction by 31 March 2024.

Arvos is being advised by Kirkland & Ellis (legal), according to the two sources. Triton, the group’s sponsor, did not wish to comment.

The ad hoc group (AHG) of lenders consisting of five to six CLO managers including Blackstone and Barings are being advised by Latham & Watkins (legal) and Rothschild (financial).

The group’s capital structure is below:

Link: Cap table. The figures in the capital structure have been sourced by 9fin. Note, this excludes the €112m letters of credit facility.

Previously published article on 17 January 2024 reproduced below:

Arvos lenders set to take 45% equity stake (9fin)

Arvos Group’s lenders have been asked to vote on a restructuring plan, which involves them taking over 45% of the company in exchange for writing off around 43% of the TLB (as per 9fin calculations) and pushing out the maturity by three-years. The restructuring deal also involves an equity injection from its sponsor Triton of €40m, according to a source close to the lenders and a market participant.

Arvos and Triton did not wish to comment.

The Luxembourg-headquartered industrial equipment and service provider is split into two divisions: Ljungström (LJU), which provides air preheaters and gas-gas heaters and Schmidtsche Schack (SCS), which providers heat transfers applications in petrochemical, chemical and metallurgical processes.

The restructuring plan comes after attempts to sell its SCS failed to yield any binding offers last year. Lazard was advising the company on the sale process. The group is planning to appoint M&A advisors and sell the entire business by 1 January 2026. The company told lenders in its restructuring proposal that its two divisions are not possible to monetise in the near term as it will take more time to make them exit-ready. 

According to the annual report, the whole group’s net leverage was 7.9x as of 31 March 2023, which is more than double the comparable market level of around 3.5x to 3.7x. Post restructuring transaction the group is hoping to reduce the leverage down to industry level.

Lenders have until the end of today (17 January) to accede to the lock up agreement to receive the early bird fee of 15bps and up till 26 January 2024 to receive 10bps.

The group plans to implement the deal through an English Scheme of Arrangement with a contemplated convening hearing on 20 February 2024 and the sanction hearing on 18 March 2024.

An ad hoc group (AHG) of lenders consisting of five to six CLOs including Blackstone and Barings have signed up to the deal. They are being advised by Latham & Watkins (legal) and Rothschild (financial), according to the first source and a third source familiar. Blackstone and Rothschild did not wish to comment.

The group has €446m of debt coming due in the next 18 months, consisting of a €28m RCF maturing in May 2024 and a €414m equivalent TLB maturing in August 2024. The group also has a €112m guarantee or letters of credit (LC) facility.

The group’s TLB has a euro and dollar tranche. As of 30 June 2023 the euro tranche was €251.2m and the dollar tranche was €155.8m ($169.2m), according to the market participant.

The group’s TLB has climbed around five-points from end of November 2023 to 36.25-mid today, as shown below:

The market participant said the TLB is quoted at 39/42.

The group has a German holding company and the corporate offices in Heidelberg. It operates six global manufacturing facilities and has sales execution offices in Australia, China, Czech Republic, Germany, India, Japan, Poland and the USA and has more than 1,000 employees worldwide. 

The equity injection will be in the form of preferred equity subject to 1.5x multiple on invested capital (MOIC) preferred return up to €60m, according to the sources. Of the €40m being injected by the sponsor, €30m will go towards paying down its TLB and €10m will go towards transaction costs, under the restructuring plan launched on 21 December 2023.

All the group’s facilities will be extended by three years, pushing its RCF to May 2027 and its TLB to August 2027. The cash interest for the TLB and RCF will remain unchanged at E/S+550bps.

Around 57% (as per 9fin’s calculations) of the TLB (€235m) will be reinstated as follows:

€205m at operating company (OpCo) level. After the €30m prepayment, €175m will remain.

€30m will be hived-up to holding company (HoldCo) level and will rank ahead of any preferred equity. This will have 0.5% cash interest.

The reinstatement for both the OpCo and HoldCo tranches will be on a pro-rata basis for the existing US dollar and euro tranches. The rest of the TLB will be converted into 45% of equity in the company. Triton will retain 55% of the company. 

The group is planning to sell the entire business by 1 January 2026, as mentioned earlier. If the group manages to sell it for an enterprise value over €380m then the equity split changes to 65% for Triton and 35% for the TLB holders.

The size of the €28m RCF and €112m LC facility will remain unchanged under the plan. A €17m bilateral overdraft (OD) facility will be extended to March 2025 and thereafter can extend in one-year increments to March 2027.

The restructuring comes after Arvos did not manage to deleverage through asset sales, which was a commitment under its previous A&E in 2021. Moody’s said the company announced it was not successful in selling its SCS division.

The company was required to dispose of a business segment of no less than 40% of Arvos' EBITDA by March 2023 and 100% of the proceeds were to be used to make a pro-rata mandatory prepayment towards all the lenders, according to S&P. The A&E involved extending its RCF, €112m guarantee or letters of credit (LC) facility and TLB by two years to 2023 with the option, which was later extended by another year.

The group reached out to around 100 potential buyers of SCS in the first half of 2023 but failed to garner any binding offers, as mentioned earlier. The main roadblocks to the deal were SCS’ focus on petrochemicals and its history of poor financial performance.

As of the end of September 2023 the group’s cash balance was €33m with €11m available under its RCF, according to Moody’s. Moody's-adjusted debt/EBITDA was 8.9x as of LTM September 2023. The ratings agency forecasts negative FCF generation in the next 12 months with funds from operations insufficient to cover interest payment and capital spending needs (around €60m combined). It downgraded the name to Ca from Caa2 on 19 December 2023 on the back of the increased risk of default.

On the plus side Moody’s said the group had a solid order backlog of €290m as of September 2023, sizeable aftermarket business supporting consistent double digit Moody's-adjusted EBITDA margins as well as modest capital spending needs of around 1% of sales, somewhat supporting FCF generation.

Arvos rallies support from majority of lenders for restructuring

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