Commscope/COMM

9fin’s hot take

CommScope will use the $2.1bn in cash proceeds from its upcoming sale to make an investment — typically associated with capital expenditures and purchasing assets, but could be used to shift assets and cash around to the extent allowed under the covenants (more on that below) — within the company and will pursue a drop down transaction before the sale closes to negotiate primarily with its 2026 secured and 2025 unsecured creditors. We expect the 2025 unsecured bondholders to get par, and the secured lenders to have to fight much harder to retain value.

Situation overview

CommScope’s debt rallied following the company’s press release announcing a sale of its Outdoor Wireless Networks and Distributed Antenna Systems businesses to cable and antenna connector company Amphenol Corporation for $2.1bn, as reported by 9fin here.

Once the sale closes in 2025, CommScope must navigate what to do with the proceeds and what transactions are available to the company to delever and address its upcoming maturities. To do that, the company and its advisors must negotiate with a secured-weighted lender group that includes funds of Apollo Global Management advised by Gibson Dunn and PJT Partners, and an unsecured-heavy creditor group advised by Akin Gump and Ducera that includes funds of Franklin Resources, Capital Group and JPMorgan.

What the company can do before considering an LME

With the sale expected to close in the first half of 2025, under the senior secured term loan due 2026 (key terms summarized here), the company has 365 days (plus an additional 180 if there is a reinvestment commitment) upon receiving the net cash proceeds to choose from a few options how to apply the proceeds. CommScope can (1) repay the 2026 senior secured term loan (2) reinvest or (3) a combination of these options.

CommScope currently has $8.9bn in net debt, $5.3bn of which is secured. Even if the company used the total amount of sale proceeds to pay off the 2026 term loan, that would still leave a maturity wall of nearly $4bn through 2026, including $1.3bn of senior notes due June 2025, $1.5bn of senior secured notes due 2026, and what would remain of the currently $3bn of outstanding senior secured term loans. Notably, even if the sale closed on time and prior to June 2025, the term loan does not permit applying the proceeds to pay off the unsecured bonds — at least not directly (more on that below).

According to the second amendment of the company’s credit agreement, the company currently has capacity to incur about $2.8bn in first lien debt utilizing the $950m in incremental basket, $1.5bn in the credit facilities basket and $350m general liens basket paired with the general debt basket. Although this is a large number, CommScope will still need more to address the $4bn maturity wall and, accordingly, the company will likely engage in an LME to extend maturities and delever.

Group goals

As mentioned above, there are two main groups organizing in this capital structure and it remains to be seen whether or not they will align across the capital structure, or isolate based on debt instrument and maturity and try to get in with the company first. Each lender has varying goals and leverage, but first the debt with the most power:

• The senior unsecured notes due 2025 holders have a powerful position as the debt in the capital structure with the nearest maturity. The noteholders will either want to be paid down in full, which absent a transaction in the near term is exactly what they will get, or they will want to be offered a secured position, likely with a higher interest payment and tighter borrower restrictions.
• The senior secured term loan due 2026 holders who are technically the highest priority lenders are in a tough spot. Although the sale proceeds must either be used to repay this group or be reinvested back in the structure, the holders cannot force the company to opt to pay down the loan rather than reinvest, and reinvest is an ambiguous term to enough of a degree to make holders uncomfortable. Additionally, these holders do not want to see $1.3bn exit the structure and go to the 2025 unsecured holders, in the hopes that there will still be liquidity to pay off their loan in 2026. Accordingly, they have an incentive to work with the unsecureds for a more holistic transaction with the hope that the 2025 unsecured noteholders extend the notes maturity where the 2026 term lenders still maintain their priority. We could imagine a transaction involving a partial paydown and maturity extension with a bump in rate and tightened documents.
• The senior secured notes due 2026 similarly want to either get paid off in 2026 or be given some higher priority and a bump in coupon in exchange for an extended maturity, or some combination of the two. The senior secured notes have an incentive to join together with the other secured lenders in hopes of keeping their position pari during any transaction. Another possibility is if the rest of the lenders agree to a transaction around them extending everyone else’s maturity past 2026, as long as enough collateral is left within the structure, there is value in holding out for maturity — but in this drop down environment, this is a risk.

The rest of the structure includes the following notes:

• Senior secured notes due 2029
• Two sets of senior unsecured notes due 2027
• Senior unsecured notes due 2028

There are various crossholders in the other main groups who also own these securities, but on their own, there is no separate group. Given their long time horizon, holders are likely hoping these notes can tag along with some deal prioritizing nearer maturity dated bonds and be involved in any transaction proposed. The hope is that the company will properly delever and emerge from any transaction a leaner structured company with a chance of paying off whatever’s left of these debts when they come due.

LME Option #1: Drop down

We believe the most likely next step for CommScope would be a drop down transaction. To pursue a drop down, CommScope would utilize certain investment and restricted payment baskets to transfer certain collateral to either a newly created unrestricted subsidiary or a restricted subsidiary that the company would designate as unrestricted, thereby removing the collateral from creditor reach, since this entity would not have to pledge its assets as collateral or be subject to the covenants of the credit agreement. This transaction is likely to be favored by the company because it does not require any lender consent. Also, the company then has the option to apply the new money any way it chooses or assuming a co-op is not in place the company has the upper hand to coerce an exchange with whichever lender group it chooses.