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Private Credit 

David Orbay-Graves

Bianca Boorer

It’s been quite the year for distressed debt given the global political tumult and soaring interest rates. In our Restructuring Tracker we have 30 completed deals this year. For this years’ notable legal precedents head over to 9fin’s legal wrap of 2023 available here.

One trend to emerge in 2023 was a greater willingness for company owners, and specifically private equity sponsors, to hand over the keys of their investments to creditors. High yield and leveraged finance issuers such as Matalan, Takko, Praesidiad and TelePizza have all either been —— or are in the process of being —— handed over to lenders in return for debt relief. In contrast, Keter seems to have managed to find bidders for the company which cover the debt to avoid being taken over by its lenders. We shall see if a sale closes by Q1 24. 

What factors determine whether private equity sponsors are willing to write a cheque to support their portfolio companies, versus cutting the business loose? One private equity lawyer told 9fin that it is not only purely objective factors —— a cold, calculated decision on economic returns —— that drives this decision.

“There may be specific factors such as relationships with lenders or other market relationships that they [sponsors] might prize,” said the lawyer. “They may be aware that certain of their limited partners [...] will have some sort of other interest in the business just given the complex spread of capital flows into any significant assets. But there’s also psychological factors, and I think we shouldn't dismiss these as being some sort of indulgence.”

Any investment —— distressed or otherwise —— involves a “leap of faith”, which means understanding the wider factual matrix that “can’t necessarily be captured on a spreadsheet”, the lawyer continued. This includes things such as due diligence or experience of the market.

“In relation to a distressed situation, you will have wider factual factors that you take into account, like what your own view of the market of a particular asset is,” the lawyer continued. “But also there are more purely psychological factors, and sometimes you will just be more or less attached to a business for any objective or non-objective reason. And that may have a significant effect on a lot of investors' decision as to whether to do everything from equity fund the gap, all the way through to cutting the business loose and having little more to do with it.”

Often the alternative to handing over the keys will be for the private equity owner of a business to write an equity cheque (or subordinated loan) large enough to convince creditors to agree to an amend-and-extend of their debt facilities, often in conjunction with a partial conversion of interest to PIK interest. This may appeal, in particular, to CLO investors, who might struggle to hold equity of a restructured company given their mandate. Despite the rise in debt-for-equity swaps, there have been several prominent examples of this situation playing out in 2023, notably Tele Columbus, Schoeller Allibert and Adler Pelzer. 

A related trend to start gaining prominence this year has been an uptick in interest in NAV (Net Asset Value)  lending— whereby private equity sponsors raise debt backed by the assets in their funds — often using the proceeds of the loan to support a particular portfolio company, said a second lawyer. Such structures have always existed, but are gaining traction given the current environment where PE portfolio issuers require support, the lawyer noted.

Below we summarise selected debt-for-equity swaps and A&Es tracked by jurisdiction:

Matalan — We kicked off the year with UK discount fashion retailer Matalan being taken over by its creditors after a failed sale process. Its first lien (1L) bondholders —— Invesco, Napier Park, Man Group, Napier Park and Tresidor —— took the keys from its founder John Hargreaves in exchange for a partial write down of their notes and the provision of new money. The maturity of the reinstated portion of the notes was pushed out from 2023 to 2028. The group’s second lien (2L) noteholders and a shareholder loan from Hargreaves was entirely wiped out.

Of note, the 2L bondholders also put a bid in for the company during the sales process in order to try to elevate their position and improve recoveries. The deal was implemented out-of-court via the distressed sale mechanism under the intercreditor agreement. The company’s troubles started during the Covid-19 pandemic when high street retailers had to shut their doors. The sale process started in September 2022 but by January it became clear bids were not high enough to cover the 1L debt. The ad hoc group (AHG) of 1L bondholders were advised by Perella Weinberg Partners and Kirkland & Ellis. The 2L bondholders were advised by Houlihan Lokey and Freshfields. Teneo ran the sale process and Clifford Chance was the company’s legal counsel. The Hargreaves family worked with Lazard and Paul Hastings.

Vue — Cinemas also suffered from the Covid-19 global shutdown. Similar to Matalan, Vue was taken over by its 1L lenders in exchange for a partial write down of their debt and provision of new money. The group’s 2L debt was completely wiped out. The deal was initially meant to be implemented through an English Scheme of Arrangement, however after receiving 100% consent from lenders, Vue was able to implement it consensually. 

The AHG of 1L lenders consisted of Barings, Farallon, Invesco, PGIM and Lord Abbett. Barings and Farallon are the largest shareholders post recapitalisation. Houlihan Lokey (financial) and Latham & Watkins (legal) advised the lenders, while Vue retained Lazard (financial) and White & Case (legal).

Praesidiad — Carlyle-owned Praesidiad, a UK-headquartered perimeter fencing company, is set to become another company to be handed over to creditors. The group’s debt is made up of a €290m E+400 bps TLB, due October 2024, a €80m RCF and $36m of term loans due in October 2024. In August, the company announced that lenders have agreed to write-off around 60% of their debt, extend maturities until 2027 and provide an extra €25m in new funding. Ownership of the company will transfer to creditors. 

The ad hoc group of lenders includes Alcentra, Bain, Capital Four and Cheyne Capital. An English Scheme of Arrangement was sanctioned in November approving the restructuring, though implementation may take some time as various regulatory approvals will be required due to the presence of sanctioned Russian bank Gazprombankamong the Scheme creditors. 

Praesidiad is advised by Houlihan Lokey as financial advisor and Linklaters as legal advisor. The ad hoc group is advised by Moelis as financial advisor and Simpson Thacher as legal advisor.

Atento — Beleaguered Latin American call centre operator Atento is yet another company to have been taken over by its creditors. The company’s restructuring proposal was sanctioned by an English court in November under a UK Restructuring Plan. Atento’s Restructuring Plan secured overwhelming support from all four creditor classes convened by the group. The plan involves the equitisation of the company’s $500m 8% 2026 SSNs, its interim financing facilities and hedging facilities; meanwhile, new two series of SSNs totalling $77m will be reinstated with an upgraded security package and exit financing of $76m will be provided. Atento was advised by Houlihan Lokey and FTI Consulting as financial advisors and Sidley Austin and Loyens & Loeff as legal advisors. The ad hoc group was represented by Rothschild as financial advisor and Hogan Lovells as legal advisor. Atento was spun-out of Spain’s Telefonica in 2012 and was listed in New York.

CELSA Group — Another significant instance of creditors taking the keys in 2023, albeit not a private equity owned company (CELSA was owned by the Rubiralta family). Creditors received court approval to take over the Spanish steel producer in September, following a lengthy battle in the courts with the Rubiralta family. An ad hoc group of creditors including Deutsche Bank, Attestor, Anchorage Capital Group, GoldenTree Asset Management, and SVP, filed for a Spanish Restructuring Plan on the same day that the new Spanish Restructuring Plan came into force in September 2022. 

Among the novelties in the new Spanish law are the ability for creditors to propose a restructuring plan, which is what occurred in the case of CELSA. Under the deal, some €1.3bn in debt will be converted into equity, with the remainder extended until October 2028. 

The ad hoc group were advised by Kirkland & Ellis and Gomez Acebo as legal advisors and Houlihan Lokey as financial advisor. Within the ad hoc group, the so-called ‘jumbo lenders’ were advised by Cuatrecasas as legal advisor. Working capital facility lenders are working with Uría Menéndez as legal advisor and PJT Partners as financial advisor.

CELSA was advised by Cortés Abogados as legal advisor. Investment banks Lazard and AZ Capital advised the Rubiralta family.

TelePizza (Food Delivery Brands) — Private equity sponsor KKR walked away from its Spanish fast food chain company TelePizza earlier this year as part of a debt restructuring. The company had been struggling since the pandemic lockdown, and also had onerous commitments under a franchise agreement with Pizza Hut. 

The deal was innovative for its use of the recently re-cast Spanish Restructuring Plan, which allows for cross-class cramdown. A Spanish court finally gave its approval for the deal in October, after the broad outline of a deal was agreed with creditors in February. TelePizza said it signed an agreement with an ad hoc group of its €335m 6.25% 2026 SSNs to implement a recapitalisation of the business and to provide up to €60m interim financing. 

The company had a relatively straightforward capital structure, with just one bond, the 2026 SSNs. Other debt included a €45m 3.25% 2026 super-senior RCF, a €40m 3.75% 2026 Instituto de Crédito Oficial (ICO)-guaranteed loan from Santander, €17m other facilities and €4m shareholder loans. Broadly speaking, TelePizza’s restructuring involved its 2026 SSNs being written down by to two-thirds. The reinstated debt will mature in December 2028 and carry interest of 12.25%, payable in cash if the company hits certain liquidity thresholds, or otherwise in PIK. In exchange, the noteholders will receive up to 75% of the equity in the restructured group. The rest of the equity is earmarked for the new loan providers. 

The €40m bilateral loan guaranteed by Spanish state-owned ICO will also be impaired — with principal reduced in an amount that is “economically equivalent” to the treatment of the SSNs. This aspect of the deal proved contentious, as ICO did not want a haircut, and there was a question of whether the state-guaranteed facility could be crammed down in the new Spanish process. In the end, ICO — while not supporting the deal — did not oppose the court application. 

The bondholder group include Bayside Capital, Blantyre, Fortress, Oak Hill and Treo AM and is advised by Rothschild (financial) and Milbank (legal). KKR is advised by Simpson Thacher (legal). FDB is advised by Houlihan Lokey(financial), Kirkland & Ellis (international legal) and Uría Menéndez (local legal). The company also reportedly hired Alvarez & Marsal and FTI Consulting to develop a business plan.

Tele Columbus — German cable TV and fibre broadband company Tele Columbus found itself with more than €1.1bn debt coming due in 2024 and 2025, comprising its €650m 3.875% May 2025 SSNs and €462m outstanding under its E+350bps TLA maturing in October 2024. Cable TV is going out of fashion, and its capex-intensive fibre rollout is yet to pay rewards. As such, concern started growing that it may struggle to refinance its liabilities, and creditors appointed law firm Milbank as an advisor back in summer. 

A solution appears to have been found, as largest shareholder Morgan Stanley Infrastructure Partners (60%) has agreed to inject €300m equity (including €100m that has already been provided) to fund capex. In return 2025 TLB lenders and the 2024 SSNs have agreed to extend maturities until 2028 (maturities are harmonised) in conjunction with a margin uplift, albeit paying almost entirely PIK interest. There is around €133m of new money, with those lenders participating in the €205m super-senior exit facility able to elevate a portion of their existing debt via a roll-up into new reinstated OpCo debt, with the remainder of the reinstated debt sitting at a new HoldCo. The business has been split into a NetCo and ServCo, which could provide a future deleveraging event via M&A. For more analysis on the transaction, see 9fin’s review here.

Tele Columbus has so far secured support from 90% in aggregate of its SSNs holders and TLA lenders. Implementation is expected via an English Scheme of Arrangement/Restructuring Plan and/or a German StaRUG process.

The company is advised by Goldman Sachs as financial advisor and Freshfields as legal advisor. The ad hoc group of creditors appointed Houlihan Lokey as financial advisor alongside Milbank. Morgan Stanley is advised by financial advisor Lazard and law firm Linklaters.

Takko — German fast fashion retailer Takko was one of the first deals to wrap up in 2023, with lenders taking over the business as part of a deal announced in April. Under the terms of the deal, bondholders took control of the business from private equity sponsor Apax Partners, with the maturity dates of reinstated debt pushed out to 2026. The sponsor was left with around 5-10% of the post-reorg equity. 

Investors holding Takko’s €510m senior secured notes (comprising SSNs and SSFRNs, both due in November 2023), as well as those holding a pari passu term loan also received roughly €300m in reinstated OpCo debt due 2026. Alongside the equity and reinstated OpCo debt, senior secured creditors also received an allocation of new junior HoldCo level instruments as part of the restructuring. Takko’s €80m 7% super-senior term loan, due May 2023, will be fully reinstated with amended terms. 

The vast majority of the senior secured notes were held by a bondholder group comprising AlbaCore, Napier Parkand Silver Point. Takko was advised on the restructuring by financial advisor PJT Partners and law firms Simpson Thacher & Bartlett and Gleiss Lutz. Bondholders were advised by financial advisor Houlihan Lokey and law firm Freshfields. Bank lenders by financial advisor Moelis and law firm Clifford Chance.

Adler Pelzer — German automotive parts manufacturer Adler Pelzer’s €425m 4.125% April 2024 SSNs traded in the low-to-mid 80s at the start of the year, as concern over the company’s ability to refinance its 2024 SSNs mounted. However, in May, the company’s owner Adler Group agreed to provide a €120m subordinated shareholder loan to the group, which gave the market sufficient confidence to refinance the notes with new €400m 9.5% April 2027 SSNs (priced at a 92.5 OID). The shareholder loan matures at least one year after the new SSNs and does not pay cash interest.

Wittur — German elevator components maker is in the process of being taken over by KKR, who is a 2L creditor to the group. KKR has agreed to equitise all of its debt as well as provide the group with new money. Part of the group’s 1L debt and RCF will be reinstated pari passu at the OpCo level, while the remaining 1L debt will be elevated to the HoldCo level. The deal is being implemented consensually, after it received 100% consent and no longer needed to do a English Scheme of Arrangement. The company is working with Kirkland & Ellis (legal) and Houlihan Lokey as financial adviser, as reported. The 1L TLB lenders selected Milbank (legal) and PJT (financial) as advisers. Simpson Thacher & Bartlett (legal) and Rothschild (financial) are working with KKR.

PlusServer — German cloud service provider will be taken over by its lenders in exchange for agreeing to its majority of its TLB being hived up to Holdco level and providing new money. The deal is being implemented by a UK Scheme of Arrangement. The sponsor BC Partners previously ran a sale process with the help of Jefferies but that didn’t bear any fruit. The group’s lenders are being advised by Milbank (legal) and Houlihan Lokey (financial). The company is being advised by Latham Watkins (legal) and Kirkland & Ellis is representing BC Partners, according to the first source. Distressed fund Alchemy is one of the holders of the TLB.

Flint — Luxembourg headquartered paint and ink maker was taken over by its 1L lenders in September through a fully consensual deal. The lenders agreed to haircut the debt by more than 50%, extend the 2023 maturities by up to four years and provide a new super senior facility. 

The consortium of investors were led by Alcentra Limited, Baring Asset Management Limited, CVC Credit and KKR Credit. The AHG was advised by Houlihan Lokey (financial) and Latham Watkins (legal). The company was advised by Kirkland & Ellis (legal) and PJT Partners (financial). 

The group started negotiating with bondholders in February as it had insufficient liquidity to meet the maturity and it struggled to refinance given its high leverage. The loans were also previously extended by two years in August 2020 via an English Scheme of Arrangement.

Schoeller Allibert — Bondholders of Netherlands-based plastic containers and pallets manufacturer Schoeller Allibert likely sighed a breath of relief, when sponsor Brookfield agreed in October to inject at least €125m fresh equity into the business. Concern over Scholler Allibert’s debt situation was mounting after weak performance in H2 2022 and the upcoming maturity of its €250m 6.375% November 2024 SSNs and the expiry of its €30m RCF in May 2024. The company included a going concern warning in its financial statements for FY 22 and Q1 23 relating to material uncertainty around its ability to refinance the 2024 maturities. 

The company appointed Houlihan Lokey as financial advisor to assist in the refinancing or liability management transaction, while bondholders appointed Rothschild. Hedge fund SVP snapped up a significant portion of the bonds over the course of the year. In the end, owners Brookfield (70%) and Schoeller Industries (30%) provided €154m in equity, while SVP provided a €125m term loan in order to refinance the bonds. The RCF was extended by four years.

Hilding Anders — Swedish mattress company failed to bounce back and has had to restructure its debt for the second summer in a row (after it completed a consensual deal in August 2022). 

As a result, its sponsor KKR will hand over the keys to the lenders, who have had to stump up €20m of emergency financing to keep the company afloat after “unforeseen liquidity issues”. The group’s creditors holding around 90% of the group’s outstanding debt have acceded to a lock-up agreement to support the terms of the new restructuring deal. 

The takeover is contingent on the completion of the sale of Askona or on approval from OFAC. The deal was sanctioned by the UK Court in July. The company was advised by PJT Partners (financial) and Kirkland & Ellis (legal). The lenders were advised by Lazard (financial) and Latham & Watkins (legal).

Cracks start emerging in the Real Estate sector

“Higher for longer” emerged as the mantra du jour in 2023. The real estate sector, which has dined out on cheap debt for more than a decade, is regularly cited as being one of the industries most exposed to the new elevated interest rates environment.

The underlying problems are simple. Assets were funded with cheap debt courtesy of post-GFC and post-pandemic quantitative easing. But when it rolls round to refinancing time (at the new higher rates), these investments no longer make economic sense. On the other side of the ledger, asset valuations are declining as cap rates rise (affected by rising bond yields in turn leading to higher discount rates) — pushing up LTVs and throwing their ability to refinance at all into doubt. 

As many predicted, the real estate sector has indeed been the source of several of the year’s high-profile stressed and restructuring situations — Adler Group (albeit restructuring talks kicked off last year), Aggregate, Demire,Heimstaden, SBB, Signa Development and Vivion Investments. In July, 9fin published an in-depth report on the German Real Estate Sector, which examined many of the issues facing these issuers in detail.

To paraphrase Warren Buffet’s old adage: “It’s only when the tide goes out that you see who’s not wearing any swimming shorts.” What has been notable, according to one hedge fund investor, is that the visible signs of financial stress have generally been in those companies which have also struggled with governance concerns of one type or another, suggesting these are the first to suffer when market conditions turn sour.

For example, several of the above-mentioned companies (namely Adler, SBB and Vivion) having been targeted by short-sellers alleging all sorts of corporate malfeasance. Therefore, it came as little surprise when feared short-seller Muddy Waters rounded out 2023 by targeting another real estate business — Central and Eastern Europe-focused CPI Property Group — in November, having previously shorted Vivion in late 2022 (and which subsequently conducted a stressed amend-and-extend mid-year). It is worth noting the CPI Property Group strenuously refuted the allegations. 

However, stress in the real estate sector is likely to continue to be a major theme over the coming year — and not just for companies tainted by governance concerns. A research report published earlier this month by CBRE suggested that lower asset values and higher debt service costs mean that “some investors will will be unable to fully refinance loans taken out in 2019-2022 and a debt funding gap will arise”. CBRE estimates this funding gap for the period 2024-2027 is around €176bn, equivalent to 27.5% of the €640bn in private commercial property debt that was originated in the 2019-2022 period.

And that’s not all, many of the companies mentioned above are likely to be forced sellers of assets into a depressed market, which could further impact valuations. 

Below we summarise developments in selected stressed real estate situations by jurisdiction.

Accentro — in March, German real estate company Accentro did an amend and extend (A&E) on its bonds as it struggled to get a refinancing underway. The German real estate market has been in the spotlight after short seller reports pointed towards issues occurring at fellow real estate company Adler. Holders of the group’s €250m 2023 SUNs and €100m 2026 SUNs agreed to a three-year extension in exchange for a 2% coupon uplift. The deal was implemented consensually.

The group was advised by Perella Weinberg Partners (financial) and Latham & Watkins (legal). The bondholders were advised by Houlihan Lokey (financial) and Milbank (legal). The group’s sponsor Brookline Real Estate was advised by Kirkland & Ellis (legal).

In the summer, the group reopened talks with its bondholders as owner Brookline Real Estate was set to lose control after defaulting on a loan secured against its 75% shareholding in Accentro. On 20 July, the company announced it received a non-binding expression of interest for a possible takeover from NongHyup Bank, who is a trustee for Shinhan AIM Structured General Private Investment Trust No.5, and Nox Capital. Shinhan granted the defaulted loan to Brookline Real Estate. On 8 November, the company said it received a non-binding offer from the parties to acquire a controlling interest in the company, which provides for an equity or equity-like capital raising of up to €20m. The offer was subject to various conditions including the amendment of the bonds. However the company announced on 1 December the talks with the two parties had not yet led to sufficient results.

Under the terms of the agreed A&E, the group must make mandatory redemptions under both the notes from the proceeds of sales of its investment properties. However due to the weak market environment the group asked its bondholders to postpone the payment due in December 2023 as well as two other payments due under the bond maturing in 2026. The group also wanted to defer the interest payment due in February 2024 until 31 December 2024. The bondholders consented to the changes at the start of this month.

Adler Group — in April Adler’s controversial restructuring was implemented through a UK Restructuring Plan. Preferential treatment was afforded to subsidiary Adler Real Estate near-term bonds with 2023 and 2024 maturities and structurally senior to Adler Group, which were repaid with funds from €937m of new money. Adler Group 2023 convertibles and Adler Group 2024 SUNs were elevated to second priority level and all other SUNs sit with third priority behind new money and second priority. 

The deal was challenged by a group of dissenting 2029 creditors. The appeal was considered by the UK Court over three hearings in October and the judgment is still being eagerly awaited by investors. Our in-house Adler nerds go over what’s next for Adler on Cloud9fin, listen here.

Aggregate — this company wins the award for the most restructurings in one year, at a whopping four! It quickly lost control of almost all of its assets, albeit one remains which is also in default, as it failed to refinance the debt against its incomplete projects. The first was at its Portuguese subsidiary VIC Properties in March, taken over by VIC’s convertible bondholders after a failed sales process. The consortium of investors were led by AlbaCore Capital Group, Mudrick Capital Management and Owl Creek Asset Management. 

Two months later it lost QH Track to Oaktree, after cost overruns and delays to its completion. The group has disposed of its other QH assets. Also in May, the group's bondholders consented to amend the notes maturing in 2024 and 2025. This included deferring payment of remaining coupons until maturity, with a yearly uplift of 2.75%. 

Last month, the group kicked off a process in the UK courts for senior creditors (Fidera and AXA) to take over its Fürst asset. The project’s junior creditors have been trying to fight against this in the Luxembourg courts. Fidera is being represented by Sullivan & Cromwell (legal) and AXA is represented by Greenberg Traurig (legal). DLA Piper (legal) and FTI Consulting (financial) are representing the company.

Corestate — in August Corestate finally completed its debt restructuring after a year of negotiations with its creditors and shareholders. The group haircut its bond debt by around 78% and reinstated the remaining into new notes with an extended maturity of 31 December 2026. In exchange for the haircut, an ad hoc committee (AHC) of bondholders received an 80% stake in the post reorg company, and management retained their 10% equity stake. The deal was implemented consensually. 

The bondholders who took over include Corbin Capital Partners, Pacific Investment Management Company, Whitefort Capital, Nut Tree Capital Management, Weiss Asset Management and Indaba Capital Management. The company was advised by Allen & Overy (legal) and Rothschild (financial). The AHC was advised by Houlihan Lokey(financial) and Milbank (legal). Listen to the company’s legal advisors take us through the protracted restructuring process on Cloud9fin.

Signa — German RE developer Signa Holding filed for insolvency at the end of November, after attempts to find emergency funding proved futile. The filing came five days after one of the group’s subsidiaries (Signa Real Estate Management) filed for insolvency in Germany. Ratings agencies expect Signa Development will be the next domino to fall, with the price of its 2026 bonds tumbling into single-digits. 

Meanwhile, Signa Prime is preparing to file for insolvency and is seeking €600m in debtor-in-possession (DIP) financing. The funds will be used to complete its key outstanding projects and therefore increase recoveries for creditors through a controlled divestment process.

Demire — Bondholders of the German commercial real estate company organised in October 2023, appointing Houlihan Lokey as financial advisor and Hengeler Mueller as legal advisor. A person familiar with the matter said the bondholder group includes Blackrock, BlueBay and DWS. Meanwhile the company is advised by Rothschild as financial advisor and Noerr as legal advisor.

The issue for the company is its roughly €670m maturity wall in 2024, comprising €499m outstanding on a notional €600m 1.875% SUN and a further €170m of bank debt. In its Q3 23 financials, Demire noted that the 2024 SUNs are now current: 

“In this context, the Company is looking intensively into the refinancing of the bond and is already in talks with a group of bondholders or their advisers about this.” No further details were given during the call. The 2024 SUNs currently trade in the high-60s.

Vivion Investments — Germany-based Vivion Investments, which owns a UK hotel portfolio and a German commercial real estate portfolio, was another high-profile target of a short-seller report last year —— with Muddy Waters claiming that many of its asset valuations were inflated. 9fin published an extensive assessment of the allegations (Part One here, Part Two here) early in the year. 

At the start of 2023, the most pressing trigger facing the company was the upcoming maturity of a securitised loan against its UK hotel portfolio, however Vivion was relieved of this pressure when it managed to refinance the dealwith M&G in January. However, this still left some €654m in unsecured bond debt coming due in 2024 and a further €815m coming due in 2025, which investors were concerned about (prices dipped into 60s for the longer-dated unsecured notes).

But in August, Vivion launched a coercive amend-and-extend transaction, which saw partial cash paydown (20% for the 2024 notes, 10% for the 2025 notes) and the extension of the exchange of the remainder into new secured 2028 (for the 2024 SUNs) and 2029 (for the 2025 SUNs) notes. 9fin assessed the merits of the deal here. While the transaction may have successfully pushed out the bulk of its maturities, Vivion may not be out of the woods yet, as €183m in August 2024 SUNs remain outstanding. With big portions of the company’s cash appearing to be either restricted or set aside in subsidiaries as a contingency, Vivion may need to find alternative methods to repay the stub notes next year.

Haya Real Estate — Somewhat different from the other real estate situations detailed here, Haya is a Spanish real estate debt servicer which effectively underwent a pre-pack sale to Intrum, using an English Scheme of Arrangement to compromise its €370m 2025 SSFRNs. The sale was concluded on a debt free basis at an initial cash purchase price of €136m, with proceeds being divided up between bondholders. Noteholders largely consented to the deal despite the steep haircut, probably due to an understanding that improved exit opportunities were unlikely to materialise given structural changes to the Spanish NPL market. The Scheme of Arrangement was sanctioned in August. 

Following a restructuring in 2022, 72.5% of Haya’s equity was held by Cerberus with the remainder owned by bondholders (at the time of the restructuring the bondholder group included Alcentra, Blackstone, Cairn Capital, Invesco, and Tikehau). Haya’s bondholder group was advised by PJT Partners as financial advisor and Latham & Watkins as legal advisor. 

The company was advised on the latest restructuring deal by Houlihan Lokey as financial advisor and Linklaters as legal advisor.

Samhallsbyggnadsbolaget (SBB) — “Hard to pronounce, harder to justify value,” was how Viceroy Research headlined its initial report targeting Swedish landlord SBB back in February 2022, in which the short-seller alleged a variety of undisclosed related-party transactions and unjustified asset valuations. 

This year proved no less of a roller coaster for the company: the company fell from IG-rated to CCC+ over the course of the year. In June the company posted Q1 results which appeared to show SBB had breached a maintenance covenant, only to restate its results immediately afterwards with the covenant breach cured. 

Later in the year, US-based hedge fund Fir Tree, advised by Cleary Gottlieb, has sought to accelerate its holdings on these grounds. But prior to that, bondholders organised, hiring PJT Partners as financial advisor and White & Case as legal advisor. The company is advised by Moelis as its financial advisor. 

Most recently in November, SBB ran a tender offer for its bonds and repurchased some €417m of its notes due in early 2024. The bond buyback follows on from the sale of SBB’s 1.16% stake in its EduCo asset to Brookfield received regulatory approval in October. The disposal hands control of EduCo to the global asset manager, which already held a 49% stake in the subsidiary. The sale will result in the repayment of a substantial vendor loan granted to EduCo as part of Brookfield’s initial acquisition of the 49% stake last year. Coupled with the purchase price, this will result in cash to SBB of around SEK 7.8bn —— enough to cover a substantial portion of SBB’s 2024 and 2025 bond maturities.

Distress in the energy sector has largely been held at bay by a broadly supportive oil price, despite a notable headwind for North Sea producers in the form of the government’s Energy Profits Levy. Brent started the year quoted at $79.05; slipped as low as $71.12 in May; hit a high of $94.36 in September; and is today roughly back where it started at $78.21.

Analysts from Goldman Sachs, writing in a 17 December research note, expect Brent to continue to trade in the $70-90 range in 2024. “The key reason is that we are raising our 2024 US liquids supply growth forecast to 0.9mb/d (vs. 0.5mb/d) on ongoing gains in drilling speed and well completion intensity, and a falling hurdle rate,” the analysts wrote.

As a result of the generally robust oil price —— and the fact that many upstream producers emerged from the previous cycle with a new-found capital discipline —— in the upstream production segment, financial distress and stress only emerged among issuers facing company-specific idiosyncratic risks.

These were either related to an overleveraged balance sheet (Tullow Oil), the emergence of unexpected liabilities (Waldorf Production), or serious operational failures (IOG Plc). Restructuring transactions were few and far between, with Nostrum Oil —— a deal that has been under negotiation since 2020 —— the only prominent completion this side of the Atlantic in 2023.

However, outside of the upstream segment, two energy industry service providers —— first McDermott, followed by Petrofac —— have run into financial difficulties. One of the key difficulties facing these contracting firms stems from the industry's dependence on securing performance guarantees from banks or insurers, which they require in order to secure new contracts or receive advance payments. Additionally, McDermott’s proposed restructuring also features a relative novelty, as it seeks to wipe out a large arbitral award using the cross-class cramdown available in the court-supervised UK Restructuring Plan.

Below we summarise developments in stressed energy situations in the UK:

Tullow Oil — London-listed Tullow, which has production assets largely located in Ghana, started the year with $2.5bn in gross financial debt (split between its $800m 7% 2025 SUNs and its $1.7bn 10.25% 2026 SSNs); liquidity of $1.1bn (cash: $636m; undrawn RCF: $500m). The company had been guiding FCF for FY 23 to come in at c. $100m with oil at $80/bbl. While production has been stable, the key question concerning investors was whether Tullow would be able to deleverage enough from FCF generation to successfully refinance its substantial debt stack (the SUNs traded down into the 50s earlier in the year, as per the chart below).  

Complicating matters, the 2025 SUNs have temporal seniority but are structurally subordinated to the 2026 SSNs —— leading to diverging views on whether the company should be focusing its deleveraging efforts on the near-term maturity, or the larger issuance. 

At one point, it appeared that the company may look to partially repay the 2025 SUNs and extend the rest (with a haircut). However, in the end the company managed to secure a new $400m prepayment facility from Glencore, effectively securing the repayment of the 2025 SUNs and also allowing for a tender of the 2026 SSNs at an average price of 89.3 cents on the dollar.

Waldorf Production — North Sea-focused production company Waldorf Production, which has $275m in secured bond debt outstanding (including $125m coming due in October 2024), faces higher than anticipated decommissioning costs as well as sizeable $117m contingent payments coming due as a result of acquisitions it made from MOL, Capricorn and Shorelight. Unrestricted cash dropped to $71m at end-Q3 23. 

As a result, the company —— which appointed Citi for a strategic review earlier in the year —— is looking to restructure its unsecured debt (namely the contingent liabilities) and hired boutique investment bank LAB Energy Advisory to dispose of its stake in the Scott-Telford licence. However, management revealed during its latest earnings call that Waldorf has no plans at present to seek to restructure its bonds.

IOG Plc — UK-listed North Sea-focused production company IOG Plc was a casualty of operational difficulties, with reserves and production falling far short of early estimates. The company appointed administrators from FRP Advisory in September. 

Prior to this on 2 August, IOG said it was seeking the deferral of its 31 July and 20 September coupon payments due under its €100m 2024 SSFRNs until 29 September. The first of these two coupon payments had already been deferred from their initial payment date of 20 June 2023. 

However, the company, advised by Smith Square Partners, was unable to secure a further extension from bondholders, advised by ABG Sundal Collier. An attempt to sell the business, led by advisory firm Kirk Lovegrove, prior to the appointment of administrators did not find a buyer.

Nostrum Oil & Gas — London-listed, Kazakhstan-focused energy company completed a debt restructuring in February 2023 via an English Scheme of Arrangement. The restructuring was prompted by lower-than-anticipated production due to water in its oil wells, as well as an inability to source sufficient feedstock for its GTU3 gas processing plant. 

As part of the restructuring deal, Nostrum’s $1.125bn in unsecured bond debt —— which it defaulted on back in 2020 —— was partially written off as part of a debt-for-equity swap, which handed bondholders nearly 90% of the company’s equity. The remaining debt was reinstated into new $250m 5% June 2026 senior secured notes (SSNs) and into $300m 13% PIK (plus 1% cash) June 2026 senior unsecured notes.

The company was advised by Rothschild (financial) and White & Case (legal). A bondholder group was advised by PJT Partners as financial advisor and Akin Gump as legal advisor. 

More recently, in November 2023, Nostrum issued a request for proposals to investment banks for an advisor to conduct a strategic review. Sources told 9fin that the review was expected to have a broad scope, potentially including assessing options to monetise assets, options around Nostrum’s debt stack, or weighing a sale of the business.

McDermott — Energy services firm McDermott, which was taken over by creditors in 2020 via a US Chapter 11 restructuring, approached courts in England, the Netherlands and the US earlier this year for approval of a UK Restructuring Plan that would see the company’s debt maturities extended and some $1.7bn in arbitral awards and administrative fines (proposed to be treated as unsecured creditors) being wiped out. 

The company noted in its Practice Statement Letter that, absent a maturity extension of the relevant debt facilities, it will be required to post cash collateral for roughly $2bn in Letters of Credit facilities on 27 March 2024, which it will be unable to do. The company is also raising a $250m new money facility from various members of an ad hoc committee of creditors via a drop down transaction backed by its storage tanks unit. 

The ad hoc group comprises 683 Capital, Arbour Lane, Bank of America (US Special Situations Group), The Baupost Group, Cetus Capital, Cyrus Capital, Eaton Vance, First Pacific Advisors, Glendon Capital Management, Invesco, Mason Capital, MFN Partners, Nut Tree Capital, Sculptor and Sound Point Capital. The ad hoc group is advised by PJT Partners (financial) advisor and law firms Davis Polk & Wardwell, Weil and Loyens & Loeff. A steering committee of bank lenders and LoC providers was advised by FTI Consulting (financial) and law firms Linklaters and Bracewell. Reficar is advised by law firm King & Spalding. McDermott is advised by Kirkland & Ellis and NautaDutilh as legal advisors, Credit Suisse as financial advisor, and Alvarez & Marsal as restructuring advisor. 

However, the restructuring proposal is being contested by unsecured creditor Reficar. McDermott had a $1bn arbitral award made against it, in favour of Refineria de Cartagena (Reficar), by the ICC in June 2023. The award stems from issues at the Reficar refinery project in Colombia, which was completed by McDermott in 2015. A further $718m administrative fine was levied against McDermott by the Colombian administrative authority related to the same project. 

McDermott’s UK Restructuring Plan sanction hearing was pushed back to mid-February by Mr Justice Miles, after Reficar successfully sought to have two days added to the sanction hearing duration. It is expected that valuation issues are likely to feature prominently in the matters to be debated at the hearing.

Petrofac — UK-listed energy industry contractor Petrofac has faced a turbulent few years. In October 2021, Petrofac pleaded guilty to seven counts of failing to prevent bribery in the Middle East between 2011 and 2017, and was ordered to pay £77m following a UK Serious Fraud Office investigation. The fines precipitated an emergency capital raise and refinancing via the issuance of a new $600m 9.75% 2026 SSNs. 

Despite winning some very significant new contracts this year, most notably with Dutch state-owned energy company TenneT, it emerged that Petrofac had been unable to secure performance guarantees. This meant that it could not receive advance payments for its contract wins, and the company said that it was likely to miss its earlier guidance of being FCF neutral in FY 23. 

Following the announcement, the company hired advisors, namely Moelis and Teneo as financial advisors and Linklaters as legal advisor, while bondholders appointed Houlihan Lokey as financial advisor and Weil as legal advisor. Bank lenders appointed FTI Consulting and Latham & Watkins. The situation resulted in the company’s bonds plummeting into the high-30s (having been indicated in the high-70s earlier in the year). However, in its December trading update, Petrofac said it has now secured some of the guarantee facilities it needs, prompting a slight recovery in the bonds. Investors await details of how the situation will unfold from here.

Well that’s a wrap for 2023. We shall see what 2024 brings for distressed debt. We wish you all a wonderful Christmas and New Year!

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