The corporate family rating of the company has been downgraded to Caa1 from B3 and its probability of default rating to Caa1-PD from B3-PD. The senior secured term loan B due October 2023 and the senior secured revolving credit facility due July 2023, have also been downgraded to Caa1 from B3. The outlook on the ratings has been revised to negative from stable.

A large CLO investor suggested CLOs would be likely to approve the extension, since a failure to get it passed would mean a downgrade to triple-C, putting pressure on the widely watched “Triple C bucket” metric in CLO vehicles.

The company was offering to buy back a portion of the TLB at par and pushing out the maturity of the rest by two years in exchange for a 100bp margin increase.  The group’s sponsor BCP was also offering to inject €50m of equity.

In order to fund the buyback Keter had planned to borrow a second-lien loan and an additional first-lien loan from existing and new lenders that will have the same collateral as the extended term loan lenders.

One major obstacle to getting the deal through, however, is the number of CLOs in the deal which are already out of their reinvestment periods, and therefore face limits on approving A&E transactions.

CLOs invested in Keter that are out of their reinvestment period include Bain Capital Euro CLO 2018-1, BNPP IP Euro CLO 2015-1, BNPP AM Euro CLO 2017, Bosphorus IV, CVC Cordatus III and VI, Man GLG I and II,  Marlay Park, Milltown Park and Newhaven II, St Paul’s III, IV V and VIII, and Palmerston Park, Richmond Park and Willow Park.

The extension offer had a coercive kicker in its initial form, as lenders that did not participate would see key protections removed through a “covenant stripping” mechanism.

Covenant stripping basically meant they would extend the loan into a new 2L tranche, but strip the covenants from the old loan, so if left behind in the stub you are temporarily senior but in a much worse position.

“Originally it was worrying when they came with the first offer, given the prospect of BC Partners stonewalling us and leaving us without any security. We would hope to be repaid at par, but for a CLO it is better to keep the security and a lower margin,” said the buysider. “I understood they rowed back from that, since a few other CLOs had that problem.”

In order to release the guarantees and security, Keter needed to reach a higher threshold of super majority lender consent, which is typically 80%. If they had been able to reach this threshold, the existing TLB would effectively have become unsecured.

Moody’s said in its downgrade notice that it “understands the company is working on a refinancing plan with the aim to complete it in the coming months”.

The buysider said: “We haven’t really seen the latest evolution. It is probably discussed with the big guys first, but something will probably come. The agent bank seem to be tight-lipped for now.”

Another buysider told 9fin that they sold out of their position before the proposal was launched. They were hoping to be taken out at par in a restructuring and also would have been fine with a straight amend and extend to push out the problem.

“The reaction I’ve heard from other lenders so far has been pretty negative, they’ve not seen the covenant strip out mechanism before and just got some messages of real frustration, especially given this could have been refi’d out way earlier if only the company hadn’t gotten greedy — now it’s lenders who pay the price.”

The group initially tried to refinance the loan in January but the deal was shelved by sponsor BC Partners after investors demanded a larger premium than it was willing to pay. Instead the group placed a €100m add-on a few weeks later.

Moody's said in its latest report that this delay in refinancing its existing bank loans within 12 months of these becoming due has weakened the group’s liquidity profile.

The rating agency highlighted that the current volatile capital market conditions and deterioration in the broader macroeconomic environment are making the refinancing more challenging and potentially more costly, given the company's very high leverage and the rising interest rates.

Moody’s expects Keter’s leverage to remain at around 8x in 2022 and only fall below 7x by 2024.

The downgrades also reflect the company’s weak liquidity profile.

Moody’s expects the company’s operating performance to remain weak over the next 12-18 months. Keter's year-to-date August 2022 sales increased by 13% on the back of price increases and strong demand in the first half of the year. However, EBITDA declined by 15% in the same period as a result of inflationary pressures.

Margins in the second half of 2022 will also be lower than initially anticipated, as persistent inflation challenges both topline and expense levels. A contraction in consumer discretionary spending in 2023 will challenge the company's ability to improve its credit metrics.

In addition to the TLB, Keter has uncommitted short-term loans from local banks with an outstanding amount of €63m as at August 2022.

As of October, the company had €131m of cash and cash equivalents, a fully undrawn €102m revolving credit facility due in July 2023, and access to a €31m credit facility secured by trade receivables and inventory, according to Moody’s.

Keter’s rating could be further lowered if the company fails to refinance its 2023 debt maturities in the coming months, or if the company pursues a debt restructuring resulting in higher losses for creditors than those currently assumed in the current Caa1 rating, according to the Moody’s note.

Keter has been majority owned by BC Partners since 2016, while minority shareholders include funds advised by private equity firm PSP and original founders the Sagol family.

BC Partners declined to comment.