Winding Up — It’s finance, Jim, but not as we know it

9fin team

26 April 2024•6 min read

Not every loan will be performing. It’s this simple fact that inextricably links the world of structured credit to distress.

We’re working on a broader educational piece that covers the topic of CLOs in restructurings, so we’ll keep our remarks on the topic brief.

What is a CLO, exactly? It’s a type of security backed by a bunch of corporate loans and (occasionally) bonds. CLOs are structured in a series of tranches, from triple-A down to an equity tranche which picks up residual interest proceeds.

CLOs dominate the leveraged loan market and arguably, restrictive whitelists mean that CLOs are some of the biggest players in the distressed markets — whether they like it or not.

Historically, CLOs had a hard time in restructurings as it was difficult for them to hold equity, they couldn’t participate in new money, and might be unable to accept a long A&E deal.

This point goes to heart of how CLOs are constructed. They face constraints on the mix of loans to bonds, the total number of CCC credits a portfolio can contain, and so on. A manager has a series of tests to comply with, otherwise things get tricky.

These limitations made pre-2020 CLO vehicles easy to exploit, which distressed funds did with gusto — namely by structuring recapitalisations to discentivise CLO participation or by buying loans at firesale prices. It should be noted that CLOs did have some tools in their arsenal that allowed them to participate in restructurings, but they were very limited in scope. But that’s not really the case anymore.

CLO documentation became more flexible post-2020, which has given CLOs the ability to behave a little bit more like distressed funds. The most important concept introduced at this time was the loss mitigation obligation.

There are also slightly more passive routes into a restructuring, such as snooze drag provisions, which allow CLOs to be “dragged” along in a restructuring by abstaining.

CLOs’ eccentricities have increasingly shaped restructuring deals. HoldCo PIK notes are a widespread bit of financial engineering — CLOs can hold equity but they prefer a heavily subordinated piece of debt one rung above equity.

And its not just PIK notes; sometimes CLO participation requires bespoke tailoring. Take Vue Cinema’s 2024 restructuring. New money participation was made on an institutional basis rather than to specific creditors to allow certain CLO funds (who were ineligible for various reasons) to provide some of the new financing.

Watch this space for a more thoroughly thought-out and technical exploration of the topic. Anyway, time for the week’s news.

This week’s news

Aggregate Fürst — The Luxembourg-incorporated property group is fighting against litigation lodged by a second-tier creditor, whose debt was released under the group’s English restructuring plan last month, in the jurisdiction.

Altice France — Certain Altice France secured creditors have signed a cooperation agreement that would bind their acts together for the next six months. The move came after Altice management asked creditors to partake in discounted exchanges — if they want to see the estimated €2.1bn proceeds from the data centres and Altice Media unrestricted asset sales.

Ardagh - Ardagh held its Q1 24 earnings call Thursday (25 April). We outlined new information to emerge on the details and nature of the surprise uptiering deal struck with Apollo last week. We also looked at reiterated FY 24 guidance which we continue to believe is going to be difficult to achieve.

Atos — French software company Atos SE is revising its business plan as clients are delaying contracts until the group’s refinancing plans become clearer, management said on a call on Thursday (25 April 2024). Revisions to the 2024-2027 business plan will lead to an increase in new money needs and potentially more debt reduction, according to the presentation. The group said it will communicate these changes to the market in the coming days. Under the previous plan the company was looking to reduce debt by €2.4bn, as reported. 9fin’s analysis on the previous plan, which requires €1.2bn of new money, is here.

Intrum — little information on Intrum’s next step for its capital structure was provided on its Q1 24 conference call. CEO, Andrés Rubio, said that it has nothing to share on the “realignment, reshaping, restructuring of the capital structure” but did confirm the Cerberus asset sale is pending one regulatory approval and should close in the next one to two months. Management also confirmed that exits from its tactical markets are now off the cards due to the larger-than-anticipated Cerberus sale. It previously eyed up potential exits for Hungary, Slovakia, and the Czech Republic, which are all investment-heavy markets for Intrum. On a results basis, much is the same. The servicing business continues to grow but margins are concerning and are far off management’s targets while limited new investments mean cash generation is high in the short term.

iQera — French debt purchaser iQera’s bondholders are organising after the company said it is working with advisors and its shareholders to assess options for its capital structure on its FY 23 earnings call Monday (22 April). iQera is being advised by Rothschild, Latham & Watkins and Darrois Villey Maillot Brochier, according to the two sources and a third source familiar. The group’s largest shareholder BC Partners is being advised by White & Case, they said. BC Partners and White & Case did not wish to comment. The group’s €500m 6.5% senior secured FRNs due 2027 reacted to the news by dropping 20 points to 62.9-mid over the week.

Oriflame — the Swedish cosmetics direct seller posted its Q1 earnings, but offered little guidance on its ongoing refinancing negotiations. Management indicated that the company would use a mix of drawings on its RCF and cash from asset sales to pay upcoming bond interest payments.

Thames Water — our editor, Chris Haffenden, and analyst, Denitsa Stoyanova, took stock of the trouble utilities company’s whole business securitisation as fears grow that the operating company may be heading into special administration.

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Sue Moore rejoins Dentons from Faegre Drinker, per a firm announcement posted on Monday (22 April), 13 years after she first departed the firm for a partner role at Stephenson Harwood. Moore worked as the head of Stephenson’s restructuring and insolvency practice for two years between 2019 and 2021.