Carlson Travel Inc (CWT) – How much is enough?
All,
Please refer to our unchanged analysis here.
A month after missing the coupon on its 10.25% 1st Lien New Money Notes and entering negotiations with bondholders, CWT announced an additional $40m of SSNs will be issued at par. We are surprised at the small size which indicates to us that CWT is doing just enough to eke out its liquidity for another quarter in the hope of a rebound and continued support from its RCF lenders.
Why $40m now?
- It’s a bet on traffic resuming following summer - and somewhat faster than the industry is expecting overall.
- The leading bondholders have clearly chosen not to press for an in-court restructuring at this juncture, but are kicking the can down the road instead - presumably with a last view to a possible rise in bookings following summer. As a result of the cash injection, CWT gets to roll the dice one more time and the onus will be on the RCF lenders to support the company liquidity wise.
- $40m extra cash will merely fund coupons and just means CWT becomes reliant on its RCF one quarter later. The cash injection gives breathing space but does not address the deficiencies in the capital structure.
The role of the RCF:
- The consent solicitation released on Friday did not contain any information on a covenant waiver from the RCF. We would expect there to be an agreement in place in return for the cash injection, but are clearly missing it here. Without a waiver from the RCF, they would be left in control of the fate of the company, ahead of the bondholders who represent 90% of the debt structure.
- We are modelling US$180m in working capital outflows over the three quarters from March to September 2021. Our model projected that the company would run out of cash and begin drawing on its $150m RCF in the June-21 quarter and we expected it to be fully drawn by the December quarter. The $40m injection will keep CWT within its RCF limits (just). Although we do not see how it will be able to meet the clean-down covenant any time prior to the end of 2023.
The consent:
- The tap will require a waiver from the Senior Secured Bondholders to increase the capacity for additional indebtedness. In return for consent holders will see the call premium on the notes rise from 104.25% to 104.75% for the period through to 30 June 2022. A fairly small concession, but a small group of holders have a majority and we see the consent being given.
- The Consent of the Third Lien holders has not been sought. There is a carve-out in the limitations on indebtedness of $50m in the Third Lien Indenture. Thus, the dripping in of cash is not a trick that can be repeated without seeking consent of the Third Lien holders.
Investment Considerations:
- Given the level of debt outstanding, we see a potential opportunity in the Third Lien notes subject to them being part of a holdout group big enough to have a blocking stake, willing to provide fresh cash, and be equitised in the context of a CH11 process aimed at returning CWT to a sustainable capital structure.
We are looking forward to exchanging any ideas on CWT with you.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055