Intralot - Implications for the 24s
All,
Please refer to our unchanged analysis here.
As previously mentioned, the core 2021 holders always had the option of upsizing their bond to pass the necessary 90% threshold required to effectuate the transaction via a voluntary exchange. This morning’s announcement of a E147.6m Redemption Facility - to be used to issue as much in new 21s via private placement to the loan providers achieves just that.
Solved: Cross Default and Blocking Minority:
- Cross Default: A Restructuring via a UK scheme for instance would have triggered a cross-default to the 24s. This reinforced the need to find a consensual deal that did not require any insolvency-related programs.
- Blocking minority: The 2024s have had a blocking minority in the 21s, which back in February prevented the 21s from gaining more than 82% approval. A voluntary exchange requires a 90% supermajority.
- The announcement made this morning points to a new Redemption Loan by the core 21s against the issuance of additional 2021 Notes, taking the resulting size of the bond issuance to nearly E400m. The new, fungible bonds will be issued via private placement to the core holders/loan providers, handing them the required supermajority to effect the transaction on a voluntary basis, circumnavigating the blocking minority and cross-default threat.
Outstanding: Litigation:
- The 24s have been attacking the deal for introducing new Sr. Sec. Debt ahead of them beyond the size of available baskets and for. However, the Evercore / A&O proposal uses a JV mechanism - a Permitted Investment even if in nature a disposition, which represents a loophole in the bond language in terms of divestitures and financing arrangements of such JVs.
- The above argument has been made in conjunction with the argument that the sale - even if made through a loophole JV - triggers a change of control as the company would be selling substantially all of its assets and that such JV would not constitute a Permitted Holder. Naturally, the company denies that and we understand that the astonishing business plan for the rest of the world business has less to do with reality than with the necessary legal basis on which to rest its claims that the Inc does not represent more than half of the value - or so the business plan implies.
Implications for the 21s:
The package for the 21s has slightly improved as the loan proceeds are to be applied pro-rata at par to the 21s - representing a transfer from the core group to other 21 bondholders.
Implications for the 24s:
- The update changes nothing with respect to the deal offered to the 24s. The 21s effectively move super sr. with a new USD bond of E205m and take 18.7% of the equity via their equitisation of 68m 24s. The 24s, therefore, are being layered and lose a near 20% of the US Group’s equity to the 21s.
- The 24s now need to decide (or probably already have) if they wish to litigate - as threatened. The large loan amount to the 21s issuer would suggest that the 21s core group is at least highly confident that no litigation will upset their transaction.
- Back at some of my past employers we would not have thought twice about it. Of course, we would litigate - if only for “reputational" reasons. Else we’ll be regarded as walk-overs and invite challenges on all sorts of fronts. But the leading 24 holders Gramercy, Chenavari, Serengeti and Alchemy do not strike us as particularly litigious and likely take a more institutional approach to reputation.
- Litigation so close to maturity could also scare some holders now and invite a sell-off.
Positioning:
- We remain long the 24s with 5% of NAV. We had admittedly expected some form of improvement to the deal to the 24s, which this update notably does not represent. Going forward we note that we are struggling to comprehend the ROW side of the business plan, but it represents the smaller part of the valuation (the majority of the 24s valuation comes from the 81% equity in the US Group.
- We do not expect the 24s to move spectacularly on today’s news and therefore will remain long those 24s for a little longer.
Happy to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003