Deal: Cablecom's debt-for-equity swap
Size: SFr3.8 billion ($3 billion)
Adviser: Goldman Sachs
Date: November 13 2003
Various US investors have made their presence felt in Europe by buying into distressed debt there in the past three years. But how much more impact might they have if they started teaming up and acting together?
That was what happened in November when Apollo Management, Soros Private Equity Partners and Goldman Sachs Capital Partners took control of Swiss cable TV company Cablecom.
Frosty response
Cablecom supplies cable services to about 1.5 million households and employs 1,300 people. All three investors had been buying Cablecom's debt as it struggled with a high level of borrowing. During 2002, Cablecom worked with a group of 38 banks to restructure its SFr3.8 billion ($3 billion) of bank debt, which was almost fully drawn.
By February 2003, with some banks nursing substantial losses, a deal was struck whereby some of the existing debt would be written down and each bank would get a chunk of Cablecom's equity.
But Apollo, Soros, and Goldman, as investors in sub-par debt, thought that Cablecom would have problems servicing what would be left of its debt, which even after the proposed write-down would have been more than SFr2 billion. Rather than consent to the deal and wait for an inevitable second restructuring, they formed a contractual consortium and, early in March, started pushing for a deal of their own.
"When Soros tried to approach the banks on its own, it got a pretty frosty response," says one observer. "But when this block of investors joined forces and attained critical mass, they had leverage over the banks."
The US investors, advised by an investment banking team from Goldman Sachs, were looking for what they saw as a reasonable valuation of Cablecom and, ultimately, for control of the company.
"We bargained for a number of things that were quite hard," says Christopher Hall, a partner at Latham & Watkins and one of the consortium's legal advisers. The consortium asked for – and eventually got – a debt reduction of 60%, in return for which the debt holders would get over 95% of Cablecom's equity. Cablecom's capital structure was overhauled, with its bank facility repackaged into three tranches: SFr1.3 billion of senior debt, SFr400,000 of slightly junior debt, and SFr200,000 of equity.
"We almost converted the debt into an acquisition finance structure," says Erik Dahl, a partner at Kirkland & Ellis, legal advisers to Soros Capital Partners. "We tried to work out a reasonable leverage ratio based on a multiple of ebitda, and to get the capital structure right from an interest service perspective but also so that it rewarded each tranche of debt with the right return."
Despite holding less than 50% of Cablecom's debt, the consortium took control by receiving a disproportionately high allocation of the equity and the second tranche of debt and a lower proportion of senior debt.
Executing the deal was difficult and tense. Under Swiss law, non-qualifying lenders (NQLs) – that is, debt holders who don't hold a banking licence – can incur large tax losses when they take positions in debt facilities. Because the swap needed 100% creditor consent, the consortium's advisers had to structure a repackaging vehicle that allowed around 30 of the consortium's fellow NQL investors to have a say in the process. This multi-issuance restructuring vehicle, Signum Ltd, is a party to Cablecom's credit agreement and represents the NQLs' interests through an agent's vote.
The consent of all the creditors was vital because the alternative to a negotiated deal – putting Cablecom through a formal Swiss insolvency proceeding known as a moratorium – would have crystallized the banks' credit losses and disrupted Cablecom's services to its customers. "The Swiss bankruptcy process is draconian," says Dahl at Kirkland & Ellis.
Personal liability
But keeping a Swiss company out of the moratorium process is tough because, when a company is over-indebted under Swiss law, directors become personally liable for creditors' losses prior to the moratorium. So Cablecom's board had an interest in getting the company into formal proceedings as early as possible.
"This deal should act as an advertising banner for the need for uniform, rehabilitative insolvency laws in Europe," says Latham & Watkins' Hall. "They have had that in the US for 25 years."
If the consortium had leverage, it used it "skilfully and honestly", according to one party. The group had originally bought Cablecom's debt at around 40 cents on the dollar. Immediately before the debt was converted into the new three-tier structure, it was trading back up in the mid-to-high 70s. "That's remarkable, and helped keep everyone's eyes on the finishing line," says Hall.
In the long term, Cablecom may be remembered as the deal that saw the debut of a new breed of US player in European restructurings – a hybrid of distressed-debt and private- equity investors.