Restructuring: Eircom ‘pre-pack’ seals subordinated wipeout
Last-minute Blackstone bid fails; Senior lenders to take control
When Irish telecommunications operator Eircom applied for examinership in the country’s high court on March 30, it was the culmination of a protracted battle between its first-lien and second-lien lenders that has seen the firm default on its debt and left it with no permanent chief executive or CFO, and a majority shareholder that has washed its hands of it.
It also owes €4.1 billion that it cannot repay.
"Eircom sleepwalked into the situation it is in today," says one observer. But it should act as a wake-up call for other over-levered corporates – and their lenders – that are not facing up to the reality of the debt obligations they face.
For a corporate of Eircom’s size to apply for examinership – akin to US-style Chapter 11, granting the firm 100 days’ protection from its creditors – is highly unusual in Ireland. It is usually the resort of small to medium-sized firms in trouble, not conglomerates the size of Eircom.
Eircom’s debts are, indeed, eye watering:it has €2.5 billion senior debt outstanding in the form of bullet term loans, a €650 million senior secured term loan A, a €150 million senior secured revolving credit facility, a €350 million FRN due in 2016, a €350 million second-lien term loan D and €425 million PIK notes due in 2017.
When it was floated in 1999, it owed less than €500 million. The firm is understood to have estimated ebitda of €550 million for the year to June 2012, down from €699 million for 2011, but in February it announced there had been a sharp deterioration in performance in the last six months of last year – it missed the deadline to produce financial results for the first quarter in October 2011.
By December 31, the amount of cash on hand was €326 million, so simple mathematics meant that a default was inevitable.
Last minute waiver
And so it proved, with a mid-February missed coupon payment on the €350 million FRN, which triggered a failure to pay credit event on CDS written against it. Eircom had narrowly avoided a covenant breach on its senior debt in July by negotiating a last-minute waiver with senior lenders.
While the examinership itself offers Eircom bankruptcy protection, the restructuring of its debt is already a done deal after its first-lien and second-lien lenders agreed terms last month. But this was only after a fractious year of horse trading and a failed attempt to find a buyer.
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The process also threw up an audacious 11th- hour attempt by Blackstone GSO, one of the largest lenders to the firm, to impose its own restructuring plan on to the company. Eircom’s big debt burden is a legacy of the pre-crisis leveraged buyout boom, when now defunct Babcock & Brown Capital bought the telecoms firm in a 2006 deal overwhelmingly financed in the debt markets through Barclays Capital, Credit Suisse, Dresdner Bank and JPMorgan.
Eircom quickly ran into trouble and was recapitalized in July 2007 with a €3.5 billion loan underwritten by Deutsche Bank and JPMorgan. Singapore Technologies Telemedia (STT) bought out the struggling Australian owner in late 2009, paying €140 million for 65% of the firm.
Senior lenders met to discuss the situation in early 2011. The second-lien lenders, which are understood to include Park Square Capital and Axa Investment Managers, attempted to join the negotiating group but were rejected.
However, progress was glacial and the company only recognized the co-ordinating committee, comprised of first-lien lenders Alcentra, Avoca Capital, Deutsche Bank, GSO Capital Partners, Harbourmaster Capital and SMBC, on July 7. At this stage, JPMorgan bowed out as adviser to Eircom, leaving Gleacher Shacklock as sole adviser.
In August, majority shareholder STT proposed a €300 million cash injection, with the senior lenders taking a 7% to 8% haircut in return for 20% of the company. This offer sat on the table until December 12 – during which time the eurozone sovereign debt crisis sharply intensified – when STT improved upon it, offering lenders 25% of the firm but stipulating that STT would be reimbursed €100 million if Ireland left the eurozone.
When the first-lien lenders again rejected the plan, STT’s directors resigned from the board and the firm pulled out on December 23.
"The first-lien co-ordinating committee was very slow to get its act together," grumbles one lender. "The first-liens should have grabbed the €300 million much more firmly than they did in August – management was supportive of the STT offer and a deal could have been done before STT got cold feet."
Given that it had paid only €140 million for Babcock & Brown Capital’s stake – and given the state that Eircom is in – it was hardly surprising that the Singaporean firm walked away.
At this stage, Eircom brought restructuring specialists Alvarez & Marsal on side to advise on the situation.
The first-lien lenders had tabled a restructuring plan of their own in November – as had the second-liens. The first-liens were proposing they take 100% control of the firm in return for write-downs of up to 10% and a maturity extension. Second-lien lenders – owed €350 million – were to receive just €25 million. The second-lien lenders offered a 71% write-down – €250 million – in return for a 5% stake in the firm. Not surprisingly, Eircom decided to see if it could find a new buyer, and engaged Morgan Stanley in early January to flush one out by March. This process failed – not helped by the fact that Eircom had announced it would be reforecasting its numbers 10% to 15% lower.
The firm then began putting plans in place to apply for examinership to implement the first-lien’s restructuring proposal. However, the negotiations were thrown wide open when Blackstone GSO, one of the largest first-lien lenders, tabled an alternative proposal at a meeting in London on March 14.
"It became apparent very early on that GSO would be tabling an alternative plan as they wanted to equitize more of their debt and take a classic private equity approach to the problem," says one observer. "But it was a surprise in terms of the timing that they left it so late."
GSO’s 11th-hour proposal involved injecting €150 million of fresh equity into the firm in return for improved seniority of its existing debt. It also offered improved terms – €35 million rather than €25 million – for the second-lien lenders. This was a tactical move reflecting the interconnectedness between the two.
Some 40% of second-lien holders also have meaningful holdings in the first-lien – and that 40% accounts for a full 14% of total first lien exposure. By sweetening the deal for the second lien, GSO was therefore hoping to win a large chunk of the first lien round as well. However, the motivation behind the move was clear.
Already one of the largest lenders to Eircom, Blackstone GSO, bought Harbourmaster Capital in June 2011 – another big lender to the firm. One source reckons GSO’s exposure could now be as high as €500 million. GSO is understood to have bought into the loans at 80c to 90c and Harbourmaster’s exposure will be at par as it was in the original 2006 deal.
"GSO was trying to protect its own position and to step up part of its debt to super senior. People were reluctant to support this," says one lender. "It didn’t get much support as it was seen as coercive – lenders would be forced to put in new money to the company if they wanted to maintain their seniority." Blackstone declined to comment.
The bid was, however, good news for the second-lien lenders as it forced the first liens to up their offer to €35 million to match it. This is the baked-in restructuring that the examinership process will now facilitate. With €1.8 billion being wiped from Eircom’s gross debt by the senior lenders taking a 15% haircut in return for control of the company, the second-lien lenders will take a 90% haircut and the PIK noteholders will be wiped out.
One advantage of an Irish examinership as opposed to a UK scheme of arrangement is that it has a 50% voting threshold rather than the latter’s 75%. Some lenders – most notably the second-liens as their consent would have been needed – had lobbied for a UK scheme of arrangement, not least because an examinership at this scale is untested. The first liens, therefore, went on a charm offensive, discussing the process with small groups of lenders at a time.
All lenders agreed to the process, however, not least because this is essentially a pre-pack restructuring that is already in place – the examinership is just the implementation mechanism. The restructuring plan has the support of more than 50% of lenders, so any holdouts will simply be crammed down.
A mountain to climb
When Eircom emerges from examinership and the restructuring is implemented, it still has a mountain to climb. It faces very strong competition from UPC in fixed line, and Vodafone and O2 in mobile. It has no chief executive, Paul Donovan having announced he is to step down at the end of this year, and its interim CFO Mark Wilson – who was appointed in January 2011 – has no permanent replacement.
The restructuring relieves it of €1.8 billion of debt – but it still owes €2.3 billion. And it has seen subordinated lenders all but wiped out after a protracted and fruitless series of negotiations. The first-lien lenders have ended up with a 15% haircut and have gained control of the company.
But the deteriorating macroeconomic environment since last summer has weighed heavily on the firm and turning it around from here will be extremely difficult – particularly without clear leadership. "Although most of the cash from the STT offer would have gone to senior lenders, there would have been a controlling shareholder and a sponsor in place to take responsibility rather than the firm being run but 300 lenders, which will be the case now," says one.
Others agree that the situation could have been better handled. "The first-lien committee were calling the shots but they simply overplayed their hand."