September Covenants Monthly: LMEs Gain Momentum in Europe as Victoria and AFE Put Pressure on Bondholders; Renewed M&A Activity Lifts Market at Close of Q3

After the traditional August slowdown, liability management exercises, or LMEs, returned to prominence in September, continuing their rise across Europe. The month saw two headline-grabbing transactions: U.K. flooring group Victoria’s latest restructuring maneuver and debt collector AFE’s aggressive consent solicitation. As outlined in our analysis, Victoria’s latest gambit involves an exchange offer for its outstanding senior secured notes due 2028, which offers holders the option to swap into new 12% PIK notes due 2031. While the exchange means a steep discount at par and a subordinated ranking to the company’s 2029 notes (the result of the Victoria’s first LME), it offers a premium to current market prices and seniority over any remaining 2028s that choose to hold out.

Meanwhile, AFE launched an aggressive consent solicitation on its €331.9 million senior secured floating-rate notes due 2030, offering noteholders either a steeply discounted cash exit at €200 per €1,000 or a swap into new second-lien and subordinated holdco loans. With around 72% of creditors already committed, the company could compel holdouts if it reaches the 90% consent threshold. Supportive lenders are funding the discounted tender and providing €25 million in new super-senior liquidity, albeit with a 5% upfront fee. If approved, the deal would also permit majority consent for further super-senior debt and allow holdouts to be redeemed at the low tender price.
 

The English judiciary overhauled the Practice Statement governing schemes of arrangement and restructuring plans under Parts 26 and 26A of the Companies Act, effective Jan. 1, 2026. Replacing the 2020 guidance, the reforms aim to streamline case management, enhance transparency and reduce late-stage disputes by introducing mandatory “listing notes” outlining key procedural and financial details, as well as written notifications to creditors. The changes codify recent case law and seek greater efficiency and fairness, requiring earlier filings and stronger evidential support. However, some practitioners warn they may erode the flexibility that has long made the English regime attractive to debtors. The court has upheld the new framework but maintained discretion to restrict access to case files or anonymize company names where necessary.
 

Theme park operator Merlin Entertainments caused waves amid a long-term issuer ratings downgrade by S&P from B- to CCC+. S&P cited an unsustainable capital structure and recent underperformance. Following the ratings downgrade, a conventional refinancing appears difficult, with the most immediate concern lying with the £617 million-equivalent senior unsecured notes maturing in 2027, which were also downgraded to CCC- from CCC by S&P.

Just weeks after Merlin ditched plans to sell certain assets, the company returned to the asset sale route. Merlin has agreed to sell its LEGO Discovery Centres and Legoland Discovery Centres to the LEGO Group, owned by its largest shareholder Kirkbi, for around £200 million, which could be used to partially repay the 2027s.

The group has options to fund the remaining amount required to redeem the 2027s. This could include monetizing additional assets through further sales, refinancing or even exchanging the junior 2027 notes with senior secured debt that would then rank pari passu with the group’s outstanding senior secured notes. Alternatively, the group has capacity for a more aggressive option by refinancing the 2027s with debt that would prime the senior secured debt of the group in respect to a portion of the company’s assets, either through a drop-down or pari-plus transaction.

For an LME options analysis on Merlin Entertainments under its senior facilities agreement and senior secured notes, contact us at [email protected]. You can get access to the covenant analysis if you have a copy of the Fourth Amendment and Restatement Agreement to the Senior Facilities Agreement dated Feb. 5, 2024.
 

Switzerland-based security company Verisure and Italy-based chemicals company Italmatch are exploring a shake up in ownership. While Verisure has publicly listed in Stockholm, Mumbai-based Dorf Ketal Chemicals is reportedly in advanced talks to acquire Italmatch.

Verisure raised around €3.2 billion in its listing, with proceeds expected to be used in large part to pay down existing debt. The group stated that it will use the proceeds from the IPO to reduce its net leverage to about 3x. As we explored in our analysis, Verisure is not required to repay any of its notes using the IPO proceeds and can choose which notes or loans to redeem. The ultimate decision on what debt to repay will likely be influenced by its debt servicing costs, including future expected base rate movements, current redemption price and debt maturity dates.

Meanwhile, Dorf Ketal Chemicals’ potential acquisition of Italmatch could trigger the change-of-control put option under the Italian chemical company’s senior secured notes due 2028. Portability may come into play, though it would require deleveraging. A contribution of about €58 million from Dorf Ketal would bring leverage within the portability threshold, although any expected synergies from the transaction may reduce the amount required. That said, with the fixed-rate notes trading at 105% and the floating-rate notes at 106%, the 101% change-of-control put right may look less compelling to noteholders.

The high-yield market regained momentum in September with 13 deals reviewed by EMEA Covenants. Refinancing accounted for the largest share of the market at 69%, though M&A activity surged to 23% and funding for general corporate purposes accounted for 8% of deals reviewed by Octus.

Software company ION Platform moved to consolidate its debt in September amid a corporate reorganization of the global business activities and assets of the existing ION Markets, ION Corporates and ION Analytics groups under the new ION Platform group. The deal included $1.5 billion and €1.1 billion of senior secured notes alongside a $2.25 billion and €2 billion euro term loan.
 

September M&A deals were a mixed bag of covenant terms. While some transactions offered pockets of issuer-friendly flexibility, covenant terms were generally measured for Intralot Capital and Ithaca Energy. Matterhorn Telecom (Salt)’s new 2030s, however, were more aggressive, introducing a number of flexibilities from its existing 2030s issued in January.

The most significant shift came in Matterhorn’s investment permissions, with the new notes introducing a ratio-based permitted investments basket with a “not made worse” alternative test, an off-market flexibility observed in only 16% of deals over the past four quarters. The notes also contain substantial capacity for value leakage at issue due to off-market headroom under their ratio permissions due to inconsistent application of IFRS for covenant calculations. This capacity could even be much higher due to a backdated builder basket.
 

Two credits stood out in September for particularly aggressive day-one provisions for value leakage and shareholder dividends due to backdated builder baskets. As we’ve seen in the case of Altice France, a backdated builder can aid significant value leakage from the group and enable an aggressive liability management exercise. In the issuance of its new notes due 2030, Gestamp Automoción’s builder basket is backdated to 2016, in line with the group’s existing senior secured notes due 2023. Gestamp’s day-one capacity for value leakage already stands ahead of the market average for the last four quarters without taking the builder into account. Unhelpfully, the notes do not disclose the capacity of the builder basket, which could balloon capacities.

Chemicals manufacturer Ineos incorporated capacity from its CNI builder basket under its senior facilities agreement that has accrued since around 2012. This backdated amount, which acts essentially as a large starter amount, is disclosed to be approximately €1.601 billion.

A summary table of European high-yield bonds in September is below:
 

To see our analysis of these documents, visit the Bonds Library, HERE.
 

The loans market picked up pace quickly after the August summer break, with EMEA Covenants reviewing 33 deals in September. Repricings dominated activity, making up 39% of deals, while M&A transactions also saw a strong resurgence at 24%. In contrast, refinancings dropped to just 21%, and both A&Es and GCP funding each accounted for less than 10% of the September market.
 

The average loan score in September was 3.59, markedly looser than July’s average score of 3.26. VFS Global had the most aggressive score in September at 4.40 while Group of Butchers had the most protective score for lenders at 2.92.

A summary table of loans reviewed by EMEA Covenants in September is below:
 

To see our analysis of these documents or to talk to one of our legal analysts, click HERE. You can get access to the analysis if you have a copy of the applicable credit agreement or subscribe to FinDox.
 

In an exclusive webinar addressing the growing use of liability management exercise in Europe, Liz Osborne, head of European restructuring at Pual Weiss; Kai Zeng, restructuring partner at Paul Weiss; and Adam Al-Attar KC, barrister at South Square, joined Octus’ Chetna Mistry. Our expert panelists examined the landmark European LMEs executed to date, delved into the legal questions they had generated and assessed the alternatives now being deployed and considered. For those who missed this insightful webinar, the replay is available HERE.