EMEA Special Sits Weekly: Selecta-tive Information Disclosure; Essity Existential Threat for Bondholder Beneficiaries; Loaded Revolvers

Reporting: Chris Haffenden

One of the key skills of a good financial journalist (and distressed analyst too) is the ability to decipher company releases. It involves reading between the lines, identifying what is not said as well as what is being said, and then putting it all into context.

As Donald Rumsfeld said, it’s all about understanding the known-unknowns.

When the press release landed for Selecta’s “comprehensive” recapitalization agreement – restructuring appears to be a banned word nowadays – I looked beyond the bullets and the promotional quote from the CEO, “a transformational and positive step forward for Selecta,” for the outline terms at the bottom of the release.

But there was nothing more; nada, diddly squat. Just two pages, and one was CEO quotes.

Surely there would be something more on the investor relations page for the Swiss-based food tech company (plain English translation: vending machines), perhaps a cleansing statement with a pre/post capital structure and a term sheet of sorts for the new-money paper and reinstated debt?

Nope. Many non-committee first-lien and second-lien bondholders were also in the dark. We were told it could take weeks/months for a cleansing presentation to arrive.

The company, whose mantra is ‘joy to go’, creating millions of moments of joy every day, wasn’t spreading that much love to us and the wider market.

The details of the ‘comprehensive agreement’ announcement were noncomprehensive at best, with some of the language as cryptic as the clues in The Times crossword.

“Selecta … .has entered into a binding agreement with its key financial stakeholders with respect to a comprehensive recapitalization of the Group (the “Transaction”). The Transaction will provide the Group with €330 million of new funding to support its long-term business plan. This new funding will be used to refinance the Group’s existing revolving credit facility and strengthen liquidity by providing for significant cash on [the] balance sheet. The Transaction will also reduce the Group’s outstanding debt by c. €1.1 billion upon completion, while the maturities for the remaining debt securities will be extended to the second half of 2030. This transformative Transaction will provide Selecta with a sustainable and long-term capital structure, ensuring stability and flexibility for the business. Through the Transaction, ownership of the Group will be transferred to supportive long-term institutional investors. The injection of new funds will enable the Group to invest further in its pan-European network and continue executing on its strateg y – and provides a strong platform to drive long-term growth and profitability … .The Transaction is expected to close in the second quarter of 2025, subject to regulatory approvals. The Transaction is being implemented using a controlled enforcement process. This is an agreed and negotiated process with Selecta’s key financial stakeholders.”

The known unknowns from this statement heavily outnumbered the known knowns:

• New Money – we know there is €330 million to refinance the RCF (€150 million outstanding and €104.1 million drawn) and provide significant cash on the balance sheet – but who is providing the new facility, will a new RCF be put in place, what is the new maturity (presumably before first half of 2030), coupon, seniority (super senior?), plus who is providing it (committee members, open to all?), and is there the ability to roll up existing debt?
• Debt reduction by c.€1.1 billion – presumably under the waterfall this would mean that the €341.4 million (equivalent) second lien debt has been extinguished in full, but does this include the preferred share liabilities? Is the remainder of the 1L debt exchanged at par or at a discount?
• Ownership will be transferred to a “supportive long-term institutional investor” – but what are the equity splits? (Providers of the new money, existing 1L lenders, do the 2L get a token amount, and is sponsor KKR retaining any of the equity)?
• Implementation – using a controlled enforcement process – is this via share pledge enforcement or distressed disposal, and what event of default would they use? Why not use a Dutch scheme or Part 26A instead?

What do we already know for context?

In March, we wrote that a group of funds, including Man GLG Group, Invesco U.S., and SVP, which are part of a coordination committee, or CoCom, with holdings in both the first and the second lien instruments, were considering providing around €150 million of super senior new money to the KKR-owned company. As part of the deal, they would receive pro rata exchange rights (my emphasis added).

Initially, two separate creditors’ groups formed for Selecta: a first lien group advised by Weil Gotshal & Manges; and another crossholder group of the first and second lien notes and preferred shareholders assisted by Milbank as legal advisor and Houlihan Lokey. The two groups are now working together and have signed a cooperation agreement aimed at increasing their leverage in negotiations with the borrower against any potential aggressive liability management exercise.

In January, Selecta secured €50 million of additional liquidity via a new credit facility provided by “some of its existing noteholders.” The additional funding adds to Selecta’s cash position of €73 million as of Dec. 31, 2024. On Jan.2 it missed an interest payment on its 1L notes.

So with the above in mind, can we treat this as a logic problem and/or think probabilistically about how this deal might be cut? My only tools are an acute spidey sense and Occam’s Razor.

Firstly, the new money isn’t that different from the quantum of our previous intel if you factor in the repayment of the RCF – but there is no indication if a new RCF will be inserted – and why additional cash on the balance sheet is needed and how much will go to “investing in its Pan-European networks.”

It’s unclear whether it would rank super senior – as we previously reported, Octus’ lawyers note that the documentation was tight, with significant restrictions placed on the amount of super senior priming debt that can be raised without majority first and second lien bondholder consent.

If the RCF is repaid, it frees up €150 million of super senior capacity, but there is unlikely to be enough headroom for €330 million unless the capacity has been increased. It is notable that on April 23, Selecta launched a consent solicitation for its 1L and 2L “to increase the numerical permission in the credit facilities basket in each indenture to €200 million from €175 million and remove the total yield per annum limitation from such basket. Certain other conforming amendments may be made to provisions of each indenture and the notes, if necessary.”

Perhaps this or “certain other conforming amendments” might get you there to €330 million of super senior debt? Note the vagueness on the terms of the €50 million of additional liquidity in January provided by “some of its existing noteholders,” was this also super senior (it would reduce super senior capacity unless repaid by the new money?).

And do the two groups working as one have over 50% of the debt to make further amendments to the docs, such as roll up/uptier their existing debt and drive the deal implementation?

Given that Selecta was able to gain consent from a majority of holders to extend the grace period for the missed January bond payment without issuing a public consent solicitation, the committee may hold a majority of its 1L debt, putting them in the driver’s seat, with KKR not expected to put in further support.

This was the fear amongst some bondholders, spoken to by Octus post-release. The price of the first lien dropped sharply after the announcement, with the 1L bonds dropping from the high 50s into the high 30s – suggesting that something was awry. The second lien is indicated around 7-9, reflecting expectations that they would be wiped out.

Over the past few days, my editorial colleagues have garnered additional information, which doesn’t fully complete the puzzle but does give a better picture of what is happening.

Selecta’s 1L notes will be reinstated into new five-year super senior notes at a 15% discount, while the 2L debt and preference shares will be fully released. The deal will result in a €1.1 billion debt reduction, stemming from the release of the company’s €343 million euro equivalent of 2L notes, the 15% haircut to the company’s 1L notes, equating to about €114 million, and around €671 million of preferred shares liabilities, which include some accrued PIK component.

We are still missing the secret sauce for the new debt – the margin/coupon rate (cash versus PIK), maturity and ranking – and while we hear that non-committee members (and 2L as well as 1L) may be able to participate, we hear this is only if they are able to provide large checks and the bulk of the new money will come from the CoCom.

The bulk of the equity will go to the new money providers, with non-participating 1L lenders getting 17% of the equity. A roll-up of some existing debt for CoCom members who are providing new money is unlikely to feature in the deal, contrary to what some buysiders have been expecting.

The transaction is being implemented through a controlled enforcement process via a share pledge enforcement and distressed disposal in the Dutch courts, likely to be triggered by the missed interest payment in January on the 1L debt, which constituted an event of default.

What is unclear is the valuation of the business on which the restructuring/distressed disposal is based – Octus had previously suggested a 6-7x multiple – but with no earnings update since last November (to end September 2024), it is unclear what the run-rate EBITDA is, and the extent of the value break in the first lien – and what is the turnaround plan and the potential equity returns?

With the second lien and pref shares wiped out, providers of new money will gain the bulk of the equity (87%). And as there is no scheme (English or Dutch) or Part 26A, we may struggle to convert all the known unknowns to known knowns. And still not enough for a post-Rx cap table.

And why all the secrecy?

Is it that committee holders are wary about sharing details publicly of a deal that may grant them enhanced economics to the detriment of others?

Or is it just a corollary of the prior restructuring – whereby the listing was transferred to the Channel Islands – where the information disclosure requirements are much less rigid?

Existential Essity Threat
In a previous edition of the Weekly, we highlighted a number of special situations and trades that arise with funds seeking to take advantage of cessation-of-business and demerger clauses, seeking to get paid out at par plus accrued, which is often well above the current trading prices of the bonds.

These clauses are rare in LevFin but are much more prevalent in investment-grade bond documentation as investor protection. Cessation of business and demerger clauses – are typically worded so that the issuer will cease to carry on all or substantially all of its business or operations.

But there aren’t any legal precedents – exactly what constitutes all or substantially all – and what is that based upon – revenue, earnings, assets?

So far, most companies have either faced down the threats from bondholders or have caved and tendered for the notes; therefore we haven’t seen the issue be addressed by the courts.

So, the legal challenge by a group of Essity AB EMTN noteholders is of significant interest, as it could be the first time this has been addressed by the courts. Advised by White & Case and Houlihan Lokey, the noteholders maintain that the sale by the Swedish hygiene products group of its subsidiary Vinda in early 2024 constituted a technical event of default under Essity’s EMTN notes. Specifically, they claim an event of default arising from a cessation of a substantial part of the business.

In March 2024, the sale of its 52% stake in Hong Kong-listed Vinda International, a manufacturer of paper tissues, was announced to a company owned by a pulp and paper producer, Asia Pacific Resources. Essity previously said that the company is “confident” that an event of default has not occurred and that the demand for early redemption is “unfounded.”

The bondholders which include Sona and Northlight, sent acceleration notices to the company on Oct. 17, seeking repayment at par.

Essity has sought to challenge the jurisdiction of the English court, with the parties in court earlier this week to hear the application. The company has taken an interesting line of argument, to say the least, which, if successful (which we think might be a stretch) could pose an existential threat for bondholders and their ability to litigate their claims.

The company is challenging the application on the grounds that: (a) it is said that Claimants have not established that they are the ultimate beneficial owners of the Notes, and (b) even if they had, the Court would not exercise its discretion to grant the Declarations as there is no dispute between Claimants and the Defendants as Claimants have no legal rights under the Notes, and the proper parties to bring proceedings against Defendants are the clearing systems in which the Notes are held.

Why aren’t the bondholders beneficiaries?

The bonds were issued out of an EMTN program with the notes held in an intermediated form through the clearing systems – Euroclear and Clearstream – under the structure the notes are constituted via a global note held by a depositary on behalf of the clearing agencies. Beneficial interests in the global notes are recorded in the records of the clearing systems. .

To support their argument, Essity is relying on the “no look through principle” in English law in which an investor holding a beneficial interest in immobilised notes has no direct claim against the issuer. Essity contends that the proper parties to bring these proceedings are the clearing systems and/or the custodians.

The bondholders accept that under English law, intermediated securities are analyzed as a chain of trusts and sub-trusts for each party in the custody chain but this does not mean that the ultimate beneficial owner has no legitimate interest in the subject matter of the custody chain.

Aside from the ultimate beneficial holders and the issuer, the bondholders say that all the other parties involved in the intermediated securities structure are passive holders, which perform administrative functions and have no economic interests of their own in the securities and are therefore not substantively affected by the relief sought.

Whereas a beneficial owner of the notes is plainly affected by the issues in dispute, they do not need to be a party to the notes or have direct rights in order to seek the declarations sought, say the bondholders. The “no look through principle” does not obviate their legitimate interest in the relief sought.

Moreover, the claimants say they have a legitimate interest in the construction of the terms of the notes as they are also contingent creditors of the issuer. In written submissions they explain that where, as in the present case, the notes are held in intermediated form then there is a right to collapse the structure by causing the issue of what is called a “definitive note” to individual noteholders, giving noteholders a direct claim against the issuer. The contingent right to call for a definitive note is sufficient, in their view, to render them contingent creditors of the issuer even where the notes are held in global form.

To support their arguments, the claimants also note that in the context of schemes of arrangement and Part 26A restructuring plans, it is well-established that the ultimate beneficial owners are the persons entitled to vote on the scheme in respect of global notes, as it is their economic interest that is affected.

As mentioned above, the bondholders’ interests in the global note are exchangeable for definitive notes on an “exchange event,” which include where an event of default “has occurred and is continuing.”

But the company disputes that an event of default has occurred under the cessation of business clause. The claimants say that the court should not strike out the case, as there is a serious issue to be tried on the merits and the dispute is binary: either an event of default has occurred under the notes, or it has not, and likewise either the custodians are entitled to serve notices of acceleration, or they are not.

For context, the clearing agencies are probably even less motivated than bond trustees to act on acceleration requests. Their role is administrative, and they are not set up or staffed to deal with such work. Bond trustees often require hefty indemnities from bondholders to mitigate against wrongful acceleration claims and will need their legal costs covered, too.

From a practical perspective if Essity wins, it could have much wider impacts for the bond market and the ability of bondholders to take action against borrowers.

It will take us a while to find out whether Essity was successful in striking out the application, as the judgment was reserved after a hearing which spilled over into a second day, which was heavy with legal precedents and authorities on the rights of claimants to bring proceedings if they are not a party to a relevant agreement.

For those who are interested in diving further into the legal arguments, the bondholders’ skeleton argument is here, and the company’s skeleton is here.

Loaded Revolvers
Revolving Credit Facilities are an often overlooked part of the capital structure, especially from a restructuring perspective.

They are unloved by banks, as they are not economical to provide, as they have to hold capital against the whole facility, which is often undrawn or part drawn. It’s begrudgingly seen as a cost of doing business, relationship banks bringing broadly syndicated loan, or BSL, and high-yield, or HY, deal hope that their fees will outweigh the cost and inconvenience.

Over the years, we’ve seen maintenance covenants stripped away from deals, as leveraged finance has moved away from being a bank dominated market. But a sole covenant has survived, the leverage covenant which provides a drawstop on RCF drawings. Typically, it restricts further drawings once 40% drawn if tripped if a leverage threshold is breached.

But, like the wider market this has been watered down over the years, from a definitional perspective (on drawn amounts, covenanted leverage) with the levels often set so wide, they rarely come into play (in some cases you would think the business is deeply underwater or technically insolvent at this point).

On the other hand, many RCFs are now structured as super senior, and sit at the front of the maturity queue, which often means they are the first trigger point for distressed companies to deal with.

In the past, banks had been relatively passive, presumably driven by the sponsor relationships and hopes of repeat refi business, and many were extended without too many amendments and restrictions.

That is changing, potentially due to fears of LMEs, and as docs get looser there is more capacity to issue super senior debt alongside you. And many hedge funds have realised the attractions of buying into the RCF (if they can get around the lender-of-record and credit institutions issues) providing a more liquid market for those banks seeking to head for the exits at the first sign of distress.

For a fund, buying into the RCF gives you a lot more control and negotiating leverage, being just one of say three or four providers. Sitting at the front of the maturity queue, and with unanimous approval needed to amendments – including perhaps more super senior capacity for new money funding from other creditors – you can play hardball and demand repayment, if you don’t get vastly improved economics.

A good example is Groupe Casino where Attestor used its RCF position to play a pivotal role in the restructuring of the French grocery group.

In recent months, we’ve seen a number of situations where the RCF lenders have not played ball, and have had to be taken out of the cap stack or have negotiated hard for better economics. For example Kem One where RCF lenders refused to grant a waiver and were taken out via a new super-senior term loan; Standard Profil, where Crossocean bought into the €30 million RCF which attracted interest from the AHG who became new lenders; and Lowell, where the RCF were the last to agree in its protracted restructuring, eventually securing a £35 million day-one paydown.

In a number of live situations, the RCF is likely to play a key role – with banks seeking to offload positions. Most notably for Victoria Plc, where a £27 million block of the RCF traded in March – with Redwood Capital actively buying up the flooring group’s bond to implement an uptier – having a say at the top of the cap stack is even more important. Octus has reported that some banks in Grupo Antolin’s RCF and term loans have been looking to reduce their exposure – but none has yet traded out.

And let’s not forget that Selecta’s RCF was ‘refinanced’ in the recent recapitalization, so I wouldn’t rule out some RCF machinations here too.

The lack of an RCF can be problematic for companies. In a previous period of distress for Standard Profil, bondholders were vociferous about the inability of the German automotive supplier to find a RCF provider for over a year.

This week we had another example – Talk Talk, the UK virtual TeleCo whose RCF was converted into a term loan under an A&E last year – with RCF lenders and senior secured bondholders given the option to exchange their holdings on a pro rata basis into a new £650 million first lien instrument and the remainder into an up to £386 million second lien instrument. Each RCF lender and senior secured noteholder could elect to take term loans or notes.

To smooth the A&E, the shareholders provided £235 million of new money mostly via a second lien. But just a few months later, performance and liquidity has deteriorated and it might breach its £10 million minimum liquidity covenant, after a £80 million Openreach contract payment in March. There are certain debt baskets available to boost liquidity, one source told Octus.

I would argue the role of the RCF is being overlooked in any interesting special situation, Austrian sensor and lighting supplier AMS Osram where over €100 million of their 2027 converts have traded into hedge funds in the past fortnight.

Dubbed the unluckiest company in our coverage by one of my colleagues, it built a microLED fab plant in Malaysia at a cost of €1.2 billion-€1.3 billion to satisfy an Apple microLED smartwatch project, the U.S. tech giant subsequently canceled the contract leading to a €600 million to €900 million noncash impairment by AMS. It then executed a sale/leaseback of the plant, and is trying to find a buyer to transfer its €430 million sale/leaseback debt off its balance sheet.

So what is the 2027 converts trade all about?

AMS has a strange cap stack, apart from the Malay plant SLB, all the debt is unsecured, including the €800 million September 2026 RCF. The €760 million converts are in front of the 2029 SUNs (€1.195 billion equivalent) and the funds are excited about a negative pledge which prevents the group from placing secured capital markets debt above the bonds.

According to Octus’ legal analysts, AMS has relatively limited general-purpose secured debt capacity under the SUNs documents – notably, the €800 million credit facilities basket cannot directly be used to incur secured debt. While any debt permitted to be incurred by non-guarantors under the SUNs can be secured by assets of non-guarantor subsidiaries, the amount of such structurally senior non-guarantor debt that can be incurred under key debt baskets, including the credit facilities basket, is subject to a cumulative cap. For subscribers to Octus’ EMEA Covenants, our analysis on the terms of the SUNs published at the time of issuance is available HERE and our legal analysts can be contacted at [email protected].

So the argument from the 27 buyers is that AMS cannot extend the RCF beyond the convertible bond maturity. In order to extend the RCF maturity, the RCF lenders could ask for a resolution on how the company plans to address the 2027 bonds and may require a reduction in the drawn amount. In such a scenario, the group will likely need to address the 2027 bond maturity at the same time as RCF.

If AMS Osram’s performance doesn’t improve, the 2027s would be in pole position given their temporal seniority, and if a refi with unsecured debt isn’t possible, they might be able to uptier themselves. And while their running yield is low, given the 2.125% coupon, with the converts trading at 86, there is potentially 14 points of capital appreciation in 12-18 months (if you assume they will deal with the maturity in good time).

That might be oversimplifying, as the RCF have their own considerations and in my view will likely need to be dealt with earlier than the 2027s. The facility may be undrawn, but the company is expected to draw on its RCF by the end of this year to fund a put option payment to minority shareholders (determined by an arbitration) of up to €585 million.

Negotiations to extend the RCF – likely for a year to September 2027, as they wouldn’t want to give up their position in the maturity queue to the converts – will need to take place soon as directors would not want the facility to go current.

But would the RCF agree to extend before being drawn down to meet the put option payment? Would they require some form of elevation (difficult under current docs) or a route to pay down first?

The 2027 buyers are encouraged by AMS’ talk of disposals in a recent management call which will generate over £500 million of cash, which could be used to pay down the converts. The asset sale covenant (admittedly most have holes) is likely to require proceeds to be applied pro rata.

Why isn’t the company thinking about fixing its capital structure to better suit a stressed high yield borrower? If it had a typical cap stack with a SS RCF, and issued SSNs as well as SUNs, it could easily get a senior secured HY deal away at 7-8% given current leverage metrics – to take out the converts and smooth an RCF extension.

Management has said it doesn’t want to issue secured paper, perhaps mindful how this will play out with its listed shareholders and not wanting to stoke priming fears among the SUNs.

In October 2023 the RCF agreed to make amendments to accommodate the Malaysian SLB transaction and amend consolidated net leverage ratio thresholds. There was an extension mechanism to extend the RCF maturity by a year to September 2026, but this needed each lender to agree. A further extension would require the same.

The Week’s Highlights

Key Analyses
A slew of late fourth quarter and fiscal year 2024 earnings reporters in the last week, including a number of stressed and special situations companies in Octus coverage. For a good wrap of the most interesting names and a snapshot of the key themes – our latest earnings weekly is available HERE.

The second in a six-part RX 101 series exploring the evolving landscape for LMEs, across Europe, was published this week covering Italy. With insights sourced directly from leading local counsel, it breaks down the legal tools, restructuring tactics and cultural norms shaping how debtors approach LMEs in five key jurisdictions: France, Germany, Spain, the Netherlands and England. For Italy click HERE and for France click HERE.

And our U.S. colleagues have produced a second in their U.S. Bankruptcy 101 series – for chapter 11 cash collateral and DIP financing; and I would recommend our piece on the emergence of Omni blockers for LMEs appearing in new deal docs – our explainer is available HERE .

Key Stories This Week
French fine foods producer Labeyrie is advised by Kirkland & Ellis on talks with its term loan lenders on an amend-and-extend transaction planned for this summer. Term loan lenders have appointed Latham & Watkins. The PAI-owned group’s €455 million TLB and its undrawn €65 million RCF mature in July 2026.

Some more notable court coverage from our legal team:

The sanction hearing for Petrofac, the subject of last week’s edition, ended last Friday afternoon, with the judgment reserved. Justice Marcus Smith has already indicated that his decision will be examined in the Court of Appeal in the last week of May, alongside a contested convening order. For our wrap-up piece, click HERE.

Another key piece of litigation is for NMC Healthcare – with the English High Court lifting the confidentiality on the $9.66 billion settlement agreement with its former major shareholders, the Bin Butti family. The court decided that open justice outweighs claimed confidentiality over the settlement agreement. EY is defending a high-stakes audit negligence claim, where NMC alleges that EY failed to detect a vast fraud perpetrated by senior management and major shareholders. The full NMC v. EY trial begins on May 19 and is expected to run until October.

We have initiated coverage on Domo Chemicals, whose lenders engaged Houlihan Lokey and Linklaters to represent them in discussions with the Belgian chemicals business, as falling revenue amid a cyclical downturn is leading to cash burn. The group is advised by FTI, with Lazard assisting shareholders on an equity raise.

And a process update for Italian automotive electrical components supplier Meta Systems filed on April 18 its concordato preventivo proposal with the Bologna tribunal, envisaging the sale of the group, which specializes in electronic solutions for cars, to German family office Certina.

Key News and Events
While somewhat overshadowed by the white smoke and the new Pope, the ‘comprehensive UK/US trade deal was an important development for UK auto manufacturers, most notably JLR and Aston Martin, whose shares soared after the joint press conference.

But it is still unclear whether the POTUS will carry out his threat to the foreign film industry with hefty tariffs, which would hurt studios in the UK – including Pinewood a HY borrower, other potential loan borrowers affected could be All3Media and Technicolor Group (France)

And ending on some good news, Cheplapharm bondholders react positively to the company’s latest earnings call, rising 3-5 points with management impressing on the turnaround plan outline and recent hires. For the conference call transcript, click HERE.

One of the key skills of a good financial journalist (and distressed analyst too) is the ability to decipher company releases. It involves reading between the lines, identifying what is not said as well as what is being said, and then putting it all into context.

As Donald Rumsfeld said, it’s all about understanding the known-unknowns.

When the press release landed for Selecta’s “comprehensive” recapitalization agreement – restructuring appears to be a banned word nowadays – I looked beyond the bullets and the promotional quote from the CEO, “a transformational and positive step forward for Selecta,” for the outline terms at the bottom of the release.

But there was nothing more; nada, diddly squat. Just two pages, and one was CEO quotes.

Surely there would be something more on the investor relations page for the Swiss-based food tech company (plain English translation: vending machines), perhaps a cleansing statement with a pre/post capital structure and a term sheet of sorts for the new-money paper and reinstated debt?

Nope. Many non-committee first-lien and second-lien bondholders were also in the dark. We were told it could take weeks/months for a cleansing presentation to arrive.

The company, whose mantra is ‘joy to go’, creating millions of moments of joy every day, wasn’t spreading that much love to us and the wider market.

The details of the ‘comprehensive agreement’ announcement were noncomprehensive at best, with some of the language as cryptic as the clues in The Times crossword.

“Selecta … .has entered into a binding agreement with its key financial stakeholders with respect to a comprehensive recapitalization of the Group (the “Transaction”). The Transaction will provide the Group with €330 million of new funding to support its long-term business plan. This new funding will be used to refinance the Group’s existing revolving credit facility and strengthen liquidity by providing for significant cash on [the] balance sheet. The Transaction will also reduce the Group’s outstanding debt by c. €1.1 billion upon completion, while the maturities for the remaining debt securities will be extended to the second half of 2030. This transformative Transaction will provide Selecta with a sustainable and long-term capital structure, ensuring stability and flexibility for the business. Through the Transaction, ownership of the Group will be transferred to supportive long-term institutional investors. The injection of new funds will enable the Group to invest further in its pan-European network and continue executing on its strateg y – and provides a strong platform to drive long-term growth and profitability … .The Transaction is expected to close in the second quarter of 2025, subject to regulatory approvals. The Transaction is being implemented using a controlled enforcement process. This is an agreed and negotiated process with Selecta’s key financial stakeholders.”

The known unknowns from this statement heavily outnumbered the known knowns:

New Money – we know there is €330 million to refinance the RCF (€150 million outstanding and €104.1 million drawn) and provide significant cash on the balance sheet – but who is providing the new facility, will a new RCF be put in place, what is the new maturity (presumably before first half of 2030), coupon, seniority (super senior?), plus who is providing it (committee members, open to all?), and is there the ability to roll up existing debt?
Debt reduction by c.€1.1 billion – presumably under the waterfall this would mean that the €341.4 million (equivalent) second lien debt has been extinguished in full, but does this include the preferred share liabilities? Is the remainder of the 1L debt exchanged at par or at a discount?
Ownership will be transferred to a “supportive long-term institutional investor” – but what are the equity splits? (Providers of the new money, existing 1L lenders, do the 2L get a token amount, and is sponsor KKR retaining any of the equity)?
Implementation – using a controlled enforcement process – is this via share pledge enforcement or distressed disposal, and what event of default would they use? Why not use a Dutch scheme or Part 26A instead?

What do we already know for context?

In March, we wrote that a group of funds, including Man GLG Group, Invesco U.S., and SVP, which are part of a coordination committee, or CoCom, with holdings in both the first and the second lien instruments, were considering providing around €150 million of super senior new money to the KKR-owned company. As part of the deal, they would receive pro rata exchange rights (my emphasis added).

Initially, two separate creditors’ groups formed for Selecta: a first lien group advised by Weil Gotshal & Manges; and another crossholder group of the first and second lien notes and preferred shareholders assisted by Milbank as legal advisor and Houlihan Lokey. The two groups are now working together and have signed a cooperation agreement aimed at increasing their leverage in negotiations with the borrower against any potential aggressive liability management exercise.

In January, Selecta secured €50 million of additional liquidity via a new credit facility provided by “some of its existing noteholders.” The additional funding adds to Selecta’s cash position of €73 million as of Dec. 31, 2024. On Jan.2 it missed an interest payment on its 1L notes.

So with the above in mind, can we treat this as a logic problem and/or think probabilistically about how this deal might be cut? My only tools are an acute spidey sense and Occam’s Razor.

Firstly, the new money isn’t that different from the quantum of our previous intel if you factor in the repayment of the RCF – but there is no indication if a new RCF will be inserted – and why additional cash on the balance sheet is needed and how much will go to “investing in its Pan-European networks.”

It’s unclear whether it would rank super senior – as we previously reported, Octus’ lawyers note that the documentation was tight, with significant restrictions placed on the amount of super senior priming debt that can be raised without majority first and second lien bondholder consent.

If the RCF is repaid, it frees up €150 million of super senior capacity, but there is unlikely to be enough headroom for €330 million unless the capacity has been increased. It is notable that on April 23, Selecta launched a consent solicitation for its 1L and 2L “to increase the numerical permission in the credit facilities basket in each indenture to €200 million from €175 million and remove the total yield per annum limitation from such basket. Certain other conforming amendments may be made to provisions of each indenture and the notes, if necessary.”

Perhaps this or “certain other conforming amendments” might get you there to €330 million of super senior debt? Note the vagueness on the terms of the €50 million of additional liquidity in January provided by “some of its existing noteholders,” was this also super senior (it would reduce super senior capacity unless repaid by the new money?).

And do the two groups working as one have over 50% of the debt to make further amendments to the docs, such as roll up/uptier their existing debt and drive the deal implementation?

Given that Selecta was able to gain consent from a majority of holders to extend the grace period for the missed January bond payment without issuing a public consent solicitation, the committee may hold a majority of its 1L debt, putting them in the driver’s seat, with KKR not expected to put in further support.

This was the fear amongst some bondholders, spoken to by Octus post-release. The price of the first lien dropped sharply after the announcement, with the 1L bonds dropping from the high 50s into the high 30s – suggesting that something was awry. The second lien is indicated around 7-9, reflecting expectations that they would be wiped out.

Over the past few days, my editorial colleagues have garnered additional information, which doesn’t fully complete the puzzle but does give a better picture of what is happening.

Selecta’s 1L notes will be reinstated into new five-year super senior notes at a 15% discount, while the 2L debt and preference shares will be fully released. The deal will result in a €1.1 billion debt reduction, stemming from the release of the company’s €343 million euro equivalent of 2L notes, the 15% haircut to the company’s 1L notes, equating to about €114 million, and around €671 million of preferred shares liabilities, which include some accrued PIK component.

We are still missing the secret sauce for the new debt – the margin/coupon rate (cash versus PIK), maturity and ranking – and while we hear that non-committee members (and 2L as well as 1L) may be able to participate, we hear this is only if they are able to provide large checks and the bulk of the new money will come from the CoCom.

The bulk of the equity will go to the new money providers, with non-participating 1L lenders getting 17% of the equity. A roll-up of some existing debt for CoCom members who are providing new money is unlikely to feature in the deal, contrary to what some buysiders have been expecting.

The transaction is being implemented through a controlled enforcement process via a share pledge enforcement and distressed disposal in the Dutch courts, likely to be triggered by the missed interest payment in January on the 1L debt, which constituted an event of default.

What is unclear is the valuation of the business on which the restructuring/distressed disposal is based – Octus had previously suggested a 6-7x multiple – but with no earnings update since last November (to end September 2024), it is unclear what the run-rate EBITDA is, and the extent of the value break in the first lien – and what is the turnaround plan and the potential equity returns?

With the second lien and pref shares wiped out, providers of new money will gain the bulk of the equity (87%). And as there is no scheme (English or Dutch) or Part 26A, we may struggle to convert all the known unknowns to known knowns. And still not enough for a post-Rx cap table.

And why all the secrecy?

Is it that committee holders are wary about sharing details publicly of a deal that may grant them enhanced economics to the detriment of others?

Or is it just a corollary of the prior restructuring – whereby the listing was transferred to the Channel Islands – where the information disclosure requirements are much less rigid?

Existential Essity Threat

In a previous edition of the Weekly, we highlighted a number of special situations and trades that arise with funds seeking to take advantage of cessation-of-business and demerger clauses, seeking to get paid out at par plus accrued, which is often well above the current trading prices of the bonds.

These clauses are rare in LevFin but are much more prevalent in investment-grade bond documentation as investor protection. Cessation of business and demerger clauses – are typically worded so that the issuer will cease to carry on all or substantially all of its business or operations.

But there aren’t any legal precedents – exactly what constitutes all or substantially all – and what is that based upon – revenue, earnings, assets?

So far, most companies have either faced down the threats from bondholders or have caved and tendered for the notes; therefore we haven’t seen the issue be addressed by the courts.

So, the legal challenge by a group of Essity AB EMTN noteholders is of significant interest, as it could be the first time this has been addressed by the courts. Advised by White & Case and Houlihan Lokey, the noteholders maintain that the sale by the Swedish hygiene products group of its subsidiary Vinda in early 2024 constituted a technical event of default under Essity’s EMTN notes. Specifically, they claim an event of default arising from a cessation of a substantial part of the business.

In March 2024, the sale of its 52% stake in Hong Kong-listed Vinda International, a manufacturer of paper tissues, was announced to a company owned by a pulp and paper producer, Asia Pacific Resources. Essity previously said that the company is “confident” that an event of default has not occurred and that the demand for early redemption is “unfounded.”

The bondholders which include Sona and Northlight, sent acceleration notices to the company on Oct. 17, seeking repayment at par.

Essity has sought to challenge the jurisdiction of the English court, with the parties in court earlier this week to hear the application. The company has taken an interesting line of argument, to say the least, which, if successful (which we think might be a stretch) could pose an existential threat for bondholders and their ability to litigate their claims.

The company is challenging the application on the grounds that: (a) it is said that Claimants have not established that they are the ultimate beneficial owners of the Notes, and (b) even if they had, the Court would not exercise its discretion to grant the Declarations as there is no dispute between Claimants and the Defendants as Claimants have no legal rights under the Notes, and the proper parties to bring proceedings against Defendants are the clearing systems in which the Notes are held.

Why aren’t the bondholders beneficiaries?

The bonds were issued out of an EMTN program with the notes held in an intermediated form through the clearing systems – Euroclear and Clearstream – under the structure the notes are constituted via a global note held by a depositary on behalf of the clearing agencies. Beneficial interests in the global notes are recorded in the records of the clearing systems. .

To support their argument, Essity is relying on the “no look through principle” in English law in which an investor holding a beneficial interest in immobilised notes has no direct claim against the issuer. Essity contends that the proper parties to bring these proceedings are the clearing systems and/or the custodians.

The bondholders accept that under English law, intermediated securities are analyzed as a chain of trusts and sub-trusts for each party in the custody chain but this does not mean that the ultimate beneficial owner has no legitimate interest in the subject matter of the custody chain.

Aside from the ultimate beneficial holders and the issuer, the bondholders say that all the other parties involved in the intermediated securities structure are passive holders, which perform administrative functions and have no economic interests of their own in the securities and are therefore not substantively affected by the relief sought.

Whereas a beneficial owner of the notes is plainly affected by the issues in dispute, they do not need to be a party to the notes or have direct rights in order to seek the declarations sought, say the bondholders. The “no look through principle” does not obviate their legitimate interest in the relief sought.

Moreover, the claimants say they have a legitimate interest in the construction of the terms of the notes as they are also contingent creditors of the issuer. In written submissions they explain that where, as in the present case, the notes are held in intermediated form then there is a right to collapse the structure by causing the issue of what is called a “definitive note” to individual noteholders, giving noteholders a direct claim against the issuer. The contingent right to call for a definitive note is sufficient, in their view, to render them contingent creditors of the issuer even where the notes are held in global form.

To support their arguments, the claimants also note that in the context of schemes of arrangement and Part 26A restructuring plans, it is well-established that the ultimate beneficial owners are the persons entitled to vote on the scheme in respect of global notes, as it is their economic interest that is affected.

As mentioned above, the bondholders’ interests in the global note are exchangeable for definitive notes on an “exchange event,” which include where an event of default “has occurred and is continuing.”

But the company disputes that an event of default has occurred under the cessation of business clause. The claimants say that the court should not strike out the case, as there is a serious issue to be tried on the merits and the dispute is binary: either an event of default has occurred under the notes, or it has not, and likewise either the custodians are entitled to serve notices of acceleration, or they are not.

For context, the clearing agencies are probably even less motivated than bond trustees to act on acceleration requests. Their role is administrative, and they are not set up or staffed to deal with such work. Bond trustees often require hefty indemnities from bondholders to mitigate against wrongful acceleration claims and will need their legal costs covered, too.

From a practical perspective if Essity wins, it could have much wider impacts for the bond market and the ability of bondholders to take action against borrowers.

It will take us a while to find out whether Essity was successful in striking out the application, as the judgment was reserved after a hearing which spilled over into a second day, which was heavy with legal precedents and authorities on the rights of claimants to bring proceedings if they are not a party to a relevant agreement.

For those who are interested in diving further into the legal arguments, the bondholders’ skeleton argument is here, and the company’s skeleton is here.

Loaded Revolvers

Revolving Credit Facilities are an often overlooked part of the capital structure, especially from a restructuring perspective.

They are unloved by banks, as they are not economical to provide, as they have to hold capital against the whole facility, which is often undrawn or part drawn. It’s begrudgingly seen as a cost of doing business, relationship banks bringing broadly syndicated loan, or BSL, and high-yield, or HY, deal hope that their fees will outweigh the cost and inconvenience.

Over the years, we’ve seen maintenance covenants stripped away from deals, as leveraged finance has moved away from being a bank dominated market. But a sole covenant has survived, the leverage covenant which provides a drawstop on RCF drawings. Typically, it restricts further drawings once 40% drawn if tripped if a leverage threshold is breached.

But, like the wider market this has been watered down over the years, from a definitional perspective (on drawn amounts, covenanted leverage) with the levels often set so wide, they rarely come into play (in some cases you would think the business is deeply underwater or technically insolvent at this point).

On the other hand, many RCFs are now structured as super senior, and sit at the front of the maturity queue, which often means they are the first trigger point for distressed companies to deal with.

In the past, banks had been relatively passive, presumably driven by the sponsor relationships and hopes of repeat refi business, and many were extended without too many amendments and restrictions.

That is changing, potentially due to fears of LMEs, and as docs get looser there is more capacity to issue super senior debt alongside you. And many hedge funds have realised the attractions of buying into the RCF (if they can get around the lender-of-record and credit institutions issues) providing a more liquid market for those banks seeking to head for the exits at the first sign of distress.

For a fund, buying into the RCF gives you a lot more control and negotiating leverage, being just one of say three or four providers. Sitting at the front of the maturity queue, and with unanimous approval needed to amendments – including perhaps more super senior capacity for new money funding from other creditors – you can play hardball and demand repayment, if you don’t get vastly improved economics.

A good example is Groupe Casino where Attestor used its RCF position to play a pivotal role in the restructuring of the French grocery group.

In recent months, we’ve seen a number of situations where the RCF lenders have not played ball, and have had to be taken out of the cap stack or have negotiated hard for better economics. For example Kem One where RCF lenders refused to grant a waiver and were taken out via a new super-senior term loan; Standard Profil, where Crossocean bought into the €30 million RCF which attracted interest from the AHG who became new lenders; and Lowell, where the RCF were the last to agree in its protracted restructuring, eventually securing a £35 million day-one paydown.

In a number of live situations, the RCF is likely to play a key role – with banks seeking to offload positions. Most notably for Victoria Plc, where a £27 million block of the RCF traded in March – with Redwood Capital actively buying up the flooring group’s bond to implement an uptier – having a say at the top of the cap stack is even more important. Octus has reported that some banks in Grupo Antolin’s RCF and term loans have been looking to reduce their exposure – but none has yet traded out.

And let’s not forget that Selecta’s RCF was ‘refinanced’ in the recent recapitalization, so I wouldn’t rule out some RCF machinations here too.

The lack of an RCF can be problematic for companies. In a previous period of distress for Standard Profil, bondholders were vociferous about the inability of the German automotive supplier to find a RCF provider for over a year.

This week we had another example – Talk Talk, the UK virtual TeleCo whose RCF was converted into a term loan under an A&E last year – with RCF lenders and senior secured bondholders given the option to exchange their holdings on a pro rata basis into a new £650 million first lien instrument and the remainder into an up to £386 million second lien instrument. Each RCF lender and senior secured noteholder could elect to take term loans or notes.

To smooth the A&E, the shareholders provided £235 million of new money mostly via a second lien. But just a few months later, performance and liquidity has deteriorated and it might breach its £10 million minimum liquidity covenant, after a £80 million Openreach contract payment in March. There are certain debt baskets available to boost liquidity, one source told Octus.

I would argue the role of the RCF is being overlooked in any interesting special situation, Austrian sensor and lighting supplier AMS Osram where over €100 million of their 2027 converts have traded into hedge funds in the past fortnight.

Dubbed the unluckiest company in our coverage by one of my colleagues, it built a microLED fab plant in Malaysia at a cost of €1.2 billion-€1.3 billion to satisfy an Apple microLED smartwatch project, the U.S. tech giant subsequently canceled the contract leading to a €600 million to €900 million noncash impairment by AMS. It then executed a sale/leaseback of the plant, and is trying to find a buyer to transfer its €430 million sale/leaseback debt off its balance sheet.

So what is the 2027 converts trade all about?

AMS has a strange cap stack, apart from the Malay plant SLB, all the debt is unsecured, including the €800 million September 2026 RCF. The €760 million converts are in front of the 2029 SUNs (€1.195 billion equivalent) and the funds are excited about a negative pledge which prevents the group from placing secured capital markets debt above the bonds.

According to Octus’ legal analysts, AMS has relatively limited general-purpose secured debt capacity under the SUNs documents – notably, the €800 million credit facilities basket cannot directly be used to incur secured debt. While any debt permitted to be incurred by non-guarantors under the SUNs can be secured by assets of non-guarantor subsidiaries, the amount of such structurally senior non-guarantor debt that can be incurred under key debt baskets, including the credit facilities basket, is subject to a cumulative cap. For subscribers to Octus’ EMEA Covenants, our analysis on the terms of the SUNs published at the time of issuance is available HERE and our legal analysts can be contacted at [email protected].

So the argument from the 27 buyers is that AMS cannot extend the RCF beyond the convertible bond maturity. In order to extend the RCF maturity, the RCF lenders could ask for a resolution on how the company plans to address the 2027 bonds and may require a reduction in the drawn amount. In such a scenario, the group will likely need to address the 2027 bond maturity at the same time as RCF.

If AMS Osram’s performance doesn’t improve, the 2027s would be in pole position given their temporal seniority, and if a refi with unsecured debt isn’t possible, they might be able to uptier themselves. And while their running yield is low, given the 2.125% coupon, with the converts trading at 86, there is potentially 14 points of capital appreciation in 12-18 months (if you assume they will deal with the maturity in good time).

That might be oversimplifying, as the RCF have their own considerations and in my view will likely need to be dealt with earlier than the 2027s. The facility may be undrawn, but the company is expected to draw on its RCF by the end of this year to fund a put option payment to minority shareholders (determined by an arbitration) of up to €585 million.

Negotiations to extend the RCF – likely for a year to September 2027, as they wouldn’t want to give up their position in the maturity queue to the converts – will need to take place soon as directors would not want the facility to go current.

But would the RCF agree to extend before being drawn down to meet the put option payment? Would they require some form of elevation (difficult under current docs) or a route to pay down first?

The 2027 buyers are encouraged by AMS’ talk of disposals in a recent management call which will generate over £500 million of cash, which could be used to pay down the converts. The asset sale covenant (admittedly most have holes) is likely to require proceeds to be applied pro rata.

Why isn’t the company thinking about fixing its capital structure to better suit a stressed high yield borrower? If it had a typical cap stack with a SS RCF, and issued SSNs as well as SUNs, it could easily get a senior secured HY deal away at 7-8% given current leverage metrics – to take out the converts and smooth an RCF extension.

Management has said it doesn’t want to issue secured paper, perhaps mindful how this will play out with its listed shareholders and not wanting to stoke priming fears among the SUNs.

In October 2023 the RCF agreed to make amendments to accommodate the Malaysian SLB transaction and amend consolidated net leverage ratio thresholds. There was an extension mechanism to extend the RCF maturity by a year to September 2026, but this needed each lender to agree. A further extension would require the same.

The Week’s Highlights

Key Analyses

A slew of late fourth quarter and fiscal year 2024 earnings reporters in the last week, including a number of stressed and special situations companies in Octus coverage. For a good wrap of the most interesting names and a snapshot of the key themes – our latest earnings weekly is available HERE.

The second in a six-part RX 101 series exploring the evolving landscape for LMEs, across Europe, was published this week covering Italy. With insights sourced directly from leading local counsel, it breaks down the legal tools, restructuring tactics and cultural norms shaping how debtors approach LMEs in five key jurisdictions: France, Germany, Spain, the Netherlands and England. For Italy click HERE and for France click HERE.

And our U.S. colleagues have produced a second in their U.S. Bankruptcy 101 series – for chapter 11 cash collateral and DIP financing; and I would recommend our piece on the emergence of Omni blockers for LMEs appearing in new deal docs – our explainer is available HERE .

Key Stories This Week

French fine foods producer Labeyrie is advised by Kirkland & Ellis on talks with its term loan lenders on an amend-and-extend transaction planned for this summer. Term loan lenders have appointed Latham & Watkins. The PAI-owned group’s €455 million TLB and its undrawn €65 million RCF mature in July 2026.

Some more notable court coverage from our legal team:

The sanction hearing for Petrofac, the subject of last week’s edition, ended last Friday afternoon, with the judgment reserved. Justice Marcus Smith has already indicated that his decision will be examined in the Court of Appeal in the last week of May, alongside a contested convening order. For our wrap-up piece, click HERE.

Another key piece of litigation is for NMC Healthcare – with the English High Court lifting the confidentiality on the $9.66 billion settlement agreement with its former major shareholders, the Bin Butti family. The court decided that open justice outweighs claimed confidentiality over the settlement agreement. EY is defending a high-stakes audit negligence claim, where NMC alleges that EY failed to detect a vast fraud perpetrated by senior management and major shareholders. The full NMC v. EY trial begins on May 19 and is expected to run until October.

We have initiated coverage on Domo Chemicals, whose lenders engaged Houlihan Lokey and Linklaters to represent them in discussions with the Belgian chemicals business, as falling revenue amid a cyclical downturn is leading to cash burn. The group is advised by FTI, with Lazard assisting shareholders on an equity raise.

And a process update for Italian automotive electrical components supplier Meta Systems filed on April 18 its concordato preventivo proposal with the Bologna tribunal, envisaging the sale of the group, which specializes in electronic solutions for cars, to German family office Certina.

Key News and Events

While somewhat overshadowed by the white smoke and the new Pope, the ‘comprehensive UK/US trade deal was an important development for UK auto manufacturers, most notably JLR and Aston Martin, whose shares soared after the joint press conference.

But it is still unclear whether the POTUS will carry out his threat to the foreign film industry with hefty tariffs, which would hurt studios in the UK – including Pinewood a HY borrower, other potential loan borrowers affected could be All3Media and Technicolor Group (France)

And ending on some good news, Cheplapharm bondholders react positively to the company’s latest earnings call, rising 3-5 points with management impressing on the turnaround plan outline and recent hires. For the conference call transcript, click HERE.