Covenant Analysis: Kem One’s AHG Proposed Uptiering Can Likely Be Structured With Only Majority Consent of the Senior Secured Noteholders; Super Senior Debt Consent May Present Hurdles

An ad hoc group, or AHG, of holders of Kem One’s €450 million senior secured notes due 2028, led by investment funds Arini and BlackRock and advised by Gibson Dunn, is reported to be considering providing new super senior money to the company and potentially uptiering its holdings in the SSNs. The ad hoc group is believed to consist of around two-thirds of the SSNs, which are trading in the mid-20s.

Kem One’s capital structure is relatively simple. In addition to the SSNs, there is a €200 million super senior debt facility, led by Monarch Alternative Capital (with 75% of the deal) but provided in part by Arini, consisting of an initial €120 million tranche drawn in full and an additional €80 million delayed-draw facility, with €30 million outstanding at June 30, 2025. Beyond that, there is just €18.6 million of unsecured debt, which we assume is not relevant for purposes of this analysis.

While the precise structure of the proposed new deal is unclear, it appears that the AHG is looking to provide new money super senior debt, potentially refinance all or part of the existing €150 million of super senior debt and uptier its existing SSN holdings into new 1.5 lien notes ranking above the remaining 2028 notes but below the super senior financing.

In terms of providing new super senior debt, the credit facilities basket in the SSNs allows debt up to the greater of €150 million and 22.5% of total assets to be incurred on a super senior basis to the SSNs. As set out in our liquidity covenant analysis, as of June 30, 2025, Kem One’s total assets (less cash) were €1.1 billion, giving €247.5 million of capacity under the total assets soft cap, allowing the €200 million super senior facility to be drawn in full and leaving a further €47.5 million of capacity remaining.

Accordingly, the ad hoc group can provide up to €47.5 million of super senior new money under the terms of the SSNs. All or any portion of the existing super senior debt facility, together with accrued interest and any call premiums, can also be refinanced with super senior debt without eating into the €47.5 million of new money capacity. Should the AHG want to put in more, it can amend the size of the super senior credit facilities basket with the consent of a majority in principal amount of the SSNs, which it appears to have.

However, the amount of additional super senior debt may be constrained by the terms of the €200 million super senior facility (whose terms we have not seen) and unfortunately we don’t know whether that is the case and, if so, what percentage of super senior lender consent would be required to increase it.

The picture for the potential uptiering of the SSNs held by the AHG is somewhat more complicated, as changes to the ranking of the SSNs are governed by the terms of the SSNs and the intercreditor agreement, and presumably by the existing super senior facilities as well. Consequently, a potential uptiering will likely have to comply with the requirements of all three.

According to the description of the intercreditor agreement contained in the preliminary offering memorandum for the SSNs, while changes to certain provisions of the intercreditor agreement only require the consent of the affected class of creditors, amendments or waivers of any provision relating to ranking and priority, turnover of receipts and application of proceeds, among other things, require the consent of both the lenders of any super senior facility and the trustee of the SSNs (acting in accordance with the terms of the SSNs).

Under the SSNs, most amendments and waivers (including increasing the size of debt baskets, as noted above) can be made with the consent of holders of a simple majority (50.01%) of the notes outstanding. However, changes affecting certain “sacred rights” require 90% consent. Included among these is any amendment or waiver that would “expressly subordinate the notes or any Guarantee” to any other debt of the issuer or a guarantor, other than as contemplated by the intercreditor agreement.

The key question here is whether an uptiering of a portion of the SSNs requires a simple majority or 90% holder consent. The answer to that probably depends on how the uptiering is structured, in particular the manner in which the uptiered SSNs will have priority over the remaining SSNs. In that regard, it’s worth remembering the different types of priority that exist under the intercreditor agreement:

Payment priority: The intercreditor agreement ranks the debt subject to its terms in order of priority of payment as follows:

• Super senior lender liabilities, the SSNs, any pari passu debt and any super senior or pari passu hedging (ranking equally without preference among them);
• Any second lien debt, any senior subordinated debt and any unsecured debt that accedes to the intercreditor agreement
• Intra-group liabilities;
• Shareholder liabilities.

Lien priority: The intercreditor agreement also ranks the priority of liens secured on the collateral as follows:

• Super senior lender liabilities, the SSNs, any pari passu debt and any super senior or pari passu hedging;
• Any second lien liabilities, unsecured liabilities and senior subordinated liabilities, to the extent secured by the collateral.

Proceeds of collateral enforcement priority: Finally, under the intercreditor agreement, any amounts received in connection with the enforcement of collateral are applied in accordance with the following payments waterfall:

• Amounts owing to the security agent, SSN trustee and creditor representatives;
• The super senior lender liabilities and super senior hedging;
• The SSNs, any pari passu debt and pari passu hedging;
• Any second lien debt;
• Any senior subordinated debt;
• Any unsecured liabilities (to the extent secured by the collateral);
• The relevant debtor.

Therefore, although the super senior debt ranks equally with the SSNs in terms of payment and lien ranking, their super senior status arises as a result of the payment waterfall from the proceeds of collateral where the super senior debt has a priority.

An uptiering that involves changing the payment ranking of the SSNs of the AHG against those of the nonparticipating holders would almost certainly “expressly subordinate the notes or any Guarantee” of the nonparticipating holders to those of the AHG, requiring approval of 90% of the SSNs. However, an uptiering that involves changing the lien ranking might not be caught by the language above which, in the absence of express language to the effect that it applies to the ranking of liens as well, is commonly understood to refer only to contractual subordination, i.e., payment ranking) – although that is not beyond debate.

Perhaps an even safer way to circumvent the “expressly subordinate the notes or any Guarantee” language would be to effect the uptiering via changes to the payment waterfall for collateral enforcement, which does not involve any change to the payment or lien ranking but only the waterfall priority. Arguably that isn’t “expressly subordinating” the nonparticipating SSNs to those of the AHG any more than the claims of the holders of the SSNs are subordinated to those of the SSN trustee, notwithstanding that the trustee is entitled to get paid with enforcement proceeds ahead of the bondholders.

While this may seem esoteric, the argument goes that if bondholders (considered to be sophisticated investors) wanted to protect themselves against the uptiering risk they should have extended the 90% consent to also expressly cover any changes to lien ranking or the payment waterfall from collateral enforcement.

It therefore appears likely that a new tranche of debt of super senior debt or “1.5 debt” appearing between the super senior debt and the SSNs in the payment waterfall could be created with just majority consent. In a simultaneous second step, the SSNs of the AHG could be exchanged for that debt, thereby moving them ahead of those of the nonparticipating holders in the payment waterfall. For a deep dive into the typical mechanics of an uptiering transaction, please see our analysis on Victoria plc.

Alternatively, the AHG can achieve the same result (improving the position of their SSNs in the payment waterfall) by simply amending the size of the credit facilities basket which is already accorded super senior status under the SSNs and exchanging their SSNs for new super senior SSNs.

One point worth noting is that the SSNs do not have a “no payments for consent” provision (currently the subject of litigation in the Hunkemoller uptiering), which makes the second step non-pro rata exchange easier to achieve.

Whatever the consent level required under the SSNs to effect an uptiering, because it will almost certainly relate to ranking and priority, turnover of receipts or application of proceeds under the intercreditor agreement, it will also need the consent of the lenders under the super senior debt facility, the terms of which we haven’t seen and which are a bit of a black box for this analysis. Accordingly, depending on what is being proposed, it might require anything from simple majority consent to all lender consent (although we suspect that with Monarch holding 75%, the lender group is probably quite small and Monarch has safeguarded its interests with its substantial stake).

If the uptiering involves moving the AHG SSNs ahead of those of the nonparticipating holders in the collateral enforcement proceeds waterfall but still behind the existing super senior lenders, the super senior lenders probably won’t care too much from a credit risk perspective and might be happy to consent after extracting a customary (albeit opportunistic) consent fee. However, if the uptiering involves moving the AHG SSNs into a class of super senior debt with equal priority under the payment waterfall (which may not require an amendment to the intercreditor agreement itself, but which we presume would be constrained by the terms of the super senior facility), the super senior lenders will certainly be more concerned, in which case the AHG may have to take a sufficient stake in the existing super senior debt (possibly all of it) in order to achieve the uptiering. We can only speculate at this stage, but perhaps that is what is driving rumors of a full or partial refinancing of the existing super senior facility.

Kem One’s capital structure as of June 30, 2025, is below: