Global Liability Management Quarterly: Better Health, Oregon Tool Blaze New Path; Drop-Downs Reduce Leverage, Bankruptcy Risks Remain; Drop-Downs as Negotiating Tactic in Europe; Logan Group Proposal Illustrates Chinese Property Sector Distress

In our first-quarter 2025 global quarterly report highlighting our work on liability management exercises, or LMEs, used by stressed creditors to partially refinance capital structures, Octus, formerly Reorg, discusses the new tactic Better Health and Oregon Tool used to effectuate their non-pro-rata uptier transactions and how creditors were affected at companies that engaged in a drop-down transaction. We also review how two European borrowers, Altice France and Oriflame, have used drop-downs to help move negotiations with creditors forward without resorting to a full LME and how Logan Group’s second restructuring is illustrative of the deep stress in the Chinese property market.

This report summarizes “aggressive” transactions completed or contemplated by U.S., European and Asian borrowers during the first quarter that, among other things, raise cash, extend maturities or reduce outstanding principal, and sometimes all three. Transactions typically result in participating stakeholders improving their ranking relative to nonparticipating creditors.

The report concludes with a table summarizing select aggressive U.S. LME transactions covered by Octus during the quarter. To date, aggressive LMEs involving, for example, uptiering and drop-downs have been more common in the U.S. market and very limited in the European market. Meanwhile in China/Asia, the real estate sector has been a hotbed of LME activity as the industry continues to struggle.

Octus’ RX 101 on LMEs and creditor-on-creditor violences is HERE. Octus’ ME 101 covering double-dip transactions is HERE, and our RX 101 on basic themes of directors’ duties across key European jurisdictions is HERE.
 

 

• Extend-and-exchange: Recent rulings in the Serta and Mitel cases have reset the parameters for structuring all LMEs involving a non-pro-rata term loan exchange. While the “open market purchase” exception has now fallen out of favor, other paths exist to a non-pro-rata exchange including the “extend-and-exchange” mechanic utilized by both Better Health and Oregon Tool over the last several months.
   
• Drop-downs: Companies engaging in drop-down transactions reduced their gross leverage ratios by about one turn on average on the basis of our analysis of 15 drop-down transactions that have occurred since 2016. The unrestricted subsidiaries that incurred debt in these transactions had gross leverage ratios of about 10x on average and cash interest coverage ratios of just 1.4x on average immediately post-transaction.

  In our opinion, this left them with little margin for error following the financing, and half the companies in our dataset filed for bankruptcy at some point after completing the drop-down transaction, with an average span of 22 months from transaction date to petition date.
   

• European use of drop-downs yet to translate into LME: Altice France’s restructuring nears an end with its drop-downs in early 2024 proving to be more of a bargaining tool in owner Patrick Drahi’s negotiation tactics to keep control of the business, as prospects of pitting creditors against each other were dampened by the emergence of cooperation agreements. We believe Drahi’s recontribution of assets into the restricted group was his way of maintaining a seat at the negotiating table, allowing for no equity injection to be needed to keep a controlling stake of the business.

  Oriflame took a similar path where assets were dropped but not used to raise debt – though in this case there were questions as to whether the assets could have supported any meaningful debt.
   

• Logan Group: The company’s second restructuring proposal reflects extreme distress in China’s property sector. Major creditors accepted significantly weakened terms, including reduced upfront cash ($787 million versus $1.267 billion originally) and favorable treatment for $1.355 billion in shareholder loans. The plan addresses $7.562 billion in total debt through four options: a cash offer at 15 cents on the dollar, short-term notes with convertible bonds, pure convertible bonds, or long-term notes. Implementation will occur via Hong Kong/Cayman schemes.

Understanding Non-Pro-Rata LME Risk in a Post-Serta World
 

The Fifth Circuit ruling in Serta and accompanying New York state intermediate appellate decision in Mitel have reset the parameters for structuring all LMEs involving non-pro-rata term loan exchanges (and not just uptiers). Although the open-market purchase exception has fallen out of favor, other paths to a non-pro-rata exchange include broadened exceptions to pro rata sharing provisions for term loan assignments in the form of permitted loan purchases without an “open market” requirement (as permitted in Mitel) or “privately negotiated” transactions.

Exceptions to the pro rata sharing provisions permitting disparate treatment of different loan classes present another alternative for getting around the Fifth Circuit ruling, as recently modeled by the so-called extend-and-exchange LMEs recently executed by Better Health and Oregon Tool.

Similarly to how the original Serta deal used an expansive interpretation of the open-market purchase exception to pro rata treatment to effectuate a liability management exercise, recent transactions have weaponized standard exceptions for non-pro-rata treatment of extended classes for the same purpose. Specifically, the extend-and-exchange strategy – pioneered by Better Health and followed a month later by Oregon Tool – allows a borrower to complete a non-pro-rata term loan exchange without relying on the open-market purchase exception, thus avoiding any direct conflict with the Fifth Circuit’s Serta ruling.

As illustrated below, the extend-and-exchange strategy generally involves two steps: First, the borrower offers a maturity extension to participating lenders only, who then roll into a newly created extended “class” or “tranche” under the existing credit agreement. Nonparticipating lenders who do not receive the extension offer remain behind in the non-extended class. Second, using exceptions to the credit agreement’s pro rata sharing provisions, the extended class then exchanges its debt for new priming debt.
 

Drop-Down Transaction Historical Reduce Leverage but Bankruptcy Remains a Risk
 

Companies reduced gross leverage at their existing credit box, or the RemainCo, by about one turn of leverage on average to 11x from 12x based on our analysis of 15 drop-down transactions that occurred from 2016 to 2024. The leverage reduction was driven by debt exchanges at below-par prices, which accompanied the drop-down, and were partially offset by new-money debt raises and the transfer of EBITDA away from RemainCo creditors.
 

After a drop-down, the funds received by unrestricted subsidiaries tend to be transferred back into the RemainCo credit box, leaving the unrestricted subsidiaries with little additional resources, other than the assets dropped down, to service their new debt. Unrestricted subsidiaries in our data set had average gross leverage ratios of about 10x and average cash interest coverage ratios of about 1.4x immediately post-deal.
 

While companies use drop-down transactions to provide capital injections and/or extend their maturity wall, in some cases, these capital injections have proved to be merely temporary fixes. Additionally, these transactions create litigation risk for the company, and potentially participating creditors, as assets are being moved out of the credit box, which may prompt litigation from RemainCo creditors left out of the transaction.

Of the 18 companies in the data set below, covering 19 transactions as Revlon consummated two distinct new-money drop transactions, 50% have subsequently filed for bankruptcy with an average span of about 22 months from the drop-down date to the petition date. Additionally, eight of these companies and/or participating lenders have faced or currently face litigation regarding these transactions.
 

European Credits Use Drop-Downs as Negotiating Tactic, Yet to Translate to LME

Altice France’s Recontribution of Drop-Down Assets Help Agree Plan With Creditors
 

After French telecommunications company Altice France paved the way to potentially engage in an LME through drop-down transactions in early 2024, an agreement reached in late February marked the nearing of a close to its restructuring talks.

Within days of the group’s shock announcement, where it had designated UltraEdge and Altice Media as unrestricted subsidiaries and felt the need for creditors to take some pain, a string of restructuring advisors were appointed, with Altice France turning to Lazard and JPMorgan, senior secured creditors organizing with Gibson Dunn and subsequently appointing Rothschild, and junior creditors organizing with Milbank and Houlihan Lokey.

The first step for advisors for both the senior and junior creditors was to coalesce their creditor groups around cooperation agreements, a relatively new phenomenon in Europe, with the aim to avoid the splitting of their respective creditor groups by the company.

In the end, the drop-down transactions ended up being a bargaining tool in Drahi’s negotiation tactics to keep control of the business, with the prospects of pitting creditors against each other dampened by the emergence of cooperation agreements.

In June, following an initial phase of financial uncertainty in light of the drop-down announcement, Altice began discussions with creditors about a possible LME, even suggesting a voluntary LME with a 20% discount for secured creditors. A month later, in July, Altice France returned with a new offer – this time proposing to repay secured creditors at prices above market levels. By August, secured creditors countered with a proposal that hinted at potentially stripping billionaire owner Drahi of control over the French operations, marking a serious turning point in the negotiations.

Meanwhile, Altice finalized the sale of Altice Media, but as warned, withheld the sale proceeds from creditors. The sale of another key asset, XpFibre, stalled due to valuation disagreements. Around the same time, Drahi launched a spree of asset sales, including the sale of a 24.5% stake in BT Group (via Altice UK), the sale of a minority stake in Sotheby’s (which he majority owns), and the sale of Teads, a subsidiary of Altice International. These moves sparked speculation regarding how he would use the cash raised.

Recognizing the long road ahead, secured creditors opted to stick together to try and reach a deal with the company, extending their cooperation agreement. Throughout the fall, proposals and counterproposals continued, with a temporary public update via a cleansing statement released in mid-November 2024 to show progress. Talks then went private again for more intense negotiations around Christmas.

In early 2025, Altice France repaid its senior secured notes maturing in 2025 – something the market had anticipated. This set the stage for a final wave of negotiations, culminating in February 2025 with an agreement between Altice and a group of its creditors.

Currently, over 98% of creditors provided binding consent to support the proposed transaction where about €8.6 billion of debt would be axed, reducing net debt to €15.5 billion and pushing maturities out to between 2028 and 2033 as well as handing over about 45% of the equity in the group to creditors.

Ultimately, with Altice recontributing the proceeds from assets that had been dropped down and sold, Drahi was able to retain a 55% ownership stake in the business. On March 28, Altice announced the opening of conciliation proceedings by the president of the Commercial Court of Paris to implement its refinancing transaction.

The level of reinstatements of debt and allocations of cash and equity for secured and unsecured creditors are shown in the chart below:
 

After the initial announcement of assets being dropped down and creditors needing to share the pain in March 2024, the group’s bonds across its capital structure recorded a steep selloff, as shown in the bond price chart below. The 2025s recorded the smallest decline as they held the nearest-maturity trigger, and as mentioned above, they were repaid at par. The 2027s ended up gaining about 15 points from their lows in the low 70s last April and May to the mid-80s after the parties agreed to a deal. The 2028s and 2029s also recorded similar trading, up from the mid-to-low-60s to the high 70s over the same period.

Buying into the debt in the aftermath of the selloff proved a profitable strategy, though, according to our recovery estimates, those who bought into the secured paper at par and kept their positions did not lose an awful lot – we estimated day one recoveries, including equity value, for secured holders of up to 90% and about 30% for unsecured holders.
 

Oriflame August Drop-Downs Failed to Move Bonds, Company Agrees to Plan With Creditors
 

Swedish-headquartered beauty business Oriflame suffered from an overleveraged capital structure and underperforming operations. The group dropped down a number of assets in August 2024 and stated that in connection with the unrestricted subsidiary designations, it was exploring options to address the group’s capital structure and evaluating potential recapitalization opportunities, including raising debt against assets of the unrestricted subsidiaries.

In response, investors in the ad hoc bondholder group signed cooperation agreements binding them together in any potential talks with the company. At the time, with the group’s bonds – a set of $550 million 2026 senior secured notes and €250 million floating rate senior secured notes – both already trading in the 20s, there was little that could move them further downward in the wake of the announcement, in our opinion.

In October 2024, there were reports that Oriflame’s founders, the af Jochnick family, were considering lending against the company’s four newly redesignated subsidiaries, allowing the cosmetics firm to use the cash raised through new financing to negotiate a restructuring of its €800 million debt stack.

However, what transpired in March this year was a restructuring agreement, initially with 80% of its bondholders, which provided the group with €50 million of new money, comprising €25.5 million from existing shareholders and €24.5 million from bondholders. The funds raised were to be used to partially repay the RCF, reinforce the company’s liquidity and cover transaction fees. The new-money financing is backstopped by Blantyre Capital, Tresidor and other large holders.

This transaction is interesting because despite the existing bonds being written down to 33% of the current notional, existing shareholders will retain their 100% shareholding. Bondholders participating in the new-money financing will receive “their pro rata share of 49% of economic upside.” The dropped-down assets were in fact contributed back to the company and were not used to raise additional debt. After the transaction, Oriflame’s leverage will fall to 4x, compared with 10.6x before the transaction, though it remains to be seen whether the group can fundamentally turn around its struggling operations.

Most recently, the group said it had gained support for the transaction of more than 91% of the company’s bonds by value. Subject to the approval of the RCF lenders, the transaction is now implementable consensually with the company’s bondholders, without the requirement for an in-court process, Oriflame added.

Logan Group’s 2nd Restructuring Illustrates Extreme Distress in China’s Property Sector
 

Logan Group’s January 2025 second restructuring proposal starkly illustrates the extreme distress facing the developer and the wider China property sector. The subsequent acceptance by major creditors of significantly watered-down terms, including less cash upfront and favorable treatment for shareholder loans – versus none in the original proposal – underscores the harsh realities and limited options available.

The company aims to effectuate its offshore debt restructuring primarily through schemes of arrangement in Hong Kong and/or the Cayman Islands, with chapter 15 recognition at its election, offering creditors a combination of cash, new straight notes and mandatory convertible bonds under four main options.

Restructuring Framework

Total scheme creditor claims amount to $7.562 billion plus all accrued and unpaid interest. This includes approximately $3.39 billion in existing notes, $250 million in equity-linked securities, $550 million in existing loans, $1.936 billion in structured finance and guaranteed debts, and $1.355 billion in shareholder loans.

Further, about $584 million of additional offshore debt will be primarily restructured through bilateral agreements, though Logan may, at its sole discretion, offer Option 4 (long-term notes) or other consideration to these debtholders. Accrued and unpaid interest will be included for scheme voting purposes but waived on the restructuring effective date, or RED.

Options

Logan has presented four main options to creditors:
 

• Option 1: Cash offer
  • $15 cash for every $100 principal amount of offshore debt;
  • Principal amount exchanged capped at $787 million.
     
• Option 2: Combination of short-term notes and mandatory convertible bonds
  • For every $100 principal amount: $40 in short-term notes, or STNs, and $4 in mandatory convertible bonds, or MCBs;
  • Principal amount exchanged capped at $3 billion.
     
• Option 3: Mandatory convertible bonds
  • Every $100 principal amount converted into Option 3 MCBs;
  • Principal amount converted capped at $3.15 billion.
     
• Option 4: Long-term notes
  • Every $100 principal amount exchanged for $100 of long-term notes;
  • Principal amount exchanged capped at $625 million.
     

The restructuring includes a pro rata allocation mechanism for options that exceed their caps, with automatic reallocation to available options. Excess from options 1, 2 and 4 will be reallocated first to Option 3, if available, then to other options proportionally based on remaining quotas.

Debt/Equity Conversion

The equitization component involves $3.27 billion in MCBs offered through options 2 and 3. These bonds follow a mandatory conversion schedule:
 

• 33% of aggregate principal converted immediately following issue;
   
• Minimum of 50% converted by six months after issue;
   
• Minimum of 67% converted by 12 months;
   
• Minimum of 84% converted by 18 months; and
   
• Full conversion by maturity (two years after RED).
   

MCB holders may optionally convert at a price of 6 Hong Kong dollars per share (versus the HKD 0.86 trading price as of April 14), subject to adjustment if more favorable terms are offered to other offshore creditors.

Credit Enhancements

The proposal includes offshore and onshore cash sweep mechanisms. Every six months, surplus cash generated from specified assets will be directed to designated accounts after deducting relevant expenses and reserves. Funds from offshore assets (including the Corniche, Florence and Stirling projects) and three designated “Wholly Foreign-Owned Enterprise” projects will primarily benefit STN holders, while the remaining surplus goes to a general account for all new notes.

Multiple guarantees and security packages back the new notes, as outlined in our original coverage. Although the notes contain standard event-of-default provisions, they include a key carve-out as defaults on additional offshore debt or any onshore debt will not trigger cross-defaults on the new notes.

As reported, Logan is in the middle of restructuring its onshore debts.

Q1 Liability Management Transactions in North America

Select first-quarter out-of-court liability management transactions in North America are summarized in the table below and available for download HERE. This list includes all transactions that Octus is aware of having closed in the first quarter.