Global Liability Management Quarterly: Cooperation Agreements Rise; Ardagh’s Pari-Plus Deal Allows Company to Benefit From Decline in Bond Prices; R&F ’24 LME Cancels $1.2B Notes, Delays Redemptions, July Coupon Payment Uncertain; Hunkemoller Creditors Primed

In our second-quarter 2024 global quarterly report, highlighting liability management exercises, or LMEs, used by stressed creditors to partially refinance capital structures, Reorg discusses the rise of cooperation agreements as a potential shield against liability management. We also review the recent pari-plus loan at Ardagh group, Hunkemoller’s uptier exchange, which may lead to litigation, and the recent exchange at Guangzhou R&F with an eye toward what it may mean for the July coupon payment.

This report summarizes “aggressive” transactions completed or contemplated by U.S., European and Asian borrowers during the second quarter that, among other results, 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 Reorg during the quarter

To date, aggressive LMEs involving, for example, uptiering and dropdowns have been common in the U.S. market and very limited in the European market. However, discussions around a possible Altice France transaction continue to grab a lot of attention. Meanwhile, in China/Asia, the real estate sector has been a hotbed of LME activity as the industry continues to struggle.

Reorg’s RX 101 on LMEs and creditor-on-creditor violence is HERE, Reorg’s LME 101 covering double-dip transactions is HERE, our RX 101 on basic themes of directors’ duties across key European jurisdictions can be found HERE, and a replay of Reorg’s webinar discussing uptiers is HERE.
 

 

• Cooperation agreements: As borrowers of covenant-lite debt, issued during the low-interest-rate environment of 2019-22, become financially distressed, creditors have experienced limited controls over borrowers and sponsors acting together to move value away from creditors. The loose protections mean that borrowers may have first-mover advantage with regard to liability management exercises. Where covenant protection is ambiguous or insufficient, creditors can look to put in place “cooperation agreements” to improve their bargaining power against a borrower.
   
• Ardagh: In mid-April, Ardagh Group, a Luxembourg-based metal and glass packaging producer, announced that an unrestricted subsidiary, Ardagh Investments Holdings Sarl, or AIHS, had entered into a new facility comprising an initial €790 million senior secured term loan, a $250 million-equivalent senior secured exchange term loan and additional senior secured term loans to fund a debt service reserve account. AIHS planned to on-lend about €755 million of the proceeds to existing issuers by subscribing to new senior secured notes due 2029 with the proceeds to redeem $700 million in senior secured notes due 2025. Importantly, this pari-plus facility is secured by Ardagh Group’s 76% stake in Ardagh Metal Packaging SA as well as the intercompany loan to existing issuers.
   
• Guangzhou R&F: Easy Tactic Ltd., the issuer of R&F’s USD notes, completed a concurrent consent solicitation and exchange offer in May 2024, involving its USD notes due 2025, 2027 and 2028. After the completion of the LME, $1.2 billion in principal of the USD notes were canceled, and $4.5 billion in principal of the USD notes remain outstanding. This exchange and cancellation are likely deducted against mandatory redemption amounts, effectively delaying redemptions because of provisions from a 2022 consent solicitation. Despite this, R&F is again looking to extend payments on offshore USD notes as it faces $147.1 million in July 2024 interest payments, highlighting ongoing challenges in China’s property sector. Reorg has compared key terms across China property LMEs in a spreadsheet HERE, as developers continue to experience unprecedented industry headwinds since the second half of 2021.
   
• Hunkemoller: Dutch lingerie retailer Hunkemoller secured a €50 million super senior loan from an ad hoc group of creditors led by Redwood Capital. In return for providing the new money, the ad hoc group exchanged its €186 million portion of the group’s €272.5 million 9% senior secured 2027 notes into priority “first-out” secured notes ranking ahead of the remaining €86.5 million bonds. Lenders whose portions of the debt become subordinated are now considering a legal challenge. Although the transaction was permissible under the debt documentation, according to sources, questions have arisen regarding the directors’ duties to treat all creditors equally.
   

Cooperation Agreements May Provide a Shield Against Liability Management Exercises

Although cooperation agreements are not novel technology in the United States, their popularity among creditor groups exploded in 2024 in response to the unprecedented surge in liability management activity. In the first half of 2024 alone, Reorg reported on more than 10 instances in the U.S. where creditor groups have organized under a cooperation agreement.

The co-op groups formed in 2024 have tended to cluster around the same pool of legal and financial advisors and have formed at various stages of the LME lifecycle, including as a reaction to a specific transaction (e.g., Echostar, Ardagh) or as a preemptive defense against the potential actions of a distressed borrower (e.g., Bausch Health, Weight Watchers).

While a company’s management and sponsor are likely to be significantly aligned with regard to an LME and are often able to act quickly and decisively, lender groups, which may contain CLO funds, are often slower-moving and more fragmented. Additionally, certain lenders may be more experienced with managing distressed scenarios through liability management exercises and more nimble in obtaining the advantage vis-a-vis other creditors.

Importantly, cooperation agreements cannot prevent borrowers from undertaking transactions that are permitted under the terms of their credit documents (such as drop-downs, for example), however they may circumscribe which creditors would participate in such a transaction. In this way, they may provide creditors with the ability to present a united front against a borrower, sending a clear message that creditors will work together to form a deal and that sweetheart deals with specific lenders will not be available.

Each cooperation agreement will be specific to the situation and drafted by lawyers in a bespoke manner, although there are customary provisions, including:
 

1. Participants must refrain from selling, although acquisitions are allowed with the new debt automatically bound by the cooperation agreement.
    
2. Participants must refrain from taking or encouraging action inconsistent with the group’s objectives.
    
3. Settlements must receive supermajority support.
    
4. No communication with the borrower, outside of the group.
    
5. Remedies for breach, which may include specific performance.
    

The following issues may or may not be addressed in a cooperation agreement, depending upon how it is drafted.
 

1. Relative weighting of voting rights for the supermajority settlement.
    
2. Exclusion or inclusion of various creditor classes.
    
3. Treatment of cross-holdings, including shareholder participation.
    
4. Disclosure requirements, such as debt holdings or prior communications with borrowers.
    
5. Parameters of settlement agreement, which may especially be relevant for CLOs.
    
6. Specific remedies for violation of the agreement.
    

Below is a list of select cooperation agreements executed in 2024, including background information contextualizing the formation of each group. The full list can be found HERE.
 

Ardagh Group’s Pari-Plus Loan Includes Facility Allowing Apollo to Uptier Holdco and Group Unsecured Debt Through Exchange
 

On April 15, Ardagh Group’s unsecured and Holdco PIK debt fell 4 to 5 points after the packaging producer announced that it had entered into a new facility with Apollo comprising an initial €790 million senior secured term loan, a $250 million-equivalent senior secured exchange term loan and additional senior secured term loans to fund a debt reserve account at its subsidiary Ardagh Investments Holdings Sarl, or AIHS. Importantly, these loans were secured by Ardagh’s 76% common equity stake in Ardagh Metal Packaging SA and all other assets at AIHS, including its 100% preferred equity stake in AMP, which has a face value of €250 million.

AIHS would then on-lend about €755 million of the proceeds of the initial term loan to redeem Ardagh Group’s $700 million senior secured notes due 2025, which were about to become current. The intercompany loan will be pari passu with the senior secured debt at Ardagh Group, while Apollo will also benefit from the AMP stake, creating a pari-plus structure.

In addition to the pari-plus loan, the $250 million-equivalent senior secured exchange term loan provides Ardagh with a “hunter-gatherer” feature, wherein Apollo can exchange Holdco PIK notes and Ardagh Group unsecured notes into new senior secured exchange term loans at a principal amount equal to the purchase price paid by Apollo plus a premium. This feature will likely enable the company to benefit from the weakness in the bond prices caused by the announcement of the transaction which caused the euro-denominated Holdco PIKs to drop by almost 5 points while the sterling-denominated 2027 senior unsecured notes fell by almost 4 points, according to sources. However, as of the time of the first-quarter earnings conference call, management noted that the exchange term loan facility had yet to be utilized, as it did not believe pricing was yet “attractive.”

Below is a simplified schematic of the Ardagh transaction describing the debt levels at the various Ardagh enterprises following the transaction.
 

R&F’s February 2024 LME Effectively Pushes Back $1.2B Notes’ Redemption Dates
 

Guangzhou R&F Properties Co. Ltd.’s most recent LME, launched in February 2024 and completed in May 2024, involved an exchange and cancellation of $1.2 billion in aggregate principal of the due 2025 notes, 2027 notes and 2028 notes. Given the drafting of the mandatory redemption mechanism from an earlier LME in 2022, the amounts exchanged and canceled would be deductible against the mandatory redemption amounts under the outstanding amended USD notes, effectively pushing back the redemption timeline for the notes.

This is because of an earlier 2022 consent solicitation, for which R&F’s USD notes were amended to include a mandatory redemption provision. The drafting sets out that the amounts due under the mandatory redemption payments are to be reduced by any redemption or repurchase and cancellation of the notes on or prior to the mandatory redemption date.

If the amounts exchanged and canceled across the affected series of notes are deemed to be a “redemption” or “repurchase and cancellation,” it would count toward reducing the “Minimum Principal” under the mandatory redemption provision. Therefore, if such amounts exceed the “Minimum Principal,” the mandatory redemption requirements are satisfied.

However, a potentially complicating factor of the 2024 LME is that the “offeror” under the exchange offer is a third party – London One Ltd., which is a special-purpose vehicle 100% owned by Chance Best Holdings Ltd. Chance Best is in turn indirectly wholly owned by Mr. Cheung Chung Kiu. The USD notes are issued by Easy Tactic Ltd., a 100% owned subsidiary of R&F.

The exchange offer documentation seen by Reorg indicates that Easy Tactic Ltd. and R&F are deemed to be working in concert with London One Ltd. to facilitate the exchange offer and consent solicitation, but that the exchange offers are invitations solely from London One Ltd.

Reorg’s analysis outlines the economic substance of the transaction, explaining why the notes exchanged and canceled in 2024 would likely fall within a deduction under the mandatory redemption provisions nevertheless. This indicates that R&F has fulfilled its 2024 mandatory redemption requirement of $323.1 million under the due 2025 notes.

Notwithstanding the substantial mandatory redemption fulfillment, Reorg reports that R&F is working with JPMorgan to further extend payments under its offshore USD notes as the company struggles with $147.1 million of cash interest payments in July 2024. A grace period for missed interest payments of 30 days is applicable.

This transaction underscores the difficulties faced by R&F amid continued distress in the China property industry.

Hunkemoller Non-Pro-Rata Uptier Is First Significant Instance of Creditor-on-Creditor Violence in Europe
 

After Hunkemoller received a new €50 million loan from a group of creditors led by Redwood Capital, and in return uptiered those creditors’ €186 million of 9% senior secured 2027 notes into priority “first-out” secured notes, lenders to the Dutch lingerie retailer whose debt positions became subordinated began considering legal challenges.

In what is being considered by some as a clear case of separating lenders with the same security and the first significant instance of lender-on-lender violence in Europe, the deal agreed with a group of bondholders led by Redwood Capital allowed some holders of Hunkemoller’s €272.5 million 9% senior secured 2027 notes to prime other creditors.

While the transaction, which allowed some holders of Hunkemoller’s €272.5 million 9% senior secured 2027 notes to prime other creditors, was permissible under the debt documentation, questions have arisen regarding the directors’ duties to treat all creditors equally. This legal point is central to the now-subordinated creditors’ potential legal argument. See our RX 101 on basic themes of directors’ duties across key European jurisdictions HERE. The article focuses on duties that directors owe to creditors, shareholders and the company, and does not address any corporate and social responsibility duties.

Americas Second-Quarter Liability Management Transactions

Select second-quarter out-of-court liability management transactions in North America are summarized in the table below and available for download HERE.