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Relevant Documents:
€250M SUNs Due 2024 – OM
Reorg Asset Sale Analysis

Pro-Gest and its newly appointed Chief Restructuring Officer Angelo Rodolfi have replaced the company’s legal advisor Molinari Agostinelli with Chiomenti, sources familiar with the situation told Reorg. The situation of the company’s other legal advisor Latham & Watkins is currently uncertain. Lazard remains in place as the company’s financial advisor.

Rodolfi’s appointment came after Sergio Iasi, considered close to creditor Carlyle, resigned from the role at the start of July.

Negotiations between the company and its creditors have been going on for months and reached a stalemate when the governance of the company changed. Pro-Gest’s bondholders hired Houlian Lokey about a year ago to prepare for talks around the company’s €250 million 3.25% unsecured 2024 notes. Sources expect developments in the definition of a debt workout plan not before September.

On July 15, Pro-Gest said its subsidiaries Cartiere Villa Lagarina SpA, Tolentino SpA and Cartitalia SpA decided not to make interest payments on their respective notes on the due date of June 30. In addition, an event of default has now occurred after a June 21 missed interest payment.

The group noted in its announcement that, as of June 2024, total turnover is “more than 10% higher” than the figures outlined in its business plan, with cumulative turnover up by 4% compared with forecasts for the first half of the year.

As reported, Pro-Gest’s ad hoc bondholder group is in discussions with King Street to team up and provide fresh funds to the company. The involvement of the third-party investor would help the bondholder group to fund a large new money contribution, which would be used to repay the debt held by Carlyle, amounting to about €250 million including PIK-ed interest, as well as support the business.

King Street is advised by DC Advisory, sources said.

Under this scenario, the 3.25% €250 million unsecured notes due December 2024 could be part extended and elevated into secured debt, and part equitized.

The bondholder ad hoc group held earlier discussions with Carlyle as well to potentially come up with a “joint” solution to rework Pro-Gest’s capital structure. Under this scenario, Carlyle and the bondholders would “split” the recovery by both participating in a new money instrument, extending their debt and potentially converting part of it into equity-like instruments, as reported.

As a further alternative, all of Pro-Gest’s outstanding debt could be reinstated, with a significant piece of the bond becoming a third lien type of instrument. Under such a structure, Carlyle would hold the most senior piece of debt, followed by a secured bond and finally by an unsecured bond, sources noted. Creditors would have governance over the asset sales, proceeds from which would go toward repaying the debt according to the waterfall, sources noted. Some new money contribution is expected to feature in any plan to fund the company’s business plan.

Pro-Gest’s new money need is unclear at the moment. Some sources previously speculated that the company may require fresh funds in the range of €50 million to €60 million to support its new business plan. As reported, Pro-Gest’s liquidity position is thin. Cash and cash equivalents were €40 million as of November 2023 (as disclosed by management), with the group reliant on uncommitted lines from Italian banks that could be switched off at any moment. As of March 2023, liquidity had reduced further despite remaining sufficient to manage the company’s activities, also thanks to some cash-pooling mechanisms used to address cash needs, sources said previously.

To remain in control of the business, Pro-Gest founders, the Zago family, would have to provide new money or find a third-party investor willing to team up with it, as well as proposing a deal that satisfies the company’s creditors.

As reported, Pro-Gest founder Bruno Zago met personally with Italian turnaround fund Pillarstone in February 2024 to discuss a possible restructuring deal involving the provision of new money from the fund in exchange for an equity stake and some governance rights in the company. However, these initial talks were informal and were not agreed to by the company’s advisors, and have not yielded anything concrete, sources said.

At the end of April, Pro-Gest finalized its new business plan, which was drafted by the company’s CRO Iasi and his team. The company has not approved its consolidated financial statements for the year ended Dec. 31 by the end of April 30, citing its current financial situation, ongoing discussions with its primary financial creditors and the “reshaping and refocusing of the group’s industrial and financial plans” that are currently underway. The company has 45 days of grace period to approve and release the results, according to sources.

Pro-Gest’s capital structure features €350 million of debt at the level of its operating companies, which includes €200 million of secured notes issued to Carlyle and credit lines from local banks. In addition to the operating company debt, there are €250 million senior notes due 2024 at the holdco level. These notes are unsecured and guaranteed by five subsidiaries of the issuer Pro-Gest SpA: Cartiera di Carbonera SpA, Tolentino Srl, Cartitalia Srl, Cartonstrong Italia Srl and Trevikart Srl.

Pro-Gest’s capital structure is below:

Pro-Gest SpA
09/30/2023
EBITDA Multiple
(EUR in Millions)
Amount
Maturity
Rate
Book
Privately-Placed Notes (CVL) 1
90.0
Dec-2025
€35M Privately-Placed Notes (Tolentino) 1
35.0
Dec-2025
€75M Privately-Placed Notes (Cartitalia) 2
75.0
Dec-2025
Mortgages 3
18.4
Total Secured Opco Debt
218.4
3.6x
Other bank debt (unsecured) 4
100.5
Total Other Opco Debt
100.5
5.2x
2024 Senior Unsecured Notes
250.0
Dec-2024
3.250%
Total HoldCo Debt
250.0
9.3x
Leases
17.3
Total Other
17.3
9.5x
Total Debt
586.2
9.5x
Less: Cash and Equivalents
(46.7)
Net Debt
539.5
8.8x
Operating Metrics
LTM Revenue
591.1
LTM Reported EBITDA
61.5
LTM Reorg EBITDA
89.0
Liquidity
Other Liquidity
84.0
Plus: Cash and Equivalents
46.7
Total Liquidity
130.7
Credit Metrics
Gross Leverage
9.5x
Net Leverage
8.8x
Notes:
Reorg EBITDA is normalized EBITDA, as reported by company. Other liquidity is as of Jun,. 30 and consists of amounts available under uncommitted credit lines.
1. Issued in Dec. 2020.
2. Issued in Jun. 2021.
3. As of Jun. 30, 2023.
4. Reorg assumption.

Carlyle’s financing has a 4.75x net leverage covenant, which would have been breached in June 2023 if the company did not obtain a series of waivers, as reported. The company’s bonds do not have any leverage covenant.

Pro-Gest’s ad hoc bondholder group, holding over 50% of the unsecured bonds and including funds DWS and Cheyne Capital, is working with Houlihan Lokey and Linklaters. Carlyle, which holds €200 million in aggregate of secured debt due December 2025, is advised by Rothschild, Milbank and Gattai.

Before the summer of 2023, Pro-Gest’s advisor Goldman Sachs held extensive negotiations with wall-crossed investors with regard to a potential secured refinancing of the capital structure. Investment funds including Bain Capital showed interest in the deal. However, sources said that Goldman Sachs did not manage to attract enough new investors and convince existing ones to play their part in the refinancing transaction.

Reorg has reviewed the final offering memorandum of Pro-Gest’s 2024 notes. Under the terms of the notes, general amendments require consent from a majority of the holders of the debt. To make money term amendments, approval from at least 75% of the outstanding notes is required. This includes changes to principal, term, interest, the release of security and guarantees as well as default/event-of-default waivers relating to nonpayment of principal, interest, premium or additional amounts.

Consequently, the AHG holding over 50% of the 2024 notes would be able to make certain amendments (or grant certain waivers) under the note terms, however, the group would not be able make key “money” changes to the bond, for example undertaking a “light touch” amend-and-extend exercise, without increasing the percentage of the notes it holds.