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Victoria Plc Bonds Slide Over Drop-Down Transaction Fears; Bondholders Organize, Close to Mandating Legal Advisor  

Reporting: Robert Schach
Credit Research: Charlie Ward
Legal Research: Azzurra Camillieri, Bart Capeci

U.K.-headquartered carpet and tiles distributor Victoria has today seen its €500 million senior secured notes due 2026 drop by around 3 points to 90 and its €250 million SSNs due 2028 drop by 9 points to 76, according to Solve, amid rumors that the group is seeking to orchestrate a drop-down transaction in order to deal with the upcoming 2026 bond maturity.

Under the rumored transaction, a couple of funds have offered to provide around £185 million of new financing to Victoria secured on some of its U.K. assets under a drop-down transaction. The deal would provide Victoria with some additional liquidity to try to find a solution to deal with the upcoming €500 million SSNs, including potential liability management exercises, or LMEs. However, some investors are skeptical that the amount would be sufficient to enable the company to find a workable solution, given that it’s less than half the amount of the debt maturing in 2026. There are also significant crossholders among Victoria’s debt, which could limit participation in any potential LME exercise, sources added.

The potential drop-down assets generate around £25 million EBITDA, which means that the new financing would be around 7.5x levered, which looks pretty punchy, one source added.

Victoria’s bondholders are in the process of organizing and are close to selecting a legal advisor, sources said.

According to a restructuring analysis published in August, an open market refinancing for Victoria is not feasible in Reorg’s view, as the company would be unable to provide investors with sufficient incentives for either existing or new investors to purchase new notes based on projected weak short-term performance after the refinancing amid uncertainty of recovery. While we think an amend and extend of the 2026 notes is the most straightforward way to manage the maturity wall, we flagged that other LMEs, including a drop-down, could be used as a threat to convince noteholders to support an A&E.

To illustrate this, we modeled that a coupon uplift to just 8% would result in cash burn totaling €28 million in the year following this imaginary refinancing scenario in our base case, as shown below. The group burned €36 million of cash in 2024.
 

The group’s capital structure is below:
 

Victoria plc
 
03/30/2024
 
EBITDA Multiple
(GBP in Millions)
Amount
Maturity
Rate
Book
 
Finance Leases and Hire Purchase Agreements (pre-IFRS 16)
1.0
 
 
 
Factoring and Receivables Financing Facilities 1
38.4
 
 
 
Total Asset backed Debt
39.4
 
0.2x
Unsecured Loans 2
62.5
 
 
 
Total Opco Debt
62.5
 
0.6x
£150M Super Senior RCF due 2026 3
10.3
Feb-24-2026
SONIA + 3.000%
 
Total Super Senior Revolving Credit Facility
10.3
 
0.7x
€500M Senior Secured Notes due 2026 4
418.3
Aug-24-2026
3.625%
 
€250M Senior Secured Notes due 2028
213.8
Mar-15-2028
3.750%
 
Total Senior Secured Debt
632.1
 
4.6x
Obligations Under Right-of-Use Leases 5
166.8
 
 
 
Total Lease Liabilities
166.8
 
5.7x
Total Debt
911.1
 
5.7x
Less: Cash and Equivalents
(72.8)
 
Net Debt
838.3
 
5.2x
Plus: Preferred Equity
287.0
 
Plus: Market Capitalization
176.6
 
Enterprise Value
1,301.9
 
8.1x
Operating Metrics
LTM Revenue
1,273.0
 
LTM Reported EBITDA
160.7
 
 
Liquidity
RCF Commitments
150.0
 
Less: Drawn
(10.3)
 
Plus: Cash and Equivalents
72.8
 
Total Liquidity
212.5
 
Credit Metrics
Gross Leverage
5.7x
 
Net Leverage
5.2x
 
Notes:
EUR converted to GBP at Mar. 31, 2024 rate of 1.1690. LTM EBITDA is underlying EBITDA as reported. Market cap as of August 20, 2024. Preferred shares totalling £286.6 million and factoring and receivable financing totalling £19.7 million excluded from the capital structure.
1. Recourse factoring
2. Includes Small, local working capital facilities at the subsidiary level, which are renewed or amended as appropriate from time to time. Split between Opco debt and Unescured term loans not given at
3. 3% is the assumed rate based on the disclosed cost of RCF financing. In December 2021 the group’s RCF was increased in size from £75 million to £120 million. Following the year-end the RCF increased further in size, as a result of the acquisition of Balta, to £150 million
4. €11M Repurchased.
5. IFRS 16 lease liabilities

A drop-down would allow Victoria to move assets into an unrestricted subsidiary and then raise debt secured by those assets that would be both structurally and effectively senior to the notes. The notes don’t contain a J. Crew blocker preventing the transfer of material intellectual property or other assets to an unrestricted subsidiary, and so a drop-down is possible in principle.

We don’t have much detail on how the drop-down might be structured, but one possibility would be to do a “pari plus” transaction along the lines of what Lycra proposed (but later abandoned in favor of a broader restructuring) last year.

Victoria notes the speculation. As previously announced (FY Audited Results announcement 19 June 2024) “the Board has started working on a range of refinancing options to allow adequate time to optimise the terms of the replacement funding.” They are still very much at the stage of gathering their thoughts and are not ruling anything in or out at this stage, a spokesperson said.

The group’s corporate structure is below: