Lenders seize keys

Lenders to German roof supplies maker Monier look certain to take control of the business in the coming weeks after seeing off a major effort from sponsor PAI to retain control of the company. A successful outcome for distressed debt investors will come in large part because of their better appreciation of the mood among CLO managers, who until now had been seen by many sponsors as sheep to be led in restructurings rather than candidates happy to take the keys.

With creditors, again led by institutional investors, also set to seize IMO Car Wash, it looks as if the tide has turned on sponsors seeking to take advantage of disarray among lenders to grab back distressed assets.

Last week senior lenders to Monier rejected a sweetened PAI offer to inject €135m of new cash into the business and swap one-third of debt for up to 50% of equity. The PAI offer was the largest new money bid from a sponsor to buy back a portfolio company, but was nonetheless rejected by lenders, who are increasingly happy to take short-term pain for long-term equity upside.

Some 75% of senior lenders now support an alternative restructuring plan, initiated by distressed debt investors Apollo, TowerBrook and York, who collectively hold in the region of 20% of debt, but are backed by a wide array of lenders notably including CLO managers thought to include experienced debt managers such as Alcentra, Babson and M&G.

Second-lien lenders are out of the money under both proposals, the latest example of the reality that second-lien ranks as junior debt in the event of real distress.

The lender-initiated proposal at Monier would cut debt by “just” 50% to €700m of senior debt and €300m of PIK, with that debt paying an interest slashed to just 25bp, or €30m annually.

As well as debt reduction, the proposal features €150m of new money in the form of super-senior secured loans, split between a €45m three-year A loan paying 7% over Euribor cash and 5% PIK, and a €105m five-year B loan paying 7% cash and 6% PIK, increasing to 7% cash and 9% PIK after 18 months. A further €50m of super-senior secured financing is available on an uncommitted basis.

The equity swapped under the proposal will be offered to senior lenders on a pro rata basis to their current holdings.

While the PAI proposal featured a more aggressive deleveraging of Monier, which should aid the long-term viability of the business, institutional investors are believed to have favoured the alternative because it not only offered them more equity but also left a greater volume of debt in place – not that good for management but better for keeping CLO managers’ portfolios stocked.

According to one bank lender: “The deal will be done because it works for CLOs. It leaves more debt in place, which helps CLOs by keeping more money in the vehicles they have to mark-to-market and gives them more equity.”

Another reason CLOs are backing the deal now is that the poor performance of so much of their portfolios has actually freed them to take a more aggressive approach to restructuring, including holding more equity.

That is because CLO managers have seen their Triple C buckets fill up and the number of defaults in their portfolios rise to a level where the management fees coming into vehicles are switched up the CLO structure, away from managers. While CLOs had been incentivised to help avoid defaults until fees were switched off, the opposite may now be true.

“We’ve passed the stage where CLOs were desperate to keep their subordinated fees coming in,” said a debt manager involved in Monier. “Forty per cent of the market has now been switched off and once that’s gone they are liberated to rethink their analysis.”

Houlihan Lokey and Lazard advised Monier creditors, while Goldman Sachs advised PAI and the company.

IMO lenders take control

Meanwhile, the auction process to find a buyer for IMO Car Wash foundered on some of the same concerns.

Senior creditors had instructed financial adviser Rothschild to conduct an auction process in an effort to sell the European car wash chain, which owes £360m to a group of banks and other loan investors. The auction was launched after lenders rejected a restructuring proposal from Carlyle to slash debt by more than 50% to £171m in exchange for a £25m equity injection.

The lenders, including distressed fund Angelo Gordon, then proposed a deal structured around extending new senior and junior debt to the company, while implying a 31% haircut on the outstanding debt.

At the same time, they launched an M&A process to seek alternative buyers and valuations. However, bids from private equity houses fell below lenders’ own assessment of the value of the deal, according to someone involved in the process, while trade buyers were absent because IMO has few if any European peers.

As a result, lenders pushed ahead with their own proposal and, while the M&A process failed to find a buyer at an attractive price, the auction is understood to have shown unambiguously that value in the deal breaks in the senior debt.

Debt is currently split between senior debt made up of a £120m term loan A, a £120m term loan B and a £30m capex facility, €90m in mezzanine and a €25m PIK loan from the sponsor.

The coming COMI

Another point in common between both Monier and IMO is the likelihood that the lender-backed deals will be executed through a scheme of arrangement under English law. For IMO that should be a straightforward enough execution – a pre-pack administration followed by a court sanctioned scheme of arrangement under its domestic law.

Monier, on the other hand, may require a shift in centre of main interest (COMI) from Germany to an English law jurisdiction. Unlike many Continental jurisdictions, the English regime allows a 75% majority of in-the-money lenders to force through a proposal under court supervision – dramatically cutting the ability of hold-outs to delay or block deals.

Clifford Chance is preparing a plan to shift Monier’s COMI to the UK, which could be done as quickly as a matter of weeks, according to one lawyer, though at a cost of double digit millions.