Concordia bondholders await settlement plan

Concordia

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Seasoned high-yield managers have been left scratching their heads at the activities of bus company Concordia. Hardeep Dhillon reports on an unusual restructuring

After seeing the value of their investments drop considerably, subordinated bondholders of Nordic transportation company Concordia may be rubbing their hands with glee as the company enters restructuring. It has not been an easy ride for investors who have seen the company struggle financially over the last few years as contract prices have fallen and fuel and lease costs have risen.

“This is a long-term story of an underperforming company with an over-leveraged capital structure that ran out of money,” says Bradshaw Crombie, high-yield analyst at Merrill Lynch. One high-yield manager adds: “This is one of the first restructurings that Europe has witnessed for a long while and it has certainly not passed without event.”

The seeds of decline are hard to pinpoint, he adds, but Crombie views January’s refinancing of the bank debt with a senior secured €160 million 9.125% 2009 bond as an indication that Concordia could not produce meaningful free cashflow and was sacrificing its future financial flexibility for short-term liquidity. “Without a significant turnaround in operations, the capital structure looked unsustainable,” he adds.

The failings in Concordia’s business profile and a lack of liquidity were emphasised by the fact that the bus operator had expensive debt that it could not afford to service, adding more strains to its cashflow.

Distress call

All these factors combined to force Concordia to bring in turnaround specialist firm Alvarez & Marsal in December of last year. This was followed by an announcement on January 15 that the company was seeking a recapitalisation from its investors. “This clearly indicated that a subordinated note equitisation was all but inevitable,” adds Crombie.

The company has two bonds outstanding: the aforementioned senior notes and a €130 million 11% 2010 subordinated issue. The latter is structurally subordinated, but the senior bonds are held by the most senior lenders to the company and this has been reflected in the bond’s spread performance which has remained stable around par.

Bondholders became concerned that the firm would not be able to pay the Skr135 million (€14.9 million) coupon payments on both bonds due in February. Their concern became reality when Concordia announced to the market that it would only part-pay the coupon on the seniors.

In what many have called unprecedented, Concordia paid just 83.9% of the coupon and said it would use a 30-day grace period to consider whether to pay the remaining amount. “I have never heard of a company do this,” says Merrill’s Crombie, echoing the thoughts of many in the high-yield market.

Bondholders made contact with legal advisors and subsequently two committees were formed. Though both the company and advisors have maintained radio silence and discussions have gone private, Credit understands that the senior committee, organised by Bingham McCutchen, includes Putnam, among others.

The subordinated committee, led by Cadwalader, Wickersham & Taft, is advising Avenue Capital, BlueBay Asset Management, Dalton, Fidelity, Henderson Global Investors, Lonestar and Mizuho – Barclays Capital and Concentric left the committee last month. Cadwalader represents holders of about 90% of the notes.

Some of these funds have an overlap with the senior committee, as there has been some consolidation at the €5–10 million range with some smaller hedge funds disposing of their €1–2 million holdings. It is understood that hedge funds and distressed accounts also hold the bonds.

The question many in the market were asking was whether Concordia’s failure to pay the full coupon amount was a ploy to get the senior lenders onto the negotiation table for a reorganisation of the company. It seems that in part this may have been the case, but there could be another issue at stake.

One source close to the negotiations tells Credit that the company wanted to make good under its promissory note arrangements where cash was being upstreamed to Nordic Bus to pay the senior coupon. “They paid enough of it so as not to trigger a cross default in local financing arrangements in Sweden. These are local financers of leasing arrangements, many of whom were in the bank syndicate who got refinanced by the senior notes last year,” he says.

As time ticked down on the grace period, Concordia decided to repay the remaining 16.1% of the coupon, acknowledging that the seniors would have to come to the table at a later date in any restructuring. But the firm declined to pay the subordinated coupon and entered into another 30-day grace period that was due to expire on March 15.

One high-yield investor questions the company’s policy and is at a loss to provide any reason why the seniors would want to do anything that would throw a spanner in the works. “They have a good security package and limited downside risk. If the company was turned over to the subordinated holders, a change of control in the senior notes calls for redemption at 101,” says the investor.

The next step

The most likely scenario for the company is an equitisation, either in part or in full, and options open to the firm include an in-court or out-of-court settlement. An in-court scenario requires 75% of bondholder acceptance and is a mechanism similar to one used in a deal for Polish high-yield telecom company Netia.

An out-of-court settlement would need about 90–95% of bondholders to agree and would be a similar deal to the restructuring of container firm Ifco Systems. “This is more attractive as it is a quick transaction, requires no SEC tender offer and cuts back on legal costs,” says the investor.

Going into the last two weeks of the grace period, sentiment for a positive outcome was high. As Credit went to press, the company and the committees were in the process of meeting for further negotiations. Simon Poulton, senior director at Alvarez & Marsal, is optimistic that a consensual agreement can be reached within the allotted time. “Talks are constructive and all parties concerned want to secure the future of the business,” he says.

One source close to the proceedings adds: “We are quite anxious to get things done. This is not a complicated deal so it should be done during and before the grace period expires. The equitisation arrangement is pretty straightforward, and four weeks is plenty of time to get a deal with good faith on both sides. And there is no reason why we should fail to get it; there is no need for the company to go into default and there are no skeletons in the cupboard,” he says.

But is that the end of the affair or is there still time for a sting in the tail? Some high-yield analysts are pondering what Goldman Sachs Capital Partners, 51% shareholder – Schoyen Gruppen holds 47.15% – will do. In the event of any reorganisation, Goldman will receive residual equity.

So, according to one analyst, does the fact that Goldman Sachs, the investment bank, was providing the best prices for Concordia debt in February suggest another game plan? “Goldman was the worse bid on the Street for months and now it’s the best bid. What is going on?” says the analyst.

Another high-yield analyst suggests that there is a belief that Goldman may have a trade buyer interested in the company. The validity of this statement is hard to judge as the analyst adds that he does not believe that a rational trade buyer would pay the market rate for the company, although one attraction is Concordia’s high market share.

Nonetheless, those involved on the bondholder side are still committed to eking out a deal. As a debt-for-equity swap is the most likely outcome, some analysts speculate that subordinated bondholders could receive about 90% of the equity, leaving the remaining 10% to be divided between shareholders and management.

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