(Bloomberg) – This is the latest showdown between creditors in the hyper-competitive world of distressed debt investing – helping cash-strapped borrowers make the decisions even as the credit era ends. cheap money.
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Struggling aerospace supplier Incora last week secured a financial lifeline from a group of investors, including Silver Point Capital and Pacific Investment Management Co., who pushed rival creditors down the line of repayment, aided by unusually aggressive moves from its private equity sponsor Platinum Equity.
The transaction – known as a bootstrap – sparks outcry from creditors left behind. It’s also sparking fresh fears in the industry that investors are stepping up a costly fight among themselves to make money work in an evaporated pool of $200 billion in troubled debt.
Wesco Aircraft Holdings Inc., which operates as Incora, has reached an agreement with the two investment companies that will give it $250 million in fresh cash and swap bonds due in 2024 for longer maturities. .
The new securities will be backed by collateral that was previously pledged to other creditors, i.e. those outside of the group led by Silver Point – including Golden Gate Capital, the arm of asset management from JPMorgan Chase & Co. and funds managed by BlackRock Inc. – – will be the worst off in any future restructuring.
Silver Point and Pimco brokered a settlement directly with the company and Platinum, which ultimately diluted other creditors’ claims over Incora’s assets, according to people with knowledge of the matter who asked not to be identified during private discussions.
“This is the latest unsurprising example of intercreditor violence,” said Scott Josefsberg, head of special situations research at Covenant Review. “It’s very unfortunate for the creditors who are left behind, without even having the opportunity to understand what happened or why.”
Platinum owned some of Incora’s unsecured debt and consolidated its holdings, a move seen as unusual and aggressive to industry watchers, the sources said. The transaction transformed a mass of secured and unsecured debt into new, longer-maturity secured debt that ranked ahead of existing bonds and reduced protections on those older debts.
Incora did not respond to a request for comment. Milbank’s corporate counsel and sponsor Platinum declined to comment. Silver Point and Pimco declined to comment. BlackRock, JPMorgan and Golden Gate also declined to comment.
Deals like Incora’s have been struck several times over the past few years, and Pimco itself is embroiled in another potentially seedy deal after announcing plans to award fresh money to Envision Healthcare Corp. , reported Bloomberg. Such deals – in which investors lend fresh money and are rewarded by jumping ahead of the payout line – have sparked creditor battles at companies such as restaurant supplier TriMark USA, the Boardriders Inc. surf apparel and mattress manufacturer Serta Simmons Bedding. In many cases, disputes have ended in court.
Through tactics such as transferring assets or promoting heavily discounted debt swaps, cash-strapped companies have found creative ways to survive the pandemic and other major upheavals. But the deal with Incora reveals how far fund managers and private equity sponsors will go to protect their positions.
“Hold the Bag”
Some holders of Incora’s 9% guaranteed bonds due 2026, fearful of how their positions would change, banded together to try to block the deal, the sources said. When it appeared that the group of bondholders was large enough to stop the transaction, Incora issued more 2026 securities, diluting the participation of other creditors. The move then gave Pimco and Silver Point enough votes to allow Incora to issue the new senior notes, the people said.
“Incora isn’t just diluting a lock-in position, but we believe they’ve also received consent from incoming creditors, which is rare,” said Valerie Potenza, head of high-yield research at Xtract Research. “Assuming there’s no litigation, it’s a way for a company to try to work with a group of creditors if they don’t have enough bondholders to do what they want. .”
For Incora, the deal significantly reduces the risk of near-term default, giving it enough liquidity to make a $100 million payment due in May. It also gives the company more time to improve cash flow amid a slow recovery in demand for widebody aircraft parts. Incora, based in Fort Worth, Texas, was created in March 2020 – days before the pandemic caused a near-total shutdown of air travel – through the combination of two Platinum-backed companies, and has debt over of $2 billion.
The company maintains that the transaction is in full compliance with all obligations set out in the bond documentation and will save it up to $90 million in interest charges, according to a person familiar with the matter.
Meanwhile, weakened parties received advice from Akin Gump Strauss Hauer & Feld and Perella Weinberg Partners, some people said. Akin did not respond to a request for comment, while Perella declined to comment.
Incora bonds jumped after the deal was struck, partially reversing an earlier decline, although they remain deeply distressed. The company’s 8.5% secured notes due 2024 rose nearly 8 cents on the dollar to 68 cents, while the 2026 bond climbed 5 cents to 67 cents. Its 13.125% debentures due 2027 jumped 13.5 cents to 43.5 cents.
“Sponsors continue to push the boundaries of liability protection and ultimately when things go wrong, lenders are stuck holding the bag,” said John McClain, high yield portfolio manager at Brandywine Global.
(Updates the ninth paragraph comment line.)
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