The cracks in the easy-money edifice started to appear in 2019, as several companies with complex capital structures suddenly teetered on the edge, going from heroes to zeroes with little warning as there were no covenants to trip. A prime example was Steinhoff. For holding the retailer’s empire together and working against the odds in other situations, Moelis is IFR’s Restructuring Adviser of the Year.
Moelis prides itself on a “one firm” approach to restructurings, being able to offer the same service to clients from Europe to the US to Asia. That approach proved highly useful in the past year as complex cross-border restructurings, fuelled by years of cheap debt, became marquee assignments.
With few covenant triggers to highlight impending problems, distressed companies with complicated multi-layered and multi-jurisdictional capital structures descend into trouble suddenly, with immediate and deep liquidity problems already baked in.
This has created tricky, and in many cases insurmountable, problems for company-side restructuring advisers drafted in at the last minute to find turnaround solutions.
As a result, the last year saw many high-profile European situations ending in liquidation, especially within the struggling retail sector.
Against this backdrop the success of the €11.8bn restructuring of South African retailer Steinhoff has been a major highlight of the recent debt restructuring market. The process was driven by Moelis, which was appointed as company adviser in December 2017. The deal closed in August 2019.
Steinhoff – which has assets around the world, such as Poundland in the UK, Mattress Firm in the US, Conforama in France as well as Pepkor across Africa and other businesses in Australia – was hit by an accounting scandal in December 2017, which sent its shares down 95%.
Initially liquidation of the group seemed the only outcome. But Moelis stemmed the immediate liquidity crisis, securing within a month of appointment new credit lines for the UK operating company and others. It had also sold the group’s stake in investment company PSG for R7.1bn (US$598m) and made other disposals.
“Moelis was there at the critical stage at the start and saved the company from bankruptcy in the first three months – other financial advisers were not involved at this time,” said Matthew Prest, co-head of Europe at Moelis. “We worked on all aspects of the deal.”
Moelis then began complicated discussions with creditor groups on a term sheet which saw all debt reinstated at par at holding companies Steinhoff Europe AG and Steinhoff Finance Holding by way of company voluntary arrangements, but with maturities extended out to December 2021.
Debt restructurings also took place at European property group Hemisphere and Mattress Firm in the US, implemented by way of a contractual agreement and a pre-arranged Chapter 11 filing respectively. It also refinanced French home furnishing chain Conforama via a conciliation process.
“It was a great outcome for the market. There were times where we thought the whole thing would implode but it didn’t. We delivered,” said Charles Noel-Johnson, co-head of EMEA restructuring.
Other company side assignments saw Moelis close Dubai International Capital’s US$1bn restructuring in April. The firm had acted for DIC’s parent company Dubai Holding. DIC defaulted in 2016 which resulted in its lenders making payment demands of US$350m from its parent.
Moelis together with Dubai Holding negotiated a consensual solution with lenders which effectively eliminated the parent’s exposure to DIC’s debt. “We have been in the Middle East for 10 years – no-one else comes near us,” said Noel-Johnson.
The firm was also the first adviser brought in to assist commodities trading house Noble on its torturous negotiations with creditors, after researcher Iceberg questioned the Singapore-listed company’s accounts.
This process, which saw US$5.9bn of debt restructured after more than a year of talks, involved many separate discussions with various parties and their advisers. The dramatic denouement required the company to shift its management centre to the UK and carry out schemes there and in Bermuda.
The lessons learnt at Noble helped Moelis assist creditors of Nyrstar several months later when the zinc miner, owned by another commodities trader Trafigura, issued an unexpected profits warning. Moelis managed to lift returns to noteholders after threatening to dislodge Trafigura’s rescue plan.
“We came up with this commodity-linked instrument which enabled our clients to get a much higher recovery than they would have got if we had gone down a more traditional route of just trying to get another bond and some cash payout,” said Noel-Johnson.
Other creditor-side credentials for Moelis included acting for an ad hoc committee of senior secured noteholders on the restructuring of German heat exchange manufacturer Galapagos, owned by private equity firm Triton.
Under the terms of the deal, which included a €140m new money injection by Triton and a deleveraging of the balance sheet and new money facilities, the noteholders got repaid at par.
In the US Moelis has a reputation for swinging for the fences, even if ultimately some of its most aggressive plans don’t quite work out. Moelis spent years fending off iHeart’s senior creditors only to eventually hand them the keys.
In the three-year battle leading up to that eventuality, however, Moelis arguably kept the company alive while trying to allow junior creditors a more meaningful recovery.
Moelis backed bond exchanges, refinancings, debt repurchases, and side-stepped a “springing lien” – a lien that would become effective once the company breached a covenant. Bondholders flatly rejected a US$14.6bn distressed debt exchange Moelis ran.
Controversially, Moelis backed a plan that saw iHeart move 100m shares of its stake in Clear Channel Outdoor Holdings to a new holding company. While iHeart was restricted from buying its own debt, the new holding company backed with the Clear Channel stock was not bound by iHeart’s covenants.
iHeart bondholders, owed nearly US$14bn, cried foul but the courts backed iHeart. Ultimately the Moelis manoeuvre was replicated in subsequent restructurings.
“We typically try to use innovative solutions,” said Bill Derrough, co-head of restructuring. “Most people would have said ‘just file the company’ and give the keys to senior creditors”. But as they were optimistic that the team could solve the bigger problems the Moelis team waded in.
iHeart did emerge from bankruptcy, cutting its debt by two-thirds from US$16.1bn to US$5.75bn, and later split its radio business from its billboard advertising business Clear Channel Outdoor.
The ultimate plan may not have been Moelis’, but the firm proved to be a tenacious advocate for its client and continued to stretch the boundaries of what is possible in a restructuring.
Moelis also defied naysayers as specialty chemical company Hexion looked to restructure some US$3.7bn. The battle for control of the company pitted senior creditors with a lock on most of the company’s collateral, including equipment and proprietary formulas, against junior creditors who were left with unencumbered assets – largely 40 factories around the world.
“It had all the makings of a massive litigation and a long bankruptcy,” said Derrough.
The senior creditors argued the buildings were worth nothing without the equipment and the formulas. The junior creditors said those assets couldn’t operate without the walls of the factory. And considering the chemical output, those locations would not be easy to relocate or replicate.
Parties on all sides said there wouldn’t be a deal and each demanded the other make concessions. The company was able to get some breathing room with a US$700m bankruptcy loan, half of which was secured by the company’s Dutch unit thereby avoiding a priming fight with US creditors.
Moelis was able to use its credibility with both sides to push a compromise that led to a fully consensual pre-packaged bankruptcy filing that was done in 90 days, again avoiding a drawn out spell in Chapter 11.
The firm, like other restructuring shops, was also kept busy in the troubled retail sector but Moelis picked its battles, assisting Neiman Marcus on its US$4.4bn exchange offer that extended debt maturities to 2023.
“Retail is a challenging market right now,” Derrough said. “In the important deals if we get involved we want to be sure we can make a difference in the outcome.”
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