With the current upheaval in the credit markets, companies with leveraged balance sheets have seen a dramatic change in the options available to them. As a result, leveraged companies should review their existing debt arrangements and available options.
Recent Example - Virgin Media
One company that recently took a number of steps to restructure its balance sheet is Virgin Media Inc., a Nasdaq-listed entertainment and communications company. The steps taken by Virgin Media improved its debt maturity profile in the face of difficult financial markets. Virgin Media has a leveraged balance sheet with a senior syndicated loan facility, several series of high yield bonds, and one series of convertible bonds. The company had prepaid most of its debt amortization payments under its senior loan facility through 2010 from cash flow and proceeds from capital markets transactions and was not in default or under threat of being in default under its financial covenants under its senior loan facility. However, given its debt maturity profile after 2010, it began a process in 2007 to review its refinancing options and to be prepared to access any of these options if the market opportunity materialized. This led first to the company refinancing amortizations through additional B tranches under its senior loan facility in the spring of 2007, and second to the company accessing the US convertible bond market in the spring of 2008. The proceeds in both cases were used to repay amortization payments under the company’s senior loan facility. Third, in the fall of 2008, the company obtained lenders' consent to complete a rescheduling of principal amortization payments due in 2010 and 2011 to provide more time to complete a refinancing of the entire senior facility in light of the foreseeable difficulties of achieving that in the near term. Key aspects of the company’s strategy were as follows:
- Continual dialogue with its board of directors to establish priorities and goals providing the ability to act quickly as markets changed.
- Obtaining support from its key relationship banks prior to launching its amendment process.
- Listening to its key advisors to understand what would be acceptable in a changing market.
- Preparing a package for its lenders that would ultimately be viewed favorably by all key constituents, lenders, bond holders, shareholders, business partners and employees.
Companies that need to address issues relating to their capital structure in the current market conditions, particularly by way of amending their credit agreements, should take into consideration the following points:
- Analyze current capital structure and financing arrangements – As a starting point for any process, it is imperative that the company has a clear understanding of where and when issues are likely to arise. For how long is the company likely to be able to meet its amortization payments and comply with its covenants? By when will a full refinancing be required? What are the restrictions and opportunities in the current financing arrangements, and what is the process for waivers and amendments?
- Address potential issues early – Ideally, the company should address any potential future issues before the market starts perceiving them as problems. By being proactive, it is likely that more options will remain open, that the company’s bargaining position with its lenders will be better, and that the various stakeholders and the public will see the company’s actions in a positive light, as a sign of prudence rather than impending failure.
- Consider all financing options – The company should look at the entire range of financing options that are available to it, such as equity, convertible instruments, bonds and bank facilities, in addition to other alternatives such as disposals. It should constantly monitor the availability of these options. Windows of opportunity for accessing capital may appear in different markets at different times and will likely be brief, given current market conditions. Be prepared to act quickly.
- Seek directions and approval from board of directors – Addressing capital structure issues in a comprehensive manner is likely to require tough decisions that may have profound effects on the company’s future financial and operational flexibility and may conflict with other potential objectives. Management should ensure that the board of directors is fully informed throughout the process and seek guidance early in the process as to the board’s priorities and expectations.
- Use key lenders as advisors – Making key lenders buy into the process by seeking their advice increases the chance of obtaining the approvals of those lenders. It is also important to seek their advice on structure and terms. It is, however, important to realize that lenders may have interests and priorities that are different from the company's, so it is important to structure transactions that balance these various interests. Lender groups are also diverse and have varying investment objectives. These differences need to be taken into account.
- Secure commitments from key lenders prior to public launch of amendment process – Obtaining firm commitments (including credit committee approval) for positive votes from lenders representing substantial voting power reduces the execution risk and enables the company to launch an amendment process with a strong positive momentum. The number of key lenders to involve will depend on factors such as how widely the company’s debt is held, the company’s relationships with specific lenders, and the logistical burden and confidentiality concerns associated with approaching a large number of lenders.
- Maintain absolute confidentiality – By running a disciplined process and avoiding any leaks prior to public launch, the company can retain the flexibility to abandon the process or revise the amendments without facing negative publicity. Moreover, by controlling the timing and contents of the initial announcement, the company will be able to introduce the amendments to the lender syndicate and the public in a planned way that is more likely to achieve positive momentum.
- Structure the amendments for all constituencies – The company should think carefully about the requirements of, and differences between, its various constituencies. It needs to structure the amendments in a way that will satisfy different lender groups, such as banks and funds or lenders in amortizing and non-amortizing tranches or lenders with divergent preferences for margin increases versus one-off fees, while also looking after the interests of the shareholders and other stakeholders in the company.
Fried Frank represented Virgin Media in its debt restructuring.