Insights series / 26 July 2021
4 high profile examples of debt-for-control strategies
The World Bank puts the global economic toll of Covid-19 at about $10tn dollars for 2020. It calculates the global economy shrank approximately 4.5% – a drop not seen since the Great Depression and two World Wars. Covid-19 therefore represents the single largest disruption to business in living memory.
Amid this disruption a number of businesses shuttered. Others were able to come to agreements with lenders operating distressed debt and debt-for-control strategies.
Skilled lawyers and fund administrators have much to offer managers pursuing this strategy: during the restructuring planning process, around court dates, in taking direct control of the company, its assets, remaining debts and support around transitioning employees and of course any future exit - all of which has to be provisioned for.
Debt to equity conversions can take place through a consensual out of court process, bankruptcy proceedings or local law processes binding to creditors. If the manager’s claim to the equity is successful through one of these routes, the debt is then converted to equity under its plan of reorganisation (if in the US) or the jurisdiction’s relevant restructuring or insolvency frameworks, through which third-party equity and (usually unsecured) creditor positions are usually exited.
What follows is a collection of high-profile examples of the debt-for-control strategy in action.
1. FatFace – September 2020
Fat Face, the retailer named after the Face de Bellevarde slope by its ski-enthusiast founders, restructured in 2020 following an accumulation of significant operating leverage.
The restructuring deal gave the group a cash injection of £15m and ownership transferred from then owner Bridgepoint to the company’s existing lenders, a group that included Alcentra, Goldman Sachs, HIG and Lloyds.
Following the restructure, the company released a statement saying the deal enabled it to deliver its current business strategy whilst also supporting any funding requirements arising as a consequence of the coronavirus (COVID-19).
Crestbridge Corporate Service team was instructed on the restructure, working together with a group of advisors that included law firm Carey Olsen.
2. Pizza Express – $519m deal, November 2020
Even before the Covid-19 pandemic, Pizza Express was having difficulty with challenges facing the casual dining sector. Facing calls from creditors to restructure its $1.5bn debt burden, it started to close restaurants and lay off staff. The company's situation was exacerbated by the UK government’s lockdown in late March 2020.
The restructuring of Pizza Express was announced in August of the same year, with plans unveiled that would lead to creditors taking over the company from owners Honey Capital, the Chinese private equity firm, in a debt-for-equity swap. The deal delivered the external debt of Pizza Express to $445m, down 43.4% from $1.03bn, whilst injecting $200m in new funds to the firm. Existing unsecured bondholders of the group were entitled to a minority position in the new company post-restructure.
The restructure took place under the UK’s new Restructure Plan procedure, introduced in June 2020, which meant the company was amongst the first to use it.
Crestbridge’s Corporate Services team also acted on the corporate restructure together with a number of other partners that helped the company secure its future.
3. Cirque Du Soleil - $1.275bn deal, November 2020
High-flying acrobatics troupe Cirque Du Soleil filed for bankruptcy protection in June 2020, following the outbreak of Covid-19 and subsequent show cancellations and performer lay-offs.
A group of creditors, led by Canadian fund manager Catalyst Capital Group, reached a “stalking horse” agreement with the performance company. A stalking horse is a bid agreed in advance of an auction, to ensure an effective reserve price. This pre-agreed bid comprised $900m in debt forgiveness and up to $375m in cash injections to help the show go on.
Cirque Du Soleil’s president and CEO commented that he was “grateful for the trust our new owners have placed in our management team.” The deal allows the performance company to build upon their international success and offers them the opportunity to apply discipline to their operations and growth, into the future.
4. Town Sport International – $80m deal, December 2020
Town Sport International, a US fitness operator and owners of brands like New York Sports Club and Boston Sports Club, filed for bankruptcy protection in September 2020, one of a number of other fitness related businesses to do so in the States. However, by December 2020, the company had successfully sold itself out of bankruptcy, thereby securing its future. The firm had turned to a group of its lenders, led by Tacit Capital, in an $80m debt to equity exchange deal, under which the group of lenders were granted control over the US gym chain.
Rather than shutting down as a response to the Coronavirus pandemic and the various lockdowns that were required throughout 2020, the deal enabled Town Sports to restructure its debts and remain open for business. The deal, the company said in a statement, would allow it not just to survive but to return as a thriving powerhouse in the fitness industry, better positioned to serve members into the future.
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