A group of Arch Coal’s lenders that purportedly hold more than 50% of the approximately $1.9 billion term loan have directed the administrative agent to not cooperate with the company’s proposed uptier exchange offer, asserting, among other things, that the transaction triggers the MFN protection on the term loan and that the company cannot tap its incremental facility for non-cash consideration, according to a statement released by the company this morning.
While the company believes the lenders assertions, which were made in a July 28 letter to admin agent Bank of America Merrill Lynch, are “without merit” and it plans to “contest them vigorously,” Arch said that if the admin agent were to follow the lenders’ direction, the exchange offers would not be completed. The company adds that it has “expressly reserved all of its rights against the lenders who sent such letter.”
To recap, Arch Coal on July 3 launched a multitiered uptier exchange on four series of unsecured notes in an effort to deleverage its balance sheet and improve liquidity, with the majority of one series driving the deal. Note that the proposed transaction entails tapping the remaining capacity under the company’s incremental facility, as well as utilizing capacity under its revolving credit, to back the issuance of pari passu trust certificates issued to junior debtholders at premium to where the deeply distressed bonds trade. The trust certificates would pay 6.25%, effectively the same coupon as the term loan (L+500, 1.25% LIBOR floor).
As reported, sources earlier said that lenders had voiced concerns that the transaction should trigger the MFN on the existing term loan (see “Arch Coal TLB slides as lenders digest uptier bond exchange,” LCD News, July 10, 2015).
In a July 28 letter to admin agent Bank of America Merrill Lynch, lenders assert the following, according to Arch Coal:
- The proposed amendment to the revolver requires the consent of the majority of all lenders under the credit agreement;
- The transaction trips the MFN protection on the term loan, which is covered by 50 bps of MFN protection, since the effective yield on the incremental loan is more than 50 bps higher than that on the existing term loan;
- The credit agreement does not allow incremental term debt to be borrowed in a transaction for non-cash consideration;
- That the company is in default under the credit agreement for failure to pay previously invoiced legal expenses of counsel to a group of lenders under the credit agreement.
- The new intercreditor agreement is not acceptable;
- The proposed replacement of the collateral agent is not acceptable
In today’s statement, Arch refutes each of these as follows, in the same order as listed above:
- The company says this is incorrect, pointing to language in the credit agreement that stipulates that proposed revolver amendments “require the consent of only a majority of lenders making revolving loans.”
- With respect to the lenders’ claims that the transaction triggers the 50 bps of MFN protection, the company argues that there are no fees associated with the issuance of the incremental term debt per the exchange, and the definition of “effective yield” under the credit agreement takes into consideration only ‘“applicable interest rate margins, interest rate benchmark floors and all fees, including recurring, up-front or similar fees or original issue discount (amortized over four years following the date of incurrence thereof …) payable generally to the lenders making such Class of Loans….”’ The company adds that since it is exchanging more than $367 million of debt at a “substantially higher” interest rate for $154 million of term loans with a lower interest rate and $22 million of cash, “there is clearly no original issue discount in the nature of fees associated with the exchange offers.”
- The company argues there is no provision in the credit agreement requiring new term loans must be funded in cash, adding that “such lenders therefore were unable to cite any such provision.”
- The company argues that it has no obligation for reimbursement because it says the exchange offers are permitted by the credit agreement and that the invoices received cover a period of time prior to the public announcement of the exchange offers.
- The company deems the lenders’ claim that the new intercreditor agreement is not acceptable “irrelevant” because it says the credit agreement requires intercreditor documentation be “acceptable to the Administrative Agents in their sole discretion.” The company notes the documentation is the same as previously approved for use with its existing junior-lien debt.
- The company also deems the lenders’ claim that the replacement of the collateral agent is unacceptable to be “irrelevant,” noting that the credit agreement says “the administrative agents shall have the right, with the approval from the Borrower . . . to appoint a successor, such approval not to be unreasonably withheld or delayed.”
Click here to read the company’s full statement. The company is expected to release second-quarter results tomorrow.
Bloomberg News reported late last week that two groups of lenders were preparing to direct the agent not to sign off on the agreement. The report said Paul Weiss Rifkind Wharton & Garrison LLP and Kaye Scholer LLP are representing the lender groups.
Following the news today, the company’s covenant-lite term loan initially gained about 1.5 points, to bracket 57.5, though has since eased from highs, recently marked at 56.25/57.25, up about a three quarters of a point from yesterday.
However, recall the company’s term loan tumbled on the news of the exchange. By contrast, the paper had been up near 70 prior to the news of the exchange, so is down roughly 13 points since the news hit. Losses in the credit have been exacerbated by a deeply negative bias towards the coal sector. The average bid of coal loans in the S&P/LSTA Leveraged Loan Index had tumbled to 67.96% of par as of yesterday’s close, from 76.56 at the end of June.
S&P earlier this month downgraded by three notches the Arch Coal corporate credit rating to CC, from CCC+, and left the outlook as negative. The senior notes were also cut to CC, though from CCC-, but the loan rating was left at B-, with a 2H recovery rating. S&P said it views the related transactions to be distressed, and the determination is based on the company’s financial condition and the significant discounts associated with the exchange offer.
“We intend to lower the corporate credit rating to ‘SD’ and the affected issue-level ratings to ‘D’ on completion of the exchange offer. Subsequently, we would assign a corporate credit rating and outlook that would reflect the new capital structure,” explained S&P credit analyst Chiza B. Vitta.
Moody’s in May downgraded the company to Caa3, also maintaining its negative outlook.
Arch Coal’s term loan, originally $1.4 billion, dates back to May 2012, though the company subsequently placed two add-ons, the most recent of which was a $300 million fungible incremental loan placed in December 2013 to help back a tender offer for the company’s $600 million issue of 8.75% notes due 2016. That deal cleared the market at L+500, with a 1.25% floor, and was issued at 98. – Kerry Kantin