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TMT liability management exercises scare creditors with dastardly terms

Lumen Technologies spooked markets last Halloween when the telecom group proposed an aggressive liability management exercise that pitted creditors against each other. The infamous announcement kicked off months of fighting at Lumen and started a wave of LMEs at other firms in the technology media and telecom space.

“It was a scary trick or treat and we were tricked!” said a credit analyst of Lumen’s 31 October earnings call. While Lumen ultimately struck a deal that received widespread support, the LME left the group with a hefty debt load and only a few more years of runway to turn around its business.

At least 11 companies in the sector have already executed some types of LME transaction such as distressed exchanges or drop downs, according to Debtwire reporting and data.

Advisors and investors say they expect many more frights in the coming quarters. Around 20 firms are candidates for possible LME transactions, with several creditor groups already formed.

“I see more LMEs coming in telecom and the TMT world,” said Douglas Mintz, a partner at Schulte Roth & Zabel. “There’s a lot of debt that’s coming due, a lot of companies that are underperforming, and capital structures that probably need refurbishing.”

LMEs can help companies extend debt maturities and boost liquidity without filing for bankruptcy, but market participants question if these transactions truly benefit companies who are already struggling with existential problems.

“If kicking the can down the road and giving management more time maximizes enterprise value, then by all means an extension makes sense,” said Daniel Miller, chief credit officer at Capra Ibex, adding that declining rates and earnings improvements can contribute to some companies’ success over time. “But there are some businesses with structural problems where it doesn’t make sense to kick the can down the road.”

Companies can work within their capital structures and execute liability management exercises for a variety of reasons, such as general distress or liquidity issues, according to Brian Lohan, partner at Clifford Chance. “That’s a much different scenario than pursuing a deal that puts a few creditors in a better position and gets the borrower some runway, but the company does not believe it has a realistic prospect of turning its business around.”

Chatham Asset Management publicly sent a letter to Sinclair this month stating that the investor supports a traditional refinancing effort, like a debt exchange for the broadcaster’s upcoming maturities, rather than an aggressive LME.

“We think this is the best option for Sinclair and its stakeholders and would strengthen the market’s confidence in the company,” said the letter. “To the contrary, a more complicated refinancing effort that divides pledged collateral would alienate existing creditors and lead to further stress on the company’s existing debt and equity.”

Declining advertising revenue for traditional media companies and subscriber loss for both media and telecom issuers has raised alarm bells for investors, pushing creditors concerned about liquidity and maturity issues to form ad hoc groups.

Radio and podcasting giant iHeartMedia is one of the most recent situations where creditors started circling with Milbank, Gibson Dunn and Paul Weiss amid weak first quarter earnings, Debtwire previously reported.

“Broadcast radio is a great example of an industry with structural limitations,” Capra Ibex’s Miller said. “Even the best managers in the world are not going to produce consistent earnings growth in these industries with structural problems.”

In iHeart’s case, creditors rushed to organize after management said in early May that the company was evaluating opportunities for its capital structure.

At Altice USAa large provider of cable and fiber telecom, an ad hoc group of creditors preemptively formed with Akin and PJT Partners following controversy at European sister company Altice France over a potential LME, as reported. Investors have also organized at TV and radio broadcaster Cox Media Group, satellite provider Telesat, Canadian fiber company Xplore and telecom supplier CommScope.

Creditors have their guards up when it comes to LMEs since several recent transactions pitted creditors against each other or ended up in situations where the companies exploited credit agreements.

Rackspace Technology, a listed cloud company that is majority owned by Apollo, executed an exchange this year that provided different terms for various creditors through public and private exchanges, while raising a new USD 275m super-priority first-lien, first-out loan. The exchanges offered more favorable terms to lenders who negotiated and signed a co-op agreement.

Holders of EchoStar’s DISH DBS unit’s senior secured notes filed suit via trustee US Bank this spring alleging the telecom group fraudulently transferred assets out of the reach of bondholders “in exchange for nothing.” Milbank is advising the holders, while White & Case is working with EchoStar.

Litigation against EchoStar is intended in part to scare away private credit funds from providing new financing to EchoStar secured by the assets, said two sources familiar with the matter. The company is under pressure to raise capital to address upcoming maturities and fund an expensive buildout out of a US wireless network.

Last year, controlling shareholder Charlie Ergen merged EchoStar and DISH Networks and weeks later moved select wireless spectrum assets and DISH TV subscribers out of reach of creditors at multiple DISH subsidiaries. Bondholders across the capital structure quickly organized into multiple groups and Milbank formed a co-op among DISH DBS secured and unsecured bonds. The moves blocked DISH from completing proposed exchanges for several tranches of bonds.

LMEs in the past have not proved a panacea for struggling companies and many have ended up filing for bankruptcy. Envision HealthcareWesco Aircraft Holdings and Robertshaw have all faced in court litigation over the LMEs struck prior to filing.

“If an LME transaction ends up being litigated in bankruptcy, the litigation can take the center stage and make a bankruptcy more complicated than it would be if the main focus were reorganizing the company’s balance sheet and operations,” said Maja Zerjal Fink, partner at Clifford Chance.