(Editor's note: The Debt Restructuring Snapshot is a new publishing format that highlights key aspects of U.S. LMTs (liability management transactions), specifically focusing on transactions where existing lender recoveries were impaired and not all lenders experienced the same impact. We provide a summary of the transaction, changes to the capital structure, the mechanics of the transaction, and the impact on recoveries and liquidity).
| Obligor profile | ||||
|---|---|---|---|---|
| Restructuring date | October 2024 | |||
| Current rating/Outlook | CCC+/Negative/-- | |||
| Location/primary industry/GICS | U.S./Transportation/Specialized Finance | |||
| Post-exchange total reported debt (estimated net change) | $958 million ($85 million) | |||
| Sponsor/owner | Oaktree Capital Management, Duration Capital Partners, and Wind Point Partners | |||
| Forecasts 2025 | ||||
| Liquidity ratio (x)/Assessment | 1.5/Less than adequate (next 12 months) | |||
| Debt to EBITDA* (x) | 18.9 | |||
| EBITDA to total interest* (x) | 0.5 | |||
| EBITDA to cash interest* (x) | 0.9 | |||
| *Adjusted by S&P Global Ratings. GICS--Global Industry Classification Standard. Source: S&P Global Ratings. | ||||
Transaction Summary
Restructuring type: Collateral/asset transfer; priming; double dip
Collateral/asset transfer
The company transferred approximately half of its assets, which generate 30% of EBITDA, to newly designated unrestricted subsidiary STG Distribution LLC (NewCo).
Priming
Existing lenders were given the opportunity to exchange their current term loan holdings for a mix of NewCo loans, with those contributing additional funds (ad hoc lenders) exchanging into a first-lien, first-out (FL1O) term loan. All non-ad-hoc lenders (i.e., those who did not contribute new money) were offered the chance to participate in the exchange but only into a mix of junior loans, like first-lien, second-out (FL2O) and first-lien, third-out (FL3O) term loans.
Double dip
The proceeds from the new and exchanged loans were then lent to Reception Purchaser LLC through a secured intercompany loan guaranteed on a first-lien basis by Reception Mezzanine Holdings LLC (its direct parent) and the subsidiary guarantors of the existing term loan (together with Reception Purchaser LLC and Reception Mezzanine Holdings LLC; collectively RemainCo). In addition to the intercompany loan being pledged to them as collateral, lenders of new term loans at NewCo also receive a secured first-lien guarantee from RemainCo, effectively creating two claims against the legacy obligors.
The market has, over time, developed certain conventions for different types of LMTs. While we here followed the market’s convention of collateral transfer, priming, and double dip, the net effect of this transaction ultimately results in an equivalent claim (with respect to RemainCo assets) and a structurally senior claim (with respect to NewCo assets) for participating lenders. This leads to an effective pari plus, or other potential interpretations.
| Reception Purchaser LLC--Original debt structure | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Original debt structure | Exchange prices | Effective ranking in waterfall | Maturity (year) | Rate (%) | Principal (mil. $) | Pre-exchange prices* | Recovery estimates (%) | ||
| RCF tranche A ($60 million) | At par | 1 | Mar-2027 | SOFR+6.00 | 60 (fully drawn) | 47, down from 68 on 8/28 | 60 | ||
| RCF tranche B (primarily to support the issuance of letters of credit) | Unexchanged | 1 | Mar-2027 | SOFR+6.00 | Varied | N.A. | NR | ||
| First-lien term loan | Various | 1 | Mar-2028 | SOFR+6.00 | 813 | 47, down from 72 on 8/28 | 60 | ||
| RCF--Revolving credit facility. N.A.--Not available. NR--Not rated. | |||||||||
| Reception Purchaser LLC--Post-exchange debt structure | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Post-exchange debt structure: | Exchanged from* | Effective ranking in waterfall | Maturity (year) | Rate (%) | Principal (mil. $) | At-close prices* | Recovery estimates (%) | |||||||||
| FL1O term loan | New money and original first-lien term loan | 1 | Oct-2029 | SOFR+7.50 cash or S+1.00 cash with option to PIK 725 bps for 36 months, S+7.50 cash thereafter | 190.6 (incl. $136.5mm of new money) | N.A. | 95 | |||||||||
| FL2O term loan | Original first lien and second lien term loans | 2 | Oct-2029 | SOFR+6.00 cash or S+1.00 cash with option to PIK 650 bps for 36 months, S+6.00 cash thereafter | 615.3 | N.A. | 45 | |||||||||
| FL3O term loan | Original first lien and second lien term loans | 3 | Oct-2029 | SOFR+6.00 cash or S+1.00 cash with option to PIK 600bps for 36 months, S+6.00 cash thereafter | 93.2 | N.A. | 0 | |||||||||
| Original RCF tranche A stub | -- | 4 (regarding transferred assets | Mar-2027 | SOFR+6.00 | 1.9 | 47.0 | 15 | |||||||||
| Original RCF tranche B | -- | 4 (regarding transferred assets | Mar-2027 | SOFR+6.00 | Varied | N.A. | NR | |||||||||
| Original term loan stub | -- | 4 (regarding transferred assets | Mar-2028 | SOFR+6.00 | 56.7 | 47.0 | 15 | |||||||||
| *Prices are based on indicative mid-price. FL1O--First-lien, first-out. FL2O--First-lien, second-out. FL30--First-lien, third-out. RCF--Revolving credit facility. SOFR--Secured overnight financing rate. PIK--Payment in kind. bps--Basis points. NR--Not rated. N.A.--Not available. Source: S&P Global Ratings. | ||||||||||||||||
Transaction Mechanics
An unrestricted subsidiary, NewCo, was created to hold the newly transferred assets. To facilitate this, the company amended its existing credit agreement to allow additional capacity for investments and to incur additional pari passu first-lien debt to accommodate the guarantees of NewCo’s debt and the secured intercompany term loan. The transferred assets and the intercompany loan collateralize the new credit facilities issued at NewCo, comprising:
- A $191 million FL1O term loan, including $137 million new money from ad hoc lenders, who, in exchange, converted their term loan holdings into the remaining FL1O;
- A $615 million FL2O term loan;
- A $93 million FL3O term loan; and
- All of these loans were exchanged from existing term loans at discounts to par at varying rates.
At transaction close, 93% of the existing term loan lenders (based on principal balance outstanding) participated in the exchange. Additionally, lenders of tranche A of the existing revolving credit facility were given the option to swap on a par-for-par basis into the FL2O term loan at NewCo.
Impact On Recovery
Impact On Liquidity
- S&P Global Ratings’ estimated recovery prospects for the existing unexchanged term loan have weakened to 15% from 60% for two key reasons. First, following the asset transfer, their collateral has been considerably reduced--about 50% based on asset values or 30% based on EBITDA generation. Second, recovery potential is further diluted by the guarantee from RemainCo for the benefit of NewCo debt and the addition of a secured intercompany loan (equivalent in size to the NewCo debt, and also guaranteed by existing loan parties). Both the new debt guarantee and intercompany loan are pari passu with the existing term loan. However, the impact is partially mitigated by a substantial reduction in legacy debt, as most of the existing term loan and revolver are exchanged, leaving only a small portion ($57 million) remaining.
- We don’t anticipate that the existing term loan will benefit from the transferred assets given its structurally junior position relative to the NewCo debt.
- The recovery position of the ad hoc group of lenders has improved as a result of the transaction. We expect a very high recovery (rounded estimate: 95%) for the FL1O term loan, although this calculation does not reflect the loss already incurred from the slight discounts to par that was part of the debt exchange.
- However, for lenders who did not contribute new money, the recovery position has declined; we expect an average recovery (rounded estimate: 45%) for the FL2O term loan and no recovery for the FL3O term loan in the event of a payment default.
- Still, exchange participants recovery prospects fare better than non-participants following the transaction. Not only are they on par with the remaining legacy term loan holders regarding RemainCo assets (consisting largely of the legacy XPOI business), but they also now hold structurally senior claims on the transferred assets. In a hypothetical bankruptcy scenario, these lenders could pursue recovery from the company via both the secured guarantee provided to them and the intercompany loan receivable that collateralizes the NewCo debt, strengthening their potential recovery through these dual claims. To be clear, these estimated recoveries do not reflect the loss already incurred from the slight discounts to par that were part of the debt exchanges.
- The company received $136.5 million in new money along with a $50 million equity infusion from the private equity sponsor, improving its liquidity position.
- Additionally, despite the overall higher pricing, each of the three new term loans permits a substantial portion of the interest to be paid-in-kind (PIK) for the next 36 months, which we estimate will reduce the cash interest outlay (by approximately $45 million) to $76 million for 2025.
- Nevertheless, we anticipate continued cash burn through the remainder of 2024 and into 2025, as ongoing operating underperformance and a slow freight cycle recovery are expected. This would likely reduce the company’s cash balance to about $50 million by the end of 2025.
This report does not constitute a rating action.
| Primary Contact: | Mayur D Bhutani, Toronto 1-4165072582; mayur.bhutani@spglobal.com |
| Recovery Analyst: | Hanna Zhang, New York 1-212-438-8288; Hanna.Zhang@spglobal.com |
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