After being decimated in the recession, speciality alumina producer Almatis has successfully restructured its debt thanks to the work of Versatus Advisers.
When a company finds itself having to restructure its debt, it has usually been through some serious drama. In the case of Almatis, the tug-of-war that accompanied its restructuring was rather more dramatic than its original problems. Helping the underdog junior lenders to fight their corner with eventual emphatic success was the recently established debt advisory firm, Versatus Advisers.
Versatus ('turned around' in Latin) was set up only last year by CEO Michael Berry, a former leveraged finance chief at Deutsche Bank and WestLB, and, most recently, Nomura International. The CEO has 30 years of banking experience under his belt. Acquaintances say his mounting horror at lax lending criteria led him to start the business, in anticipation of a growing market in distressed debt situations. Mr Berry says merely that Versatus advises on raising new debt as well as refinancings and restructurings, and points out that it is, unusually, staffed by former bankers as opposed to accountants or mergers and acquisitions specialists.
Attention grabber
Since it opened its doors, Versatus has advised on one fundraising and three restructurings, of which Almatis is by far the biggest and which has brought it wider attention. Almatis produces speciality alumina for a variety of uses, including linings for steel furnaces, holding one-third of the world market. It is registered in the Netherlands and headquartered in Germany, with manufacturing facilities in both countries and elsewhere, including, importantly, the US. It was spun out of Alcoa in 2004 and, by early 2009, was 100% owned by private equity firm Dubai International Capital (DIC).
Almatis has traditionally been relatively recession-proof but this time around it did not escape. Falling sales began to bite late in the cycle, but in spring 2009 it forecast that 2009 earnings before interest, taxes, depreciation and amortisation (EBITDA) would plummet from 2008's $158m to a mere $16.8m. It breached loan covenants and stopped paying interest on its debt.
The debt in question totalled $970m, raised in 2007 in four tranches with maturities of seven to 10 years: $660m senior secured; $75m second lien; $175m mezzanine; and $60m junior mezzanine. As the prospect of major default hit home, the senior debt began trading in the secondary market at discounts of up to 70% and the junior debt became virtually worthless. Different classes of lenders got into their respective huddles.
The position of the junior lenders was not particularly hopeful. If the earnings forecast was correct, the company was worth considerably less than the senior debt, giving the junior lenders zero economic interest in any restructuring. That was the view of the senior lenders and they proposed taking control of the company, wiping out the claims of more subordinated lenders. Having been written out of the script, the junior group had difficulty getting access or information.
But those at the back of the creditors' queue were not willing to take the situation - or the valuation - lying down. In July 2009, Versatus was appointed as financial advisor to the Mezzanine Steering Committee, made up of Alcentra, Babson Capital, Permira Debt Managers and Northwestern Mutual, and representing 16 mezzanine and junior mezzanine lenders via 40 legal entities. Almatis had appointed Close Brothers as financial advisors and the senior lenders would appoint NM Rothschild & Sons.
"The junior lenders felt that Almatis was an extremely strong company which dominated its market and had a tradition of making good profits," says Mr Berry. "It was clearly having a tough time, but they felt that the forecasts were on the low side and that it would recover more quickly and more thoroughly than was expected by management and the senior lenders."
Material costs
One important negative was the expiry of a key supply contract. When Alcoa sold the business, it agreed to continue supplying raw materials at subsidised prices for a fixed period. That period ran out in 2009, meaning that Almatis would now have to pay more for its feedstock, and some argued that this would permanently reduce the company's profitability, even if it managed to stage a recovery.
"We disagreed," says Versatus managing director Jacco Brouwer, who used to run ABN Amro's London leveraged finance team. "We believed Almatis had such a strong market position that, even if it had to pay full market prices, it could pass some of that on to its customers. We believed that the company was being too pessimistic about the outlook for sales volumes and prices, which proved to be true."
It did turn out to be true, but it would cost much time and money before any restructuring could be agreed. Oaktree Capital emerged as a substantial owner of the senior debt, acquired as prices fell.
Vulture fund Oaktree has been a notable 'loan-to-own' practitioner, buying cheap distressed debt which it hopes, with some success, to convert to equity.
As the negotiations progressed, different parties changed allegiances along the way. At first DIC said it would work with Oaktree on a solution, though this marriage dissolved rapidly.
Early manoeuvrings included a proposal to writedown the senior debt to $525m and give senior lenders 97% of the equity, leaving second lien lenders with 2%, mezzanine lenders with 0.75% and the junior mezzanine group with 0.25%. The juniors countered with a proposal to leave the first lien debt in place, which was rejected, and then suggested an amended debt and equity structure.
By October, Oaktree had built alliances to establish a blocking minority of about one-third of the votes, though it carried on buying - it eventually owned 38% of the senior debt. It suggested a more aggressive debt writedown to $400m. DIC was now talking to the mezzanine lenders. Together they drew up a plan whereby DIC would inject $50m of new money to buy back and pay down a portion of first lien debt at 80%, with the remainder left whole, and buy back some second lien debt at 20%, converting the balance to discounted payment in kind (PIK) notes and 4.5% of the equity. Mezzanine claims would be converted to 35.5% of the equity, leaving 60% with DIC.
In December, the mezzanine and Oaktree-led schemes were put to a vote, with no majority support for either deal, confirming that nothing could be done without Oaktree's assent. But all this time the financial results from Almatis were improving, bolstering the juniors' claim to an economic interest. "We were convinced that the earnings outturn for 2009 would be closer to $85m than $16.5m," says Mr Berry. "That strengthened the resolve of the other parties." In fact, they were $81.2m, with a monthly run-rate well above $100m.
The group ultimately realised that the only way to get around the obstacle would be to refinance the senior debt in its entirety. The high-yield bond markets were in good shape and DIC started to discuss an issue with a number of investment banks. "It would be difficult for the senior lenders to argue against a refinancing at par," says Mr Brouwer.
That was not the outcome that Oaktree wanted, and it now pushed for the company to file for Chapter 11 bankruptcy. Company management was keen for the impasse to end and wary of taking its chances in the high-yield markets, and it agreed. If Almatis entered Chapter 11, the juniors would have to prove their economic interest in court.
New proposals
Two more competing schemes were drawn up, with DIC and the mezzanine lenders proposing a senior and subordinated high-yield refinancing. This included $100m of new money from DIC, which would have 60% of the equity. The mezzanine lenders would take 40% and the second lien lenders would convert their entire claims to a PIK note. Some of the senior lenders now backed this plan. The others, and the company, put forward their own plan of reorganisation, writing down senior debt to $422m, leaving about 80% of the equity with Oaktree. This won two-thirds of senior support in a formal Chapter 11 ballot, and the company filed for Chapter 11 at the end of April, submitting its plan.
The junior group contested it and a valuation hearing was scheduled for July 19. At the same time, DIC sought to remove the uncertainty of a bond issue by securing a $540m private placement (in euro and US dollar high-yield notes). This was coordinated by JPMorgan and Bank of America Merrill Lynch and would be placed with GSO Capital Partners, Goldentree and Sankaty Advisors. Otherwise, its latest proposal remained the same. The company finally agreed, and the court accepted this new plan of reorganisation, which was finally voted through in a new ballot, 18 months after the initial situation arose.
"The restructurings of 2000 generally involved homogenous groups of lenders but today you see more clashes of interests," says Mr Berry. "It's easy for those with an economic interest to lose it because of hostile and precipitate action from other lenders. This showed that persistence can be rewarded. We were able to help our clients' gird their loins and keep struggling until the truth was out."
