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Distressed Borrowers Seek Creative Lending to Survive Virus (1)

March 31, 2020, 1:21 PM

When PizzaExpress secured a new loan from a private credit firm earlier this month, it was forging a path other cash-strapped companies will likely follow in the era of coronavirus.

The distressed U.K. restaurant chain obtained 70 million pounds ($86 million) from HPS Investment Partners in mid-March. As a super senior loan, it will be repaid first in the event of a collapse. Now other companies are looking for investors willing to provide emergency cash at the most secure part of the debt stack.

Where contracts allow, this kind of borrowing could spell the difference between companies’ failure or survival. Ordinarily, existing lenders wouldn’t accept having debt placed ahead of them but in distressed or emergency situations they’re more likely to consider it favorably, according to Matthew Cox, a partner at law firm Baker & McKenzie in London.

“We expect to see more and more of this kind of lending taking place in the coming weeks,” he said, adding that his clients are “actively looking” at super senior opportunities.

Direct lending funds are looking to step into these situations where previously it would have been banks, he said.

“A trend is developing where alternative credit providers are plugging the gap as they did in some ways after the financial crisis,” said Cox.

Likely Candidates

On Tuesday cruise line operator Carnival Corp., which is forecasting a loss and has suspended its dividend, offered investors first-priority claim on its assets as it seeks to raise $3 billion of cash via senior secured notes.

Borrowers including French equipment rental firm Loxam and Spanish gaming company Cirsa, both with bonds quoted at distressed levels, are potential candidates for super senior lending, according to analysts at Spread Research and CreditSights respectively. Online travel agent eDreams Odigeo SA, whose notes are quoted around 50 cents on the euro, should also consider this kind of financing to address liquidity issues, say researchers at Covenant Review.

A spokesman for Loxam said the company doesn’t intend to seek a super senior loan. Cirsa declined to comment.

“This is clearly an option that is available to us,” said a spokesman for eDreams, adding that the company has drawn 170 million euros ($187 million) from its senior revolving credit facility. “This is one of the strengths of our balance sheet.”

Private equity owners and distressed debt funds are also natural providers of this kind of financing. KKR Credit Advisors provided a 50 million-euro senior secured loan to vending machine firm Selecta Group last week that will be repaid ahead of the company’s notes in the event of an enforcement

“We are urgently working with clients to find creative solutions,” said Korey Fevzi, partner at law firm Shearman & Sterling in London. Lenders will likely only provide liquidity if they are given a senior ranking, he said.

However, while some investors are studying opportunities to lend, others are trying to work out if debt is going to be placed above them in the structure, denting the value of their holdings. Subscribers to research firm Covenant Review are increasingly asking about ways that borrowers can raise this funding.

Investor lobby group European Leveraged Finance Association is hosting webinars to show its members how to find out whether high-yield bond covenants allow companies to issue this kind of debt.

Receivable Financing

Another corner of safe lending that will see a rise in activity is receivable financing, according to John Miesner, a director on KPMG’s debt advisory team. This kind of funding is attractive to lenders because they receive corporate invoices as collateral for loans, providing alternative recourse in the event of insolvency.

“Lenders will look to structure loans in this way to improve a business’s borrowing capacity,” he said.

(Updates with comment from Loxam, detail on Carnival)

--With assistance from Marianna Aragao and Antonio Vanuzzo.

To contact the reporter on this story:
Katie Linsell in London at

To contact the editors responsible for this story:
Vivianne Rodrigues at

Bruce Douglas

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