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Hertz has apparently adopted a brand new technique for managing its debt: The rigged bondholder vote.
How does an organization rig a vote on a debt contract? Properly, Hertz wished to vary the contract on $750mn of bonds, and wanted approval from homeowners of not less than 60 per cent of that debt. It was additionally allowed to promote as much as $500mn of further bonds below that contract, elevating the whole quantity of the debt to $1.25bn. It did so, in a sale that closed Thursday.
The trick is that all the newly issued bonds had been robotically categorised as “sure” votes. So the company announced today that it has reached the 60-per-cent threshold to vary its bond contract.
Sure, actually! See this line in a SEC filing in regards to the providing, flagged by Covenant Assessment earlier this week:
Purchasers of the Further First Lien Notes within the Providing shall be deemed to have consented to the Proposed Amendments to the indenture governing the First Lien Notes.
This vote rigging technique, as Covenant Assessment calls it, isn’t new. A handful of corporations have pursued it already — Revlon had a go at it, amongst its different debt dramas, and Bombardier settled with bondholders over this tactic earlier this 12 months.
Not like Bombardier, Hertz’s vote rigging doesn’t appear associated to any varieties of asset-stripping sort of transactions. (At the least not but.)
It as an alternative seems to be a manoeuvre to get room to tackle much more debt, in line with Covenant Assessment, which says it isn’t conscious of one other firm that has made one of these transfer for borrowing capability.
Hertz does have some uncertainty round timing of a few of its money wants, associated to separate litigation that has dominated that it’s on the hook for a $270mn fee to bondholders. Analysts at CreditSights write that whereas the corporate reviews it has reserved a fee, the court docket debate has centred on whether or not the corporate might want to put aside collateral for the bondholders whereas it appeals that call to the Supreme Court docket. From CreditSights (a sister publication to CR):
We view Hertz’s actions — together with its try to hunt SCOTUS overview, which we consider is unlikely to succeed — as an try to delay funds to bondholders, highlighting its present liquidity pressures.
Covenant Assessment says that Hertz’s vote-rigging transfer might be challenged as effectively. There’s an argument that the debt limits being modified qualify as “sacred rights” that might require approval of 100 per cent of bondholders.
One other fascinating a part of the proposed modification to the debt (additionally flagged by Covenant Assessment):
The opposite Proposed Modification. . . is so as to add a proviso stating that no additional add-on notes could also be issued below the Indenture with out the consent of Canso Funding Counsel Ltd. for as long as Canso holds any of the notes.
This requires Canso’s approval for any new debt below this explicit contract (it doesn’t forestall further borrowing in any respect, in fact), writes CR’s Ross Hallock. He continues:
. . . Canso is identical fund that got here in as a white knight to purchase up add-on notes issued by Bombardier in its efforts to fend off bondholder litigation associated to an alleged breach of a sale of considerably all belongings covenant . . . So, the vote rigging tactic is one thing that Canso may be very conversant in. One wonders if vote rigging for the Firm had been deliberate all alongside, and whether or not Canso is starting a brand new sort of funding with vote rigging as a part of its thesis.
Anybody who has ideas about Canso’s finish recreation ought to be happy to e-mail them in.
