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Hertz has apparently adopted a new strategy for managing its debt: The rigged bondholder vote.
How does a company rig a vote on a debt contract? Well, Hertz wanted to change the contract on $750mn of bonds, and needed approval from owners of at least 60 per cent of that debt. It was also allowed to sell up to $500mn of additional bonds under that contract, raising the total amount of the debt to $1.25bn. It did so, in a sale that closed Thursday.
The trick is that all of the newly issued bonds were automatically categorised as “yes” votes. So the company announced today that it has reached the 60-per-cent threshold to change its bond contract.
Yes, really! See this line in a SEC filing about the offering, flagged by Covenant Review earlier this week:
Purchasers of the Additional First Lien Notes in the Offering shall be deemed to have consented to the Proposed Amendments to the indenture governing the First Lien Notes.
This vote rigging strategy, as Covenant Review calls it, isn’t new. A handful of companies have pursued it already — Revlon had a go at it, among its other debt dramas, and Bombardier settled with bondholders over this tactic earlier this year.
Unlike Bombardier, Hertz’s vote rigging doesn’t seem related to any types of asset-stripping type of transactions. (At least not yet.)
It instead appears to be a manoeuvre to get room to take on even more debt, according to Covenant Review, which says it isn’t aware of another company that has made this type of move for borrowing capacity.
Hertz does have some uncertainty around timing of some of its cash needs, related to separate litigation that has ruled that it’s on the hook for a $270mn payment to bondholders. Analysts at CreditSights write that while the company reports it has reserved a payment, the court debate has centred on whether the company will need to set aside collateral for the bondholders while it appeals that decision to the Supreme Court. From CreditSights (a sister publication to CR):
We view Hertz’s actions — including its attempt to seek SCOTUS review, which we believe is unlikely to succeed — as an attempt to delay payments to bondholders, highlighting its current liquidity pressures.
Covenant Review says that Hertz’s vote-rigging move could be challenged as well. There’s an argument that the debt limits being changed qualify as “sacred rights” that would require approval of 100 per cent of bondholders.
Another interesting part of the proposed amendment to the debt (also flagged by Covenant Review):
The other Proposed Amendment. . . is to add a proviso stating that no further add-on notes may be issued under the Indenture without the consent of Canso Investment Counsel Ltd. for so long as Canso holds any of the notes.
This requires Canso’s approval for any new debt under this particular contract (it doesn’t prevent additional borrowing at all, of course), writes CR’s Ross Hallock. He continues:
. . . Canso is the same fund that came in as a white knight to buy up add-on notes issued by Bombardier in its efforts to fend off bondholder litigation related to an alleged breach of a sale of substantially all assets covenant . . . So, the vote rigging tactic is something that Canso is very familiar with. One wonders if vote rigging for the Company had been planned all along, and whether Canso is beginning a new type of investment with vote rigging as part of its thesis.
Anyone who has thoughts about Canso’s end game should feel free to email them in.
Read the full article here