If you remember, a while back, we discussed the distressed debt opportunity that was Six Flag's bank debt. Well since then, and as expected, Six Flags filed for Chapter 11. Here is an update.
Just for a little bankruptcy lesson before we get started – when a company files, it has entered an “exclusivity period”, in which it has 180 days to put together a plan of reorganization, although the plan can be extended by the bankruptcy court almost indefinitely if they feel the debtor is acting in good faith. After such time, if the company does not come up with anything, or the plan is disputed by too many creditors and cannot be confirmed, competing plans may be submitted by creditors. Ad an additive point, this is part of the new bankruptcy law that was enacted in 2005/2006.
The proposed “Support Plan”, yet to be confirmed, contemplates the existing secured bank lenders receive consideration upon confirmation of the plan composed of $600 million in new term loans with a L+700 margin, and the balance paid in equity which would represent 92% of the total equity in the reorganized firm. The Opco Notes (SFO) would receive 7% equity, the remaining Holdco Notes (SFI) would receive 1%.
This is a stark contrast from the proposed out of court restructuring that was abruptly abandoned after a holdout caused a lack of voting support to effect an out of court debt for equity exchange. Under this previously proposed exchange, the secured bank debt and the Opco Notes would have been unimpaired, and continue receiving interest payments as if nothing had changed. The Holdco notes would receive 85% of the equity, the Preferreds would receive 10%, and the remaining 5% would have gone to the existing shareholders.
For a judge to confirm this plan, Six Flags is going to have to prove that after paying bankruptcy fees and taking care of the secured bank debt, there will be a *very* marginal amount of value left to distribute to the junior creditors. I find it hard to believe that not more than 2 months ago Six could afford to reinstate the bank debt and the Opco Notes, implying they probably think the company is worth around $1.5 Billion (close to the book value of PPE, and 5.5x 2008 EBITDA), but now, they claim to have only enough residual value left to pay 1% to the Opco Notes?
Even taking into account bankruptcy costs which will dilute recovery from what it would have been out of court (I am assuming $150 million value, or 10% Enterprise Value), Six would still have $1.35 Billion left, which is enough to cover the approximate $1.1 Billion secure bank debt, with $250 Million left to distribute among the Opco and or Holdco Notes.
Six Flags stated in it’s 8-K that it had the unanimous support of the secured lender Steering Committee, however this may be misleading to some because although this is true, the steering committee represents only 50% of the secured bank lenders. For this plan to even have a shot in hell, 50% in number as well as 66% in dollar amount is needed, and this is not even taking into account the objections that will surely come from the unsecureds who will basically be hung out to dry. Avenue Capital, as a matter of fact, holds Six Flags secured bank debt, and it has openly stated it does not plan to consent to the plan (they were not represented on the Steering Committee). Avenue deemed the proposed Support Plan a “sweetheart deal” for secured lenders, leaving little for the unsecureds. While I’m sure Avenue had it’s philanthropist duties in mind when it released this statement, some of us would probably be inclined to think they hold a portion of the unsecureds.
As of close today, the Term Loan was quoted in the 95-96 context, the Opco Notes where around 61-62, and the unsecuredes were all around 10-11. Before the filing, the Term Loan was quoted around 76-78, the unsecuredes 18-20, and the Opco Notes 69-70. Obviously the market has responded favorably for the Term Lenders at the prospect of owning the company if this plan is somehow confirmed, and as should be expected, the unsecuredes fell on the news. If one were to believe, as I do, that this plan has a very slim chance of going anywhere, it may be interesting to consider playing some capital structure arbitrage and longing the unsecuredes while buying LCDS on the Term Debt. The idea is that the deal will be recut to give the unsecuredes more recovery (there can only be upside from 1% if it’s recut), which will likely take away from some of the secured bank debt’s “sweetheart” package.
Now, what is interesting to me is how well the opco bonds have hung in. I am very excited about this case for the simple reason that this will be a real fight. Bondholders and bank debt holders both have reasonable arguments - it now depends on how well they present their case.
Nonetheless, as we mentioned in our original recommendation, the bank debt in the low 70's was a "no brainer." This is a perfect situation for a bank lender in that: more than likely we are getting par back and there is a chance, albeit small, that we might get equity, which could push our recovery well over 100% of par.
This will be an interesting distressed debt case study to follow. We will update you with any big information that comes out of the docket.