Distressed Debt Insights: CEDC Exchange as Outlined Just a Starting Point

Since the founding of the Distressed Debt Investors Club, Central European Distribution Corporation has been written up three times. Yesterday, CEDC launched exchange offers yesterday hoping to achieve an out-of-court resolution. The below article is not just a rehash of news reports and sell side commentary that has been put out today, but includes insights from a variety of sources that Distressed Debt Investing have spoken to over the past 24 hours.

While the offering memorandum, which was informed by analysis from financial advisor Houlihan Lokey, details a plan that would slash debt by $750 million, leaving it with just one $500 million issue of secured 6.5% notes, the reason to launch the exchange now was more to get the 20-day clock ticking to start elicit support for the final deal that will allow this to get done out of court, according to sources. Various options are on the table, sources said, while the whole process is backstopped by a plan to reorganize via Chapter 11 if necessary.

Important to the process has been the cooperation of Russian billionaire Roustam Tariko and his firm Roust Trading, Roust Trading, which owned approximately 19.47% of CEDC’s existing common stock as of Feb. 15, owns approximately $102.5 million aggregate 2013 converitble notes, according to the filing. Tariko doesn’t fully support the plan exactly the way it is, though through advice from advisors Blackstone and White & Case, he’s been communicating with the company to try and get this done out of court, or at least via a pre-negotiated or pre-arranged bankruptcy filing best for all concerned, according to sources – still short of a pre-packaged bankruptcy. The company, though Russian owned and the largest vodka producer in Poland, would file in Delaware.

Unfortunately for the convertible notes, Tariko’s negotiations appear to be aimed at retaining a large ownership stake and getting recovery through his other lending to the European spirits distributor, according to sources. Accordingly, neither the proposed or the alternative plan in the offering memorandum have positive outcomes for the converts or the equity compared with their levels yesterday before the news came out. 

The company's stock, trading under CEDC on the Nasdaq exchange, plummeted 60% to close at $0.62 yesterday (though the news of the exchange wasn’t publicly released until after market close, sources involved note that there was clearly a leak). The stock was up 3 cents today as of 3 p.m. EST. The 3% convertible bonds backing CEDC traded in two larger odd lots today at 10.5 and 11, quoted down at that level, compared with quotes yesterday at 15/23, according to sources, after trading at 24 and 24.5 last week.

The exchange offers are part of a financial restructuring prompted in part by the impending March 15 maturity of the converts. Specifically, it would give holders of the secured notes due 2016 65% of the common stock in CEDC. Those notes total $957 million, to be replaced with $500 million aggregate principal amount of new 6.5% secured notes due 2020. Holders of the $258 million in 3% converts, and Roust, which is owed $20 million in unsecured notes, together would share pro rata in 10% of CEDC's common stock. A separate $50 million secured credit facility provided by RTL would be converted into 20% of CEDC's common stock, according to the release.

The offer is conditioned upon the approval by the current stockholders of CEDC of a 64.51 to 1 reverse stock split and the issuance of new common stock.The offer expires 11:59 p.m. EST on March 22.

The alternative offer from a committee of holders of the 2016 notes and Tariko through his firm Roust Trading would give 2016 holders $172 million in cash and $450 million of new secured notes due 2018, bearing interest of 8%, increasing to 9% in year two and 10% after three years, and $200 million of new 10% convertible PIK notes due 2018, convertible after 18 months into 20% of CEDC’s equity, increasing to 25% if converted in 2015, 30% if converted in 2016 and then 35% if converted in 2016 or thereafter. The 2013 converts and Roust’s notes would be exchanged for as much as 15% of the total common stock. Roust would own approximately 85% of the equity of CEDC in this scenario on account of the new equity investment and the conversion of the $50 million facility into equity. The proposal has not been formally presented to the board yet.
Skadden, Arps is counsel for CEDC; Houlihan Lokey was the investment banker; and Alvarez & Marsal was financial advisor in connection with the plan.

Also, the way the memorandum was written renders Roust’s previous issue with the $30 million put option moot, as there’s a 90-day waiver between Roust and CEDC. Tariko was trying to extend out the exercise date of his put options for 5.7 million shares of commons stock but CEDC didn’t agree, so Roust sent a put notice that it planned on exercising the put at above the market price.

Tariko had been in dispute with the company, claiming it was no longer required to complete an acquisition of 28% of CEDC because the company’s restatements last year breached the agreement. Since then, CEDC and Russian Standard have been in negotiations, resulting in revised terms designed to turn the spirits distributor around.

A CEDC spokesman declined to comment. - Max Frumes


Anonymous,  2/27/2013  

Why does anyone think the current equity should get 5 percent of the company if the unsecureds are only getting 10%?

How to invest 3/02/2013  

Because 5% is fair.


hunter [at] distressed-debt-investing [dot] com

About Me

I have spent the majority of my career as a value investor. For the past 8 years, I have worked on the buy side as a distressed debt and high yield investor.