FriendFinder Large First-Lien Holders Bid Towards Par in Expectation of Refi

FriendFinder’s 14% first-lien notes due September 2013 have been bid up to the 98 context on the expectation of a refinancing that would refinance the first-lien debt at par and include an equitization of the second-lien debt, according to sources.

A lot of options are still available, including whether or not the company decides to go private, according to sources, but communications are moving forward looking with the aim of coming to a suitable deal for all parties involved well in front of the May 6 deadline of the most recent forbearance agreement.

Last week a large odd lot transacted at about 97 and the bonds were immediately bid higher following the trade, according to sources, as the largest holders are still looking to be buyers of the paper at 96/97.5. That was an indication that first-liens expect to be refinanced out at par, which sources close to the situation say is of high likelihood. The movement was the first since the company announced that forbearance extension through May 6 and skip its excess cash flow payment to “take advantage of what management believes are current favorable market conditions to refinance.”

Even in a hot debt capital markets, a straight refinancing has for months has not been probable for the 2013 notes without some further restructuring, according to sources. The notes traded as low as 71 in August, but have steadily traded up since that time as the company started to work with bondholders on an amendment and refinancing.

The company had been unable to come to an agreement with the holders of second-lien notes, and already had to obtain an extension of a waiver from the second-lien PIK notes from certain covenants. The second-lien notes would be worthless in a bankruptcy scenario, according to sources, so much of the free cash flow has been used to pay down the first-liens. The company founder Andrew Conru, an early internet entrepreneur enriched by the partial sale of FriendFinder, through a trust owned 23.4% of the company as of April 20, according to the company’s most recent disclosures, as well as nearly all of the second-lien notes along with co-founder Lars Mapstead, according to sources. Conru also owns a portion of the first-lien debt and has largely been seen as driving the negotiations, according to sources.

FriendFinder was also notified early February that it again failed to meet Nasdaq’s $1 threshold and $15 million minimum market cap over the required 180 days and was subject to delisting. The company said it would appeal.

The company has $213 million in 14% first-lien notes outstanding as of Sept. 31; $9.6 million in 14% cash pay second lien notes due 2013 and $280.53 million in 11.5% second-lien PIK notes due 2014.

The company retained CRT Capital Group LLC as financial advisor to help explore opportunities to refinance the notes late last year, according to a disclosure in December. Previously Imperial Capital was the investment banker for the company during much of its financing changes, according to sources.

Holders of approximately 94% of the 14% notes and the holders of 100% cash pay notes due 2013 agreed to the forbearance.

The existing capital structure was put in place October 2010, followed by multiple adjustments to the company’s financial arrangements with lenders.

Calls and emails sent to the company and CRT requesting comment were not responded to by press time. - Max Frumes

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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

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Distressed Debt: Aurelius Joins J.P. Morgan In MF Global Case

Aurelius Capital Management has joined the motion to allow JP Morgan to prosecute in order to resolve a claim over a portion of MF Global's $1.2 billion revolver, according to a filing today.  According to court documents, Aurelius is a lender under the ~$1.2 billion Liquidity Facility.

On Feb. 13, JPMorgan (JPM), as administrative agent and as a lender to MF Global motioned to prosecute or settle an issue regarding at least $928 million of the revolver facility that was transferred to a unit of the company referred to as MF Global Finance, or Finco, just before the bankruptcy of MF Global in October 2011.

In the Feb 13. motion, JPM points out by avoiding the $928 million of the HoldCo's intercompany claims (and subordinating the claim of Holdco vs Finco), recoveries to Finco could increase substantially. The current proposed plan allows the intercompany claim in full against Finco (a double dip) but language on whether an offsetting claim from Finco to Holdco is uncertain at best. As background, Finco drew down on the Amended Liquidity Facility in the two weeks prior to MF Global's bankruptcy.

The plan currently proposed was signed by co-proponents including Silver Point Capital, Knighthead Capital and Cyrus Capital Partners, along with Caspian Capital, Citigroup, Deutsche Bank, BlueMountain Capital, P Schoenfeld Asset Management, Scogging Capital, Serengeti Asset management and RBS, Waterstone Capital in conjunction with trustee Louis Freeh, according to the filing.

These creditors asked the court to postpone the hearing on the motion. Aurelius' counsel submitted that such request should be denied because the group represents competing interests, as they have claims in the company's other notes in addition to the revolver, according to the motion
.
Unlike the creditor co-proponents, Aurelius only holds claims in these Chapter 11 cases under the Liquidity Facility, according to Aurelius' counsel's statement.

By the same logic, Aurelius feels JPMorgan is the "best and most appropriate party to prosecute these claims and defenses because" it is not a fiduciary for multiple estates or creditors.

Attorneys representing JP Morgan at Simpson Thacher and Aurelius at Stutman Trester & Glatt declined to comment further than on what was in the filing. - Max Frumes

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Advanced Distressed Debt Lesson: MNPI and NDAs: The Alphabet Soup of Getting Restricted

A more topical issue in the distressed debt market that arose after a controversial ruling in the Washington Mutual bankruptcy case is the issue of insider trading, getting restricted, and the cleansing of material non-public information. With a significant number of cases going the pre-pack route, funds involved in these restructurings may be unable to trade due to their knowledge (material, non-public) in the case. But what happens when a fund has multiple departments that might not know what the other group knows (or is doing)? The Restructuring and Bankruptcy Team at Proskauer Rose, led by Martin Bienenstock, frequent contributors to Distressed Debt Investing, has penned a fantastic post for the site below on these exact issues. Enjoy!

MNPI and NDAs:  The Alphabet Soup of Getting Restricted

Investors wanting to equip and position themselves to negotiate a debtor’s restructuring may temporarily relinquish their ability to buy and sell securities in exchange for access to material nonpublic information (“MNPI”).  This delicate balance between the need for investment liquidity and the desire for informational transparency often leads to increasingly fierce negotiation between a company and its creditors over the terms of a confidentiality or non-disclosure agreement (the “NDA”).

When a company is ready to negotiate a restructuring of its public debt, it will typically direct its attorneys to negotiate an NDA with holders of substantial indebtedness.  An NDA will typically require the creditor to acknowledge that it may receive MNPI.  In accordance with federal securities laws, the receipt of MNPI immediately “restricts” the ability of the creditor to trade unless the creditor has executed a “big boy” letter with its counterparty.  While a “big boy” puts the buyer on notice of the creditor/seller’s possession of MNPI, many sellers will refrain from trading with “big boy” letters because the efficacy of the “big boy” remains uncertain, subjecting the seller to potential civil and criminal liability notwithstanding their execution.

In addition to these trading restrictions, the NDA will also impose contractual restrictions on the ability of the creditor to share or discuss confidential information or MNPI with parties who have not executed a confidentiality agreement with the company.  Some NDAs include a “standstill” provision prohibiting any discussions with other creditors or parties in interest for a certain term, whether those parties execute a similar NDA with the company or not. 

Indeed, if the company wishes to accelerate negotiations to achieve resolution of impending liquidity challenges, an NDA may very well facilitate, rather than impede, dialogue among its key stakeholders.  Investors will want all these contractual restrictions to terminate on the same date as the trading restrictions (i.e., the date upon which the company “blows out” or “cleanses” the MNPI, see further discussion below) to avoid the undesirable scenario where the investor can trade again for purposes of federal securities laws, but still remains subject to the contractual prohibitions in the NDA.

MNPI can range from a transaction proposal or term sheet to more detailed nonpublic financial and operational information, such as cash flow projections.  Even mere knowledge of the existence of nonpublic restructuring discussions and negotiations between the company and certain creditors may constitute MNPI.  The level of informational visibility the investor wants will often determine the length of the restrictions in the NDA.  For the investor to become “unrestricted” after its receipt of MNPI, the MNPI must either become (i) immaterial/stale or (ii) public.  Accordingly, investors will require the company to publicly disclose the MNPI at the earliest possible cleansing or “blow out” date through a press release or SEC filing.  The company will then weigh these considerations against its own external disclosure timeline (i.e., a company may not wish to preview year-end numbers before it files its Form 10-K) and the reality that it must try to accommodate the liquidity concerns of its largest creditors if it wishes to achieve a consensual deal with their participation and imprimatur.  Regardless, if the investor determines the company has failed to sufficiently cleanse all MNPI, after prompt written notice to the company, the investor frequently has the self-help remedy entitling it to disclose the information on its own.

Some investors try to avoid these issues altogether by retaining a financial advisor or law firm to get “restricted” on its behalf.  The advisor, however, cannot reveal the nonpublic content to the investor until the investor is willing to be restricted.  Thus, the investors effectively allow their advisors to negotiate for them to some extent until the investors are willing to restrict themselves and complete the deal.  This strategy also affords the investors more time to trade and accumulate their position. 

Investors at hedge funds or financial institutions having one department that trades debt for itself or clients and another department that holds debt for their own proprietary accounts, may erect internal information barriers or trading walls to enable the department trading debt for clients to continue to do so, while the other department is restricted and negotiates a restructuring.  These entities often designate one or a small number of individuals as “restricted personnel” with access to MNPI while non-designated employees on the other side of the wall continue to trade the company’s securities.  The erection of walls must be done with much care.  Large institutions, of necessity, must know and understand their total exposure to each credit for risk and financial reporting purposes.  The individuals who know this information are effectively operating above the walls and looking down at each department, creating a situation of walls without ceilings.  These individuals must be identified in advance and instructed not to share any information they learn with people trading or holding the debt for which there is an NDA.

Most importantly, investors must understand the determination of what constitutes MNPI remains an inherently subjective one.  Accordingly, investors must always evaluate the aforementioned considerations in consultation with internal compliance officers and experienced securities law counsel before trading.

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Hiring: Distressed Debt Research Analyst

As some of you know, there are a number of big changes in store for Distressed Debt Investing. I'll be posting some more specifics on the upcoming changes early next week, but in the meantime, I wanted to post this as soon as possible: I am hiring for my new company. This is a full-time, paid position. See below for details.

Position: Distressed Debt Research Analyst

Location: New York City

Description:

I am seeking an experienced, hard-working, and highly motivated distressed debt analyst that will cover a variety of distressed situations (pre-bankruptcy, during bankruptcy and post re-org). The analyst will provide fundamental published trade and investment recommendations (utilizing a value investing philosophy), write notes on bankruptcy proceeding, and maintain and update written research reports/database for names under their coverage. The analyst will work closely with me and have the opportunity to take on increasing responsibility over time.

The ideal candidate will have 1-2 years of experience working in restructuring or as a desk analyst at a broker/dealer covering distressed situations. Those with buy side experience in distressed debt investing, along with candidates from legal backgrounds (1st-3rd year bankruptcy associates), are also encourage to apply. I am looking for someone with a combination of strong analytical skills (valuation and restructuring waterfall models) as well as excellent communication abilities. And finally: tenacity, intellectual curiousity, and a strong work ethic are all requirements of the position.

Contact: To apply please send your resume to hunter [at] distressed-debt-investing [dot] com

Note: In addition, I am looking for interns this summer (starting in May). While I do not have a formal posting yet, if you are interested (we had a fantastic intern working for me the past 3 months), please reach out to me with your resume.

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