Yelling over Credit Lines

After arduous negotiations and risking approaching a dangerous zone, last week, Yell, the publisher of the yellow pages, reached an agreement to buy back £159.5m in debt.

The company has seen continued decline in print revenue from competition of internet search engines. Struggling under a £2.6bn debt burden, it became clear last year that the loan covenants (Net debt-to-Ebitda no higher than 5.7X) had to be renegotiated.

Yell’s management devised a turnaround plan that aimed to see earnings and cash-flow return to growth in three years, and also presented the lenders a proposal that would create breathing space to the company. The key components of the plan were a debt buy back, taking advantage of deeply discounted market prices, and a reduction of the £173 in undrawn bank credit facilities down to £30m. The company also would pay £15-£20m to the banks in return for the extra headroom on the loan covenants.

The lenders supported the turnaround plan, but clashed on the debt restructuring plan. On one side, Yell’s main banks, which hold about half of the company’s debts, wanted the reduction in the undrawn credit facilities. On the other side, hundreds of institutional investors objected that the reduction favored the banks at their expense.

To the group of institutional investors, a revolving credit line is a commitment made by a lender to be used by the borrower at its discretion, as long as the covenants are respected. It does not matter whether the facility is undrawn or not; what matters is that it is an option owned by the borrower that has been written by the lender. The terms of the undrawn credit facilities had been negotiated when Yell and the markets were doing much better. The institutional investors pointed out that these credit facilities therefore had value that should be shared by all lenders. Reducing the undrawn credit facility, they pointed out, was equivalent to repaying the banks the credit facilities at face value, when the value of the institutional investors’ debts sold at a deep discount.

So, as the price of their agreement to relieve the banks from their credit exposure to Yell, the institutional investors demanded that other lenders be paid compensation proportional to the portion of the credit facilities that would be voluntarily cancelled.

By sticking together, and since they (conveniently) held more than two-thirds of the votes necessary to have the debt plan approved, the group of dispersed institutional investors reached a compromise with the other lenders, clearing the way for Yell to buy back part of their debt at prices close to a 70 percent discount to face value, and push out a possible covenant breach by two years.

Whether that is enough for a company that has refinanced the terms of its loans twice in two years and is living one day at the time, only time will tell. For now, Yell should display its corporate logo upside down, proudly exhibiting the V, for victory.

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