What is the Hunter-gatherer LMT and analysis of the Ardagh-Apollo deal

Welcome to the 134th Pari Passu Newsletter, 

Super excited premium piece today!

Liability Management Transactions (LMTs) such as asset dropdowns, uptiers, double (and even triple!) dips have been covered extensively in previous editions of the newsletter. Today, we are revisiting the fascinating world of Liability Management through examining Ardagh’s infamous hunter-gatherer and pari-plus transaction that was a first for Europe.

The adoption of LMTs has been slower in Europe, especially those of the more aggressive kind. However, this is not to say that there have not been aggressive LMT tactics in obtaining a stronger bargaining position in restructuring negotiations. Look no further than Altice France and Ardagh Group, where novel LMT threats have been influential in their recent restructuring talks. This article explores the latter case, providing a comprehensive overview of hunter-gatherer LMTs and an in-depth case study of the Ardagh-Apollo transaction.

What is a Hunter-Gatherer LMT? 

A hunter-gatherer LMT  is where a third-party investor purchases a company’s existing unsecured or subordinated debt on the secondary market, and then the company exchanges it for newly issued senior secured debt under a pre-agreed structure. The core idea is to take advantage of a situation where the company’s existing bonds are trading significantly below par in the secondary market [1].  It works in a two-step process.

1. The acquisition of discount debt in the market by a Third Party;

2. Followed by an exchange of that debt into new secured instruments issued by the company

Crucial to note, the pre-agreed exchange agreement does not cover existing bondholders – it is a bilateral facility that enables only the bonds that have been ‘gathered’ by the Third Party Investor to be swapped for new instruments [2]. Thus, there is no need to solicit creditor consent for the exchange as it would be required in a traditional Uptier. Usually in an Uptier, a segment of existing bondholders are rolled up into new notes with a superior claim on the collateral, on condition that these bondholders will provide new money. This would involve obtaining the necessary consent (say, an intercreditor agreement stipulates this would be 66%) from that class of bondholders [19]. Furthermore, these exchange pre-agreements work like call options in that the company will have the right to exchange the unsecured or subordinated debt that is purchased by the Third Party when it is trading significantly below par.

It is helpful to walk through the mechanics of a hunter-gatherer LMT through an example.

Let’s consider company ABC, which has $500mm in unsecured notes maturing in 2027. Due to financial stress, those notes are trading at 40 cents on the dollar in the secondary market. Rather than launching a traditional exchange offer (which would require reaching minimum participation thresholds or bondholder consents), the company establishes an agreement exclusively with a Third-Party distressed investor, XYZ.

Under this arrangement, investor XYZ commits to buying these bonds in the open market when company ABC  decides to exercise its right to exchange the XYZ purchased bonds into newly issued senior secured debt. This new debt will be issued at a face amount that is equal to the purchase price of the unsecured notes plus a premium.

Suppose XYZ purchases $100mm face value of the 2027 notes at 40%, spending $40mm in cash. Under the agreed-upon exchange terms, the investor is eligible to receive new senior secured notes equal to 110% of the purchase price—in this case, $44mm. After company ABC conducts the swap, it achieves two things:

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