(Bloomberg) -- It's the latest creditor-on-creditor clash in the hyper-competitive world of distressed debt investing -- helping cash-strapped borrowers to call the shots even as the cheap-money era ends.
Last week, struggling aerospace supplier Incora secured a financial lifeline from a group of investors including Silver Point Capital and Pacific Investment Management Co. that pushed rival creditors down the repayment line, aided by unusually aggressive moves from its private-equity sponsor Platinum Equity.
The transaction -- known as priming -- is eliciting uproar from the creditors left behind. It's also sparking fresh fears in the industry that investors are ramping up a costly fight amongst themselves to put money to work in an evaporated $200 billion pool of distressed debt.
Wesco Aircraft Holdings Inc., which operates under the name Incora, forged a deal with both investment firms that will give it $250 million of fresh cash and swap bonds due in 2024 for longer-dated maturities.
The new securities will be backed by collateral that was previously pledged to other creditors, meaning those outside the Silver Point-led group -- including Golden Gate Capital, JPMorgan Chase & Co.'s asset management arm and funds managed by BlackRock Inc. -- will be left worse off in any future restructuring.
Both Silver Point and Pimco negotiated a deal with the firm and Platinum directly, which ultimately diluted the claims of other creditors on Incora's assets, according to people with knowledge of the matter who asked not to be identified discussing private discussions.
“This is the latest unsurprising example of creditor-on-creditor violence,” said Scott Josefsberg, head of special situations research at Covenant Review. “It's very unfortunate for creditors who get left out, without even an opportunity to understand what happened or why.”
Platinum owned some of Incora's unsecured debt and rolled up its holdings, a move considered unusual and aggressive to industry observers, the people said. The transaction transformed a slug of secured and unsecured debt into new longer-dated secured debt that ranked ahead of existing obligations and reduced protections on those older debts.
Incora didn't respond to a request for comment. The company's legal adviser Milbank and sponsor Platinum declined to comment. Silver Point and Pimco declined to comment. BlackRock, JPMorgan and Golden Gate also declined to comment.
Deals like Incora's have played out a number of times in recent years, and Pimco itself is involved in another potentially priming transaction after it floated plans to extend fresh money to Envision Healthcare Corp., Bloomberg reported. Such transactions -- in which investors lend fresh money and are rewarded by jumping to the front of the repayment line -- sparked creditor battles at companies including restaurant supplier TriMark USA, surfwear firm Boardriders Inc. and mattress maker Serta Simmons Bedding. In many cases, the spats wound up in court.
Through tactics like transferring assets or pushing deeply discounted debt swaps, cash-strapped firms have found creative ways to survive the pandemic and other major upheavals. But the Incora deal reveals the lengths money managers and private-equity sponsors will go to protect their positions.
‘Holding the Bag'
Some holders of Incora's 9% secured bonds due 2026, fearing how their positions would fare, banded together to try to block the deal, the people said. When it appeared the bondholder group was large enough to stop the transaction, Incora issued more 2026 securities -- diluting the other creditors' stake. The move then handed Pimco and Silver Point enough votes to allow Incora to issue the new, higher-ranking obligations, the people said.
“Incora is not just diluting a blocking position, but we believe that they received consent from incoming debtholders as well, which is uncommon,” said Valerie Potenza, head of high-yield research at Xtract Research. “Assuming no litigation, it's a way for a company to try to work with a group of creditors if they don't have enough bondholders to do what they want.”
For Incora, the deal significantly reduces the chance of a default in the near-term, giving it enough cash to make a $100 million payment due in May. It also buys more time for the company to improve its cash flow amid a slow demand recovery for wide-body aircraft parts. Fort Worth, Texas-based Incora was formed in March 2020 -- days before the pandemic led to a near-total shutdown in air travel -- via the combination of two Platinum-backed companies, and has more than $2 billion of debt.
The company maintains the transaction is fully in line with all obligations set out in bond documentation and will save it up to $90 million in interest expenses, according to a person with knowledge of the matter.
Meanwhile, the weakened parties have been getting advice from Akin Gump Strauss Hauer & Feld and Perella Weinberg Partners, some of the people said. Akin didn't respond to a request for comment, while Perella declined to comment.
Incora's bonds jumped after the deal was completed, partially reversing an earlier slide, though they remain deeply distressed. The company's 8.5% secured notes due 2024 rose nearly 8 cents on the dollar to 68 cents, while the 2026 bond climbed 5 cents to 67 cents. Its 13.125% unsecured bonds due 2027 surged 13.5 cents to 43.5 cents.
“Sponsors continue to push the boundaries of covenant protection and ultimately when things turn sour, lenders are stuck holding the bag,” said John McClain, a high-yield portfolio manager at Brandywine Global.
©2022 Bloomberg L.P.
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