Is this common in your experience/from your understanding? You can certainly read about the opposite with a quick search.
If a company is tapping the revolver to paydown higher-interest-rate unsecured notes, it is likely those notes are trading at a discount. Sounds like a good deal for the company. Assuming there's enough creditor consent, should we see this more often? I'm modeling out this scenario at work.
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Not common in my experience for a number of reasons. Rationale checks out from a corporate finance perspective (deleveraging + lower cost of capital); however, RCF proceeds are not fully discretionary -- it all depends on what baskets are allowed in the docs.
Also helpful to think about it from the lenders' perspectives. Assuming you have basket capacity, if you assume the RCF is secured, you'd be diluting the collateral pool by issuing more secured debt in exchange for an overall deleveraging of the company. Further, in most cases where a company's unsecured notes trade off materially, there is usually a reason - maybe an impending liquidity crunch, maturity wall, etc. all of which would make the RCF lenders (commercial banks) very hesitant to increase exposure and reduce overall asset coverage. Not to mention you'd have to figure out how to structure the paydown of the notes and think about other potential capital structure constituents, since you'd potentially be priming any other debt between the Uns and the 1L RCF.
Ok gotcha thank you & great point about collateral dilution from the SS lenders' POV. I doubted myself when I read this 2019 WSJ article about Mallinckrodt's liability mgmt efforts. They have since filed (H2 2020):
"Using proceeds from the revolver to repurchase debt in the open market amounts to substituting one form of debt for another. The advantage to the company is that the bonds it is repurchasing in the open market are heavily discounted, which results in Mallinckrodt capturing a net debt reduction. However, tapping out the revolver means that it is utilizing one of its last remaining sources of liquidity, according to analysts familiar with the situation."
Could be a case of bad reporting b.c I couldn't find more details about this out of court effort. I did read about their successful up-tier exchange during H1 2020 though.
Sure. I think that's an interesting example. Would need to look into it more but would assume they might have gotten a consent solicitation from the RCF lenders or amended the CA to do that (with accompanying fee, ofc).
Liquidity is another good point -- basically what is the opportunity cost of that capital. In most cases, proceeds from the RCF are better used to bolster liquidity and potentially avoid a filing scenario (RIP to MNK) than likely immaterial deleveraging.
Not common, but I believe I just read about Tupperware doing this. It was more of a loophole if I remember correctly. Will follow up if I’m remembering wrong.
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