Multiphase debt restructuring of Alinta Finance Australia
KordaMentha Partner Janna Robertson, reflects on the multiphase debt restructuring of Alinta Finance Australia Pty Ltd (‘Alinta’). Over a two-year period, KordaMentha provided independent advice to the Alinta Bank Syndicate (‘ABS’) and worked with a team of advisors to develop innovative and flexible strategies to avoid value diminution resulting in Australia’s first take private debt to equity swap via a scheme of arrangement.
‘KordaMentha was appointed as financial advisor to Alinta in early 2009. At the time, Alinta was a wholly owned subsidiary of Babcock and Brown Power Limited (‘BNB’), and consisted of a diversified gas and electricity generation business and retail portfolio with approximately $3 billion in senior debt outstanding. The engagement spanned approximately two years and can broadly be split into two phases.
The first phase focused on identifying operational and forecasting issues of each business unit and included a:
- detailed review of Alinta forecasting and treasury operations
- review and analysis of the financial forecasts and lending covenant implications
- review and analysis of the security position of the ABS
- review and analysis of leverage issues and settlement options relating to the BNB debt.
During this period Alinta was involved in a price review dispute with a major gas supplier that was subject to arbitration. This posed a significant threat as it had the potential to de-stabilise Alinta.
KordaMentha worked with the Lenders to understand the implications of the full range of outcomes, and prepared contingency plans for the worst-case scenarios. When the arbitration outcome was delivered, the Lenders were in a position to make urgent approvals to provide emergency facilities to ensure Alinta continued as a going concern.
Once the key issues had been quantified and resolved, Alinta and its Lenders began working towards a deleveraging of Alinta (Phase two).
The second phase of the engagement focussed on providing the ABS with option analysis relating to the full range of deleveraging solutions. Initially, it was agreed with Alinta that a dual track process involving a sale and recapitalisation would be pursued.
There were a number of challenges to this process. Firstly, the debt began to trade on the secondary debt markets and by November 2010, the composition and dynamic of the Bank Syndicate had shifted materially, increasing to approximately 47 syndicate members (typically hedge and private equity funds).
In August 2010 it became apparent that both the sale and recapitalisation processes were not going to yield an acceptable outcome to the ABS and that the debt exceeded the enterprise value of Alinta.
It was also difficult to obtain security-holder support for a deleveraging solution when there was no equity value. We were required to reset the level of debt to an appropriate level for the Company’s cash flows via a debt write-off and debt for equity swap by the senior lenders.
A lender-led take private debt for equity conversion solution emerged. In order to execute such a solution, complex inter-creditor negotiations and equity proposals were conducted.
Supporting the Lender negotiations, we worked as part of a multidisciplinary advisor team to:
- provide cash flow and outcomes analysis of the lender-led solution as it developed
- assess the potential outcomes under various insolvency scenarios – this set out the base case scenario and facilitated the restructure negotiations
- conduct contingency planning with a particular focus on avoiding or limiting insolvency appointments in Alinta such that the risk of value diminution in the event of an unplanned insolvency was effectively mitigated
- prepare independent valuations of the various Alinta businesses for submission to ASIC and the court to support the restructuring proposal.
Following an extensive negotiating period, the ABS agreed to a lender-led restructure solution for Alinta, resulting in a debt for equity swap and take private via four interdependent creditors’ schemes of arrangement and a trust scheme under part 5.1 of the Corporations Act. Due to our knowledge of the transaction and Alinta, we were also able to act as scheme administrators.
The transaction was a success for all stakeholders and provided a seamless restructuring solution outside the formal insolvency regime with minimal business interruptions.
The Alinta restructuring was the first restructure completed using a creditor’s scheme of arrangement and highlights our innovative and resourceful approach to exploring all viable avenues in a restructure.’