Blackstone Offers Highest 2011 Rates on Travelport Swap: Corporate Finance
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Blackstone Group LP (BX) is offering the highest interest seen on a loan this year if lenders agree to swap debt in Travelport Ltd. for longer-dated obligations, or else it may put the parent of the second-largest travel- reservation system provider into bankruptcy.
Travelport said in a Sept. 19 regulatory filing that lenders who accept the plan will be paid 13.5 percentage points more than benchmark rates for a $287.5 million term piece, as the Atlanta-based company tries to restructure $715 million of payment-in-kind debt that comes due next year. That margin is the widest on a first-lien loan of more than $100 million this year, according to data compiled by Bloomberg.
Blackstone, which bought Travelport from Cendant Corp. in June 2006 for $4.3 billion, needs to restructure the company to avoid falling out of compliance with a debt-to-earnings ratio requirement in its loan agreement. Travelport expects earnings before interest, taxes, depreciation and amortization to fall as a result of UAL Corp.’s merger with Continental Airlines Inc.
“They’re kicking the can down the road,” Roger King, an analyst at New York-based research firm CreditSights Inc., said in a telephone interview. “The market has gotten tough and Ebitda isn’t growing and there is concern that the business model is weakening.”
The company’s 9 percent senior unsecured bonds due 2016 fell 7 cents on the dollar to 64 cents at 9:52 a.m. today in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Those bonds, which now yield 22.16 percent, have fallen 20 percent since the beginning of the month.
Travelport is asking lenders to consent to a restructuring of its $715 million PIK loan that matures March 2012, according to the filing with the Securities and Exchange Commission. PIK notes allow borrowers to pay interest with more debt instead of cash and typically pay margins double those of senior-ranking loans.
If the company doesn’t receive unanimous consent from the holders of the debt it intends to begin voluntary Chapter 11 bankruptcy proceedings at the holding company in order to complete the transaction. Holders of a majority of the PIK loans have agreed to the restructuring, the filing said.
Travelport Holdings began soliciting votes for its prepackaged bankruptcy plan yesterday, according to a regulatory filing today.
Standard & Poor’s cut Travelport’s long-term corporate credit yesterday to CC from CCC, citing the company’s weak liquidity and high leverage. The restructuring would be viewed by New York-based S&P as a distressed-debt exchange and if the transaction is consummated the firm will lower Travelport’s rating to selective default, according to yesterday’s report.
Evan Goetz, a spokesman for Travelport, declined to comment.
The restructuring will exchange the PIK loan for $85 million in cash to pay down the debt; $207.5 million in a new second-lien PIK term loan due Dec. 2012; a $287.5 million PIK loan that matures Dec. 2016; and a $135 million PIK loan that expires Sept. 2012, which if not repaid in one year would convert into a second-lien portion due in 2016, according to the filing. Lenders would also get a stake of 15 percent to 44 percent in Travelport’s parent company, depending on when the PIK loans are repaid.
The $287.5 million term loan that pays 13.5 percentage points over the London interbank offering rate will be issued by Travelport’s holding company, which would make the debt subordinated to the securities issued at the operating company level, according to the Sept. 19 filing. The operating company had $3.2 billion of debt outstanding as of June 30, according to its quarterly filing.
The company’s leverage, measured as debt to Ebitda, was 5.16 times as of June, according to an Aug. 16 report by Moody’s Investors Service. The leverage covenant in Travelport’s credit agreement currently allows the company a ratio of 5.75.
That covenant becomes more restrictive over time and will adjust to 5.5 in December and 5.25 in June, Moody’s said. Ebitda last year was $545 million, after accounting for the sale of its Gullivers Travel Associates Ltd. business, Moody’s said.
“Moody’s believes that the company’s ability to meet covenants will be challenged both by the recent trend in earnings as well as the gradual step-up in covenant levels,” the analysts led by Richard Morawetz wrote in the report. Moody’s lowered Travelport’s rating to Caa1 on Aug. 16.
If the restructuring succeeds, the company’s leverage ratio covenant would be loosened to 8 times until June 2013, when it would be reset to 7.75 times, according to the filing.
Total leverage at the company in 2011 will increase to 7.1 times after the completion of the transaction, according to a Sept. 19 report by KDP Investment Advisors Inc. KDP expects leverage to rise in 2012 to 7.7 times.
Travelport sold its Gullivers Travel Associates business for $720 million in May and used the proceeds to repay $655 million of debt under its credit agreement, according to a June 30 regulatory filing. Net debt was reduced by $635 million in the period, after accounting for currency fluctuations, Philip Emery, chief financial officer of the company, said in an Aug. 4 conference call to discuss second-quarter earnings.
The company’s Ebitda has fallen for the past two years, and it has forecast that it will decline as much as $60 million a year as a result of the UAL-Continental deal, Emery said.
“While first-lien leverage is unchanged, total leverage will rise and this will impact liquidity and heighten refinancing risk in the future given the higher levels of debt in the structure,” Barbara Cappaert, an analyst at KDP, wrote in the report. She said the company wouldn’t be able to afford it debt payments if the business suffered further deterioration.
Through Travelport, Blackstone as of June 30 held about 55 percent of Orbitz Worldwide Inc., the third-biggest U.S. online travel agency based on sales, according to data compiled by Bloomberg. Priceline.com Inc. and Expedia Inc. are the two largest companies in that industry, Bloomberg data show.
Travelport also owns Galileo and Worldspan, which operate in 160 countries with more than 67,000 travel agency clients. The companies handle information for 350 airlines, more than 310 hotel chains and 25 car rental companies.
Blackstone was founded in 1985 by Chairman Stephen Schwarzman and Peter G. Peterson, who held several economic posts in the U.S. government under President Richard Nixon. Its holdings include Hilton Worldwide Inc., SeaWorld Parks & Entertainment and home nursing company Apria Healthcare Group Inc.
The initial PIK loan, in March 2007, was used to finance a dividend to Blackstone and affiliated equity owners, according to today’s filing.
The Travelport parent has $693 million outstanding under its senior unsecured PIK term loan that expires March 2012, according to the June 30 filing. If the company were to restructure or refinance those obligations or if creditors exercised a change of control then Travelport’s senior secured credit agreement would require it to offer to purchase all outstanding notes at 101 percent, plus accrued interest.
“We may not have the ability to repay such amounts or make such note purchases which would result in a default under the notes,” the company said in the regulatory filing.
If Travelport were to file a prepackaged bankruptcy to force a restructuring it would do so at the holding company level, Travelport Holdings, and it wouldn’t affect the operations at Travelport Ltd., the company said in a Sept. 19 press statement.
“This makes the noteholders’ position a little less tenable if there is a restructuring at their level because there is so much more leverage,” said CreditSights’s King. “They are short maturity notes with high yields so they are tempting but the fundamentals right now are weak.”
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