Seat PG set for second shock restructuring

Fri Feb 1, 2013 7:36am EST

* Seat's suspended bond coupon sparks restructuring fears

* Default could be triggered earlier if loan payment missed

* Bondholders organise committee to prepare for debt talks

By Natalie Harrison

LONDON, Feb 1 (IFR) - Italian directories firm Seat Pagine Gialle's surprise decision to suspend a bond coupon is now expected to trigger a second round of restructuring.

This week's announcement, which blamed the weak Italian economy for a continuing decline in print advertising sales, came just five months after the completion of the company's first lengthy restructuring, leaving the market second-guessing the new board's motives.

An official at Seat declined to comment further.

Chief executive Vincenzo Santelia, appointed by former subordinated bondholder Anchorage in October, was authorised to make a EUR25m amortisation loan payment in November that had not been due until December.

That decision, as well as the EUR200m of cash on Seat's balance sheet at the end of December, suggested the company was able to meet all obligations despite facing stiff competition from Google and others.

An official at Anchorage also declined to comment.

"To turn around just two months later, and say that it may not pay the bond coupon has taken everyone, including the advisers on the restructuring, by surprise," said one London-based restructuring lawyer.

Other lawyers and Seat lenders shared that view.

"The company clearly thought it had enough cash, so why the sudden change in its stance?" asked a second restructuring lawyer following the developments.

The 20-point drop in the company's bonds, which were trading at 35% of face value on Friday morning, and the halving of its share price to just 27 cents by the Thursday close show just how unexpected the announcement was.

Leveraged loan prices also tumbled, dropping 40% over the week to close at 39.5% of par by the close of business on Thursday.

The EUR42m coupon due on a EUR750m senior secured bond was due to be paid on Jan 31, but there is a 30-day grace period before non-payment would trigger a default.

Before then the board must decide whether to pay EUR6.3m of interest due on its EUR600m senior loans on February 6. If it elects not to, as some in the market expect, a default would be triggered after a three-day grace period.

"The bonds and loans rank pari passu, so even though the loan interest is pretty small, the company cannot be seen to be treating the creditors differently," said the first lawyer.

BANKS VERSUS BONDHOLDERS

Changes in Italian law that leave directors at risk of criminal charges if they act inappropriately could be another trigger for the sudden decision to reassess the company's debt burden, lawyers said.

"To me, it looks as if the new management has come in, looked at the numbers and cash resources and made a decision that there is too much debt," the second lawyer said.

Under last September's restructuring, holders of subordinated bonds agreed to swap their holdings, with a nominal value of EUR1.3bn, for an 88% equity stake in the company and 8% of the senior bonds.

The original senior bondholders were left untouched.

Theoretically, a second restructuring to reduce debt further would give the company a greater chance of survival - and benefit its new equity holders. The general consensus is that the company's EUR1.5bn debt load remains too heavy.

The senior bonds, which pay a coupon of 10.5%, are certainly expensive, especially in comparison with the 540bp margin on the company's senior bank debt.

That has led to speculation that the looming second restructuring is a result of former subordinated bondholders' desire to get lenders and those holding the senior bonds to share their pain.

"It's very difficult to get a director of a company to refuse to honour an obligation without having a good reason," said the second lawyer.

"If this is about revenge, the directors would be leaving themselves wide open."

Regardless of the reasons, restructuring advisers hoping for a mandate are watching the situation with interest to see if another full blown negotiation - expected to be principally between the bondholders and lenders - is warranted.

Another restructuring specialist said the bondholders were already organising a committee.

"I would expect bondholders to be more receptive to the idea of a debt-to-equity swap, but the banks are going to be a lot less willing," the second lawyer said.

After last September's deal Seat's leverage was cut to around 3.7 times Ebitda from seven times. Deals that have been restructured in the U.S. are usually just left with one turn of leverage, and a realistic debt level for Seat would be EUR300-EUR400m, said the second lawyer.

"The banks would never agree to that," he added. (Reporting by Natalie Harrison, IFR Markets; additional reporting by Christopher Spink and RLPC's Isabell Witt; editing by Matthew Davies and Alex Chambers)