Car wash, talkin’ about the car wash yeah

Having recently recovered from my amateur stunt man escapades I thought I’d pen a short note on the recent court sanctioned debt restructuring by IMO Carwash.

Why do investors outside of IMO care ? Well, it’s the first time that the English courts have been asked to rule on the issue of valuation in the case of a company restructuring, and it has implications for senior & junior lenders in both the high yield and leverage loan markets, particularly in light of the rising default rate.

The case recently ended up in court after the LBO ran into trouble and the proposed restructuring left no value for the mezzanine lenders. Mezzanine finance is usually the most junior debt a company will issue, senior only to the equity. The original plan was for the senior lenders to have their debt swapped for virtually all the equity in a new company, cutting the junior lenders out. The senior lenders argued in court that the mezzanine lenders had no economic interest given that the value of the assets was less than the value of the senior debt. The mezzanine lenders countered that this was an unfairly good deal for the senior lenders, arguing that the deal was being struck at trough valuations. Ultimately the judge ruled in favour of the senior lenders, dismissing the arguments of economic interest made by the mezzanine lenders.

As a result of this ruling, senior lenders are likely to gain more confidence in their ability to exclude junior creditors in future restructurings and perhaps increase their willingness to enforce their rights in certain circumstances. As investors in senior and subordinated debt, we have long recognised the increased security afforded to senior lenders.

The coming years will see further restructurings as a number of the aggressive leveraged finance transactions of previous years find themselves in difficulty. We’d expect the implications of this recent ruling to be felt by many more mezzanine lenders.