Distressed Diaries — Will the SUNs shine on Arxada A&E deal?

Sponsors Bain and Cinven are confident creditors will approve the A&E deal for Arxada, despite opposition from its senior unsecured bondholders. But is that confidence based on sunny optimism?

9fin sources say negotiations are ongoing with the SUNs in the background as the deadline to sign up for the deal is today (28 May). The company may look to extend by a day, Cinven partner Christopher Anderson, said on a Q1 26 earnings call yesterday (27 May).

The company received over 90% support from its secured creditors last week, Anderson said. However, he did not give an update on the SUN consent threshold, which was a meagre 20% at the deal launch on 13 May.

The company needs 75% from each class of creditors to implement the deal through an English scheme of arrangement, which it filed for on 26 May.

In this episode of Distressed Diaries, host and senior reporter Bianca Boorer speaks with distressed credit analyst Yusuf Sule and senior legal consultant Luke Viner about the A&E deal, creditor sentiment, what could happen if it goes to court, and how the company might handle the unconsenting SUNs.

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Producer

Chase Collum

Head of Podcasts for 9fin Limited

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Bianca Boorer
Scratching your head over the latest complicated restructuring? Wondering whether Europe will continue to follow aggressive US tactics? Well, tune in to Distressed Diaries, a podcast where we dig into companies that have taken a turn for the worst. I'm Bianca Boorer, Senior Distressed Reporter at 9fin. In this series, we will explore how companies have ended up becoming over-levered, and more importantly, how they plan to right-size their balance sheets.

So today, I'm sitting down with two members of 9fin's distress team, Yusuf Sule, Distressed Credit Analyst, and Luke Viner, Senior Legal Consultant, to talk about Swiss chemicals company, Arxada. Thanks for coming on today, guys.

Luke Viner
Thanks for having us.

Yusuf Sule
Thank you very much for having me.

Bianca Boorer
So we've been following Arxada since the start of the year, but things have started heating up earlier this month, when the company launched its A&E deal on the 13th of May. So the company agreed the deal with its senior secured creditors, but has since left out its unsecured creditors from the initial talks. The SUNs responded by forming a co-op agreement to present a united front. And the deadline for creditors to sign up to the deal is actually today, the 28th of May.

Yesterday, on the earnings call, Cinven partner Christopher Anderson said that 90% of the senior secured creditors have signed up to the deal so far. He didn't reveal how many SUNs had signed up, but at the time of the deal's launch, it was at 20%.

So we understand that talks have been ongoing with the SUNs since the launch of the deal, as they would like some of the terms to be tweaked before agreeing to it. So before we get onto the details of the deal, let's take a step back. Yusuf, how did Arxada get into its distress position today?

Yusuf Sule
Sure. Arxada's distress story, put simply, is a sponsor buying a cyclical specialty chems business at the top of the market with too much leverage and just before the cycle turned. In 2021, Swiss life science group Lonza agreed to sell its specialty ingredients division to Bain and Cinven for CHF 4.2 billion, with the carved out business later being branded to what we now know as Arxada. 2021 had favourable financing markets supported by low rates where private equity sponsors could put in a significant amount of debt on a business with high valuations. This, coupled with the chemicals industry in general, benefiting from strong demand, higher pricing power, post-COVID supply chain tightness.

And after the buyout, we saw Arxada expand through M&A, acquiring Troy and Enviro Tech, which helped scale up its microbial control solution segment. Essentially, they fend off microbes from damaging products, hence the name microbial control solutions. But this added complexity at a time when the business was still separating from Lonza.

The problem was the chemical cycle moved sharply against the company. Shortly after the carve-out, demand weakened, destocking hit volumes, and energy volatility pressured customers. And pricing dropped from its elevated levels to something more normalised. So for Arxada, this mattered because the business was not a pure defensive specialty chemicals platform. It had meaningful exposure to cyclical end markets, for instance, constructions, industrials.

And so once volumes and pricing softened, the company wasn't able to grow into its highly levered LBO cap structure. So this is the key point. The LBO was done when the overall markets and earnings were supportive. But since then, they've had to service that debt in a weaker chems environment.

Bianca Boorer
Okay. So I think we've seen that LBO story play out in a few deals. Yeah. So yeah, let's get into the A&E deal terms then. So how does that, you know, sort of pan out for both the secured and unsecured creditors?

Yusuf Sule
Yeah. So the revised transaction, this is the second. The initial proposal from sponsors Bain and Cinven was rejected by the 1L creditors. The first proposal had 1.5-lien facility in the form of CHF 150 mil of sponsored new money. And so that would have put the new money ahead of the unsecured notes, but behind the senior secured debt stack.

The revised transaction, however, changes the CHF 150 mil 1.5-lien new money into a larger CHF 200 mil junior contribution, ranking pari passu with the unsecured notes, providing, of course, they play ball. The proceeds will be used to reduce the RCF and to the extent there is excess, increased liquidity. It's also worth mentioning the revised terms also extend the RCF to January 2031 and the euro and dollar TLBs alongside the SSNs a couple months later in July that year.

The cash margins remain unchanged. The senior secured debt receives an additional PIK and a duration fee if principal is repaid later in the extension period. For the SUNs, they get extended to July 32 with cash interest unchanged, but with a PIK toggle option.

Bianca Boorer
Okay. And there's also a coercive element to the deal, right? Wherein the SUNs, you know, if they don't agree to the deal, they'll be subordinated.

Yusuf Sule
Absolutely.

Bianca Boorer
So can you tell us a bit more about that?

Yusuf Sule
So, yeah, absolutely. I think in terms of just giving a bit of background, like I mentioned beforehand, the junior contribution now sits pari passu with the SUNs. And that's if sufficient SUNs consent isn't achieved. There's a possibility for alternative implementation that the SUNs that agree with the deal could be ranking pari passu with the new money versus the non-consenters are junior.

And so this creates a holdout dilemma where if the SUNs refuse and try and negotiate better terms, perhaps maybe even push too hard, there's a potential of being primed, caverned, stripped or being left in a weaker stub. So this revised deal does two things at once. It gives the senior secured creditors a cleaner package, larger sponsor support, lower priority for the new money, RCF paydown, PIK economics and more, but also creates a more difficult choice for the unsecured creditors.

And that's why the pending transaction isn't just a question of whether Arxada's business plan is achievable. It's the more interesting question of whether Bain, Cinven and the secured creditor group have created a credible alternative route to push through the SUNs, despite the unsecureds being organised through Gibson Dunn in a co-op.

Bianca, why don't you tell us a little bit more about the creditor reactions? I appreciate your more on the ground.

Yusuf Sule
Yeah, I'm on the ground. So I think, yeah, we've been speaking to a lot of people in the market about their reactions to the A&E deal that was proposed. So obviously, I think the view is that the senior secured creditors got the better end of the stick. They get to keep par treatment. They preserve their collateral. They pick up additional economics with the PIK margin and duration fees with limited value leakage. The increased sponsor support also provides liquidity and reduces near term refinancing risk. The SUNs, though, weren't particularly happy about being layered by this new money, the 1L PIK, these exit fees and the staggered maturity as well.

As you laid out they feel the proposal is a bit all over the place when it comes to the SUNs implementation. As you highlighted, the non-consenting SUNs would be left in a stub. So, yeah, I think they are trying to kind of negotiate something in the background, even though, you know, I think that the investor call yesterday was sort of trying to paint this picture of confidence.

So we'll see what happens. We're waiting on tenterhooks. So another interesting element of the deal, so we'll bring Luke in into this segment of a podcast, is the LME blockers. So Luke, tell us more about those.

Bianca Boorer
Yeah, sure. Well, I think what's interesting here is not just the LME blockers, but the scope of them and what's actually being included. It reads a bit like a Hall of Fame list of all these LME names. And it's not just saying, OK, we'll fix a drop down loophole. It's a lot more comprehensive than that.

And we can see from the investor presentation that Arxada put out last week that as part of the deal, it's going to tighten the covenant package. And it includes this long list of LME blockers, which are essentially provisions that are designed to prevent the aggressive LMEs that we've been seeing in the US and increasingly over here in Europe.

I think it's fair to say that from what's being proposed and how it reads, it actually looks much more like a covenant reset that you would expect to see in post LME documentation. But it's also consistent with the messaging that Arxada wants to put out there. And that is by including all of these blockers, they're trying to give creditors comfort that this deal is good for everyone and to also keep everyone happy.

Luke Viner
So one of the many, the long list of LME blockers they had in their presentation was a Pfleiderer blocker, which I thought was really interesting because we haven't seen a blocker referencing a European deal before. So you've co-written a piece about this, Luke, on what this Pfleiderer blocker entails. Could you tell us a bit about how it differs from the others?

Bianca Boorer
Yeah, of course. So it's probably important to flag just at the start, we haven't actually seen the written provisions yet. But this information we've got from 9fin sources and it's not a blocker that blocks a European style deal. It's a blocker that is focused on a specific type of transaction.

So in the investor presentation, the Pfleiderer protections, as they're called, they're characterized as an add-on to a J.Crew blocker. It's not necessarily a standalone blocker, although that's probably just semantics really. But a standard J.Crew blocker is designed to stop assets, mainly intellectual property, from being moved into unrestricted subsidiaries through investment capacity or restricted payment capacity. Now, in the Pfleiderer transaction, creditors had previously negotiated some tighter protections as part of an A&E in 2024.

Luke Viner
Now, one of those protections was an omniblocker, which purports to prevent any type of LME. Now, we could probably do a whole episode on omniblockers, but I won't go into too much detail on that. But the workaround that Pfleiderer implemented was, rather than put the asset into an unsub using investment capacity, they structured the carve out as a sale, an asset sale. Linking this back to Arxada, the new language, which is referred to as Pfleiderer protections, is aimed at preventing the crown jewel assets from being carved out into an unsub via an asset sale.

It's really like a mutation of a dropdown blocker. So the company can't move value outside the restricted group by calling it a sale. And the protections could also then extend to an amended application menu, depending on what's discussed and the drafting that's agreed with the parties. But it's an important point and potentially quite nuanced that these protections and these blockers are only really as good as they're drafting.

And the market has learned that just naming a blocker and throwing it in, it's not enough. You have to look at the context in which it sits in the document. You have to read it against the investment and RP covenants, the proceeds application menus, because these provisions are layered protections and the Pfleiderer protections here are just another layer of protection.

Bianca Boorer
Yeah. It's a bit like whack-a-mole, isn't it? You know, they're just going to keep adding more and more to this layer cake of blockers.

Luke Viner
Exactly. As lawyers and investment professionals, as they get more creative with trying to structure these transactions, unfortunately, the market can only be reactive rather than proactive. And that's what we're seeing a lot more here.

Bianca Boorer
Yeah. I think it just shows that European deals are getting more aggressive and finding workarounds. Definitely. I was told the devil is in the details. So, alongside the restructuring, the business is going through a reorganization process where it's splitting itself into two parts and it's looking at various parts that it could sell as well. So, Yusuf, do you think this might be adding to creditors' concerns about value leakage?

Yusuf Sule
Yes. Leakage risk is a massive concern here. I guess just taking it back slightly and looking at the sponsor dynamic and touching on the asset sales might be best. Just from the sponsor's position, we did a bit of work there and we noted that the recovery case that they outlined in the low 400s rather for EBITDA, that would leave their equity check down around 40%. Now, mind you, that's at a 10x exit above their peak 9.6x entry multiple during the COVID boom that they bought in at.

I think it's also worth mentioning the split of the businesses. So, we have microbial solutions and NCE. Microbial solutions is what we've heard chatter about being sold. This is the stronger segment of the two. It's more defensible. It has stronger margins. And we've seen a double-digit EBITDA from this segment consistently. What's worrying here is if this segment was sold and the proceeds, the value doesn't go towards the creditors, they're going to be in a bit of a tight spot.

And so, that's where the covenant package really matters. And I think it's also worth mentioning is that Arxada's recovery plan requires consistent growth year after year. And in their Q126 call, we noted that the growth engine, wood protection, within this microbial solution was starting to slow down. And it kind of reveals the fragility of this business plan. And it has the potential of creditors potentially coming back to the company a few years down the line if markets haven't turned around.

And so, again, that's where the LME risk that Luke highlighted earlier really comes into question.

Bianca Boorer
Yeah, I think we see a lot of cases where these companies have to come back to the table over and over again. So, as I mentioned in the introduction, they've got 90% support so far from the secured creditors. And they remain confident that they'll get the 75% that they need to put this through an English scheme of arrangement with the SUNs. But Luke, I don't know, where do you see this going?

Luke Viner
I mean, you're asking me to stick my neck out there and predict something. But I think most people are expecting this to go into a scheme of arrangement. And that's also where the reference to the 75% approval threshold comes from. There's also another quite telling sign being that Arxada filed their claim form for a scheme of arrangement two days ago. So filing doesn't necessarily mean that a scheme is guaranteed.

There's actually a couple of ways that you could possibly interpret that. It could just be a matter of timing and practicality. So the transaction currently has a long stop date for the end of October. And the transaction support agreement will terminate by that date. So bearing in mind that 31 October date, the court has a summer vacation from the end of July until the 1st of October.

So trying to fit in a convening hearing and a sanctioned hearing right before the summer break is possible, but it's tight. If they try to do it after the summer break, they've only got four weeks effectively in which to try and put this transaction through. Now, if you try and straddle the summer break and have one hearing beforehand and one hearing after, I think that makes the timing of the transaction much more reasonable. Yeah.

Bianca Boorer
So given how Arxada has played out so far in terms of the negotiations, wherein the SUNs were excluded from the initial talks before the deal was announced, when they do come to court, we've seen a lot of cases where judges have looked down upon excluding minority creditors. So do you think the company could face similar criticism?

Luke Viner
I think so, where they haven't properly engaged with the SUNs. So companies that don't engage in good faith negotiations before they come to court, they do run a significant risk that the court will refuse to sanction a scheme or a plan. And we've seen that in cases like Waldorf, the first Waldorf restructuring plan. In the second Waldorf restructuring plan, we also saw the court being critical of the creditors not engaging once they've been invited.

There's also an added layer of the amended practice statement that's now been implemented since the start of the year. And it again sends that message that the court wants everyone to engage early so that when they do get their court hearing and they come to court, they're organised and the court can only focus on the key issues that they need to focus on.

Bianca Boorer
So Yusuf, coming back to you, you've done some analysis on what options the company has if the SUNs do hold out. Can you take us through some of those scenarios?

Yusuf Sule
Yeah, absolutely. Of course, this is like conjecture at the end of the day. But I imagine a useful way to think about this is that Arxada has two broad tools available. I guess the first is an exchange structure that separates consenting and non-consenting SUNs. And the second is a tender or repurchase type approach that could use sponsor capital to reduce the size of the unsecured holdout problem. So just diving a little bit more into the first, the exchange mechanics.

Arxada could offer participating SUNs a new instrument with better treatment than existing notes. That doesn't necessarily mean a large coupon uplift. It could be something like ranking, collateral or claim priority. For example, in the form of enhanced security or a better position relative to non-participating SUNs. The logic would be to create a split inside the SUN layer. Participating SUNs could move into the new support structure, whilst non-participating SUNs remain on the old notes of creating a stub. And depending on the docs and consent thresholds, they could be faced with weaker covenants and fewer protections.

And so this could be thought of almost as like a potential first out, second out dynamic within an otherwise unsecured layer. The second option, the tender repurchase route. Arxada could use its CHF 200 million sponsor contribution or some portion of it rather to help reduce the outstanding SUN balance. In effect, this would mean replacing part of the unsecured creditor base with sponsor-provided pari passu debt.

This could be really attractive because the SUNs are trading at the stress levels. They're quoted around the 60s at the moment. And so the CHF 200 million could retire a meaningful amount of the unsecured notes. And that would reduce the size of any holdout stub and potentially make an A&E easier for secured creditors to support.

The secured credit perspective, any residual SUN maturing ahead or even close to their extended maturities might make them feel uncomfortable, even if the SUNs are junior to them on the waterfall. So maybe reducing that overhang could be useful to them. I guess the pros to this type of approach is the flexibility. Like if the SUNs participate, the sponsor cash supports liquidity and RCF paydown versus if they don't, the same capital could be potentially used to manage the holdout problem by buying back some portion of the SUNs. And that's why the sponsor's contribution may function more than just liquidity support.

As Luke mentioned earlier, it could be also almost like transaction insurance. But there are important caveats. A formal tender could be complicated if the SUN co-op restricts trading or it makes it harder to peel off individual holders. And also there's the point that secure creditors might object if the sponsor proceeds are used to take any junior debt whatsoever.

And so while this route is consensually possible, it's not the obvious route or the clean route that would be uncontested.

Bianca Boorer
Well, as it's a live deal, we'll be following very closely to see how all of this unfolds. And thanks very much for joining me today, guys.

Luke Viner
Thank you very much.

Yusuf Sule
Thank you so much. It's been a pleasure.

Bianca Boorer
And thank you to our listeners. If you have any feedback on this episode, please reach out to us at [e-mail]