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UPDATE 1-Phones 4U administrator shoots down debt-for-equity plan
September 18, 2014 / 4:12 PM / 3 years ago

UPDATE 1-Phones 4U administrator shoots down debt-for-equity plan

* PwC reject bondholder restructuring during call

* Senior secured notes trade up after call

* PwC in “early stages” of exploring litigation (Adds detail, market opinion)

By Robert Smith

LONDON, Sept 18 (IFR) - Phones 4U’s administrator, PwC, said there is little chance of a debt-for-equity swap proposed to save the business of succeeding, during a phone call with bondholders on Thursday.

The phone retailer went into administration earlier this week after the country’s biggest mobile operator EE joined Vodafone in not renewing its network agreement.

A group of Phones 4U’s senior secured bondholders have proposed to restructure the UK retailer, preparing to write down a significant chunk of their debt to save the business.

US law firm Brown Rudnick, which is representing the investors, approached PwC with the scheme.

Rob Hunt at PwC said the firm has considered all restructuring options, including the bondholders’ proposal, but added there is “no realistic prospect for completing a debt for equity swap.”

Hunt added that PwC is pursuing sales of the underlying assets in the business with a range of parties, adding that discussions are progressing well with three parties in particular.

PANDORA‘S BOX

A number of market sources said before the call that they did not believe the debt-for-equity swap had widespread support from secured bondholders.

“Why would real money investors want to take equity in the company as opposed to the cash from winding it up?” asked one high-yield bond investor.

“There’s no way they’d do that, and real money investors still probably the hold the lion’s share of the bonds.”

A London restructuring lawyer said that he knew the bondholder group proposing the restructuring was not very large, and that most creditors would not want administrators to waste time considering the proposal.

“With both contracts gone there is no going concern here, and administrators will be loathe to fritter cash away by keeping the business running with no chance for survival,” he said.

He added that their recovery analysis was in the mid-20s in a liquidation for bondholders, but the bonds would trade lower if a debt-for-equity swap occurred as it would “open a real pandora’s box.”

As such the bid on the £430m 9.5% 2018 senior secured bond shot up in the secondary market after the call, from a cash price of less than 23 to 30, according to Tradeweb.

On the call, Hunt said that the business had a net cash balance of around £110m when they were appointed. This would first discharge obligations on a revolving credit facility (RCF) and preferential claims, with the RCF drawn by £20m.

THIRD-PARTY CLAIMS

During the call PwC discussed the prospect of pursuing litigation or clawback against mobile phone operators, shareholders, directors or any other third-parties.

PwC’s legal counsel said on the call that the administrator is in the early stages of investigating whether it wants to pursue legal claims against third-parties.

“They will in due course look for legal advice from us as to whether they have claims which are worth pursuing against third-parties,” said Mark Sterling, a partner at Allen & Overy.

A second high-yield investor said that bondholders would no doubt be considering lawsuits but said it would be “a tough fight.”

“Creditors may want to explore suing shareholders, but the burden of proof for any clawback is pretty high,” he said.

“In the UK you’ve got six months to successfully prove that a company was knowingly saddled with excessive indebtedness.”

BC Partners and the company’s management have made an overture to creditors, issuing a statement that they would like to meet with a bondholder committee to discuss “the circumstances around the demise of Phones 4U.”

In the statement, BC Partners and management said that they were devastated by what had happened and were “concerned by the factual inaccuracy of certain reports” over the circumstances of Vodafone and EE pulling their agreements. (Reporting by Robert Smith; editing by Alex Chambers)

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