* Bondholders offer write-down of retailer’s debt
* Bond investors sceptical of restructuring proposal
* Restructuring plan dependent on operators’ support (Recasts, adds investor reaction to plan and context)
By Robert Smith
LONDON, Sept 18 (IFR) - A group of Phones 4U’s senior secured bondholders are proposing to restructure the UK retailer, agreeing to wipe out a significant chunk of their debt to save the business.
US law firm Brown Rudnick is representing the investors, and has already begun discussions with the company’s administrators at PwC.
But a number of high-yield bond investors were sceptical about the feasibility of the plan, particularly as it is dependent on the support of the network operators.
Phones 4U went into administration earlier this week, after the country’s biggest mobile operator EE joined Vodafone in not renewing its network agreement.
“If the mobile network operators decline to supply us, we do not have a business,” said Phones 4U chief executive David Kassler.
Its debt chiefly comprises a £430m 9.5% 2018 senior secured bond placed in 2011 when BC Partners acquired the business, and a £205m 10% 2019 payment-in-kind (PIK) note Phones4U sold a year ago to fund a dividend to its owners.
“We were told by the Phones 4U management team that they had little commercial flexibility due to their debt repayment obligations,” Vodafone said in the statement.
According to Brown Rudnick, bondholders are prepared to take a significant write-down, increasing the chances of a commercially viable business and for 5,596 jobs to be saved.
“We have proposed a restructure of the business that means the capital structure will no longer be an impediment to achieving the commercial outcome which allows the company to continue as a going concern,” said Louise Verrill, a partner at Brown Rudnick.
But several investors said that creditors would be in a very weak negotiating position with the network operators.
“They’ll have to be pure price takers with the networks and are admitting that the whole value of the business is now based on its cost of debt,” said one.
Brown Rudnick did not release details on the potential haircut, but the senior secured notes were bid between 22 and 23 on Thursday morning, according to Tradeweb. The deeply subordinated PIK notes, meanwhile, are now virtually worthless, bid between 1 and 2.
On a call with bondholders on Tuesday evening, PwC said they were open to restructuring proposals from creditors, but were anxious to have those discussions sooner rather than later, as the likelihood of being able to restart the business diminishes the longer it is closed.
Phones 4U’s rapid slide into administration began at the start of September, when operator Vodafone decided not to renew its network agreement with the retailer.
The company was already under pressure as O2 had pulled its service at the start of the year and its principal rival Carphone Warehouse then agreed a merger with Dixons. The latter was a particular blow as Phones 4U had a partnership with the electronics retailer allowing it to operate store-in-stores in more than 150 outlets.
When EE, which comprises T-Mobile and Orange, decided it would also not renew its contract, Phones 4U’s owners were forced to enter administration at the start of this week.
“Our bondholder group has been working hard to ensure that the company’s cost structure can be adjusted to meet the commercial terms that EE and Vodafone put to the previous owners,” said Verrill at Brown Rudnick.
Any restructuring plan would need to regain the support of the major mobile operators in order for the business to survive.
“The carriers would probably prefer to pick over the carcass of the business, as they want to have more control over distribution,” argued one investor, however.
“It’d be harder politically, but they could promise to retain employees to soften the blow.”
PwC are holding a second update call with senior secured bondholders on Thursday afternoon and said that they would need a “private forum of creditors where we can discuss strategy,” noting that many bondholders had refrained from learning private information as it would restrict their ability to trade the bonds.
The first investor suggested that despite the senior secured bonds trading at 22, they look overbid, which reflects how few opportunities there are for distressed investors.
“Even so, I doubt any of the distressed powerhouses like Oaktree have got involved. I think a large number of the holders are still real money accounts.”
Real money investors are usually less willing to begin private discussions in these situations, as its blocks their ability to trade out of the bonds and some accounts will have restrictions on holding equity. (Reporting by Robert Smith, editing by Alex Chambers, Julian Baker)