Avanti Communications Group PLC $242 million refinancing fully funding the Company and completion of strategic review
Avanti Communications Group PLC (“Avanti”, the “Company” and, together with its subsidiary undertakings, the “Group”) today announces:
Completion of its strategic review, which includes termination of the formal sale process and end of offer period, in each case as defined in The City Code on Takeovers and Mergers (the "Code") Launch of a proposed refinancing that will fully fund the Company through the creation of $242 million of additional liquidity through $130 million of new cash funding and up to $112 million of potential interest deferrals up to April 2018 and allow the Company significant working capital to launch HYLAS 4 and grow into its capital structure Agreement of holders representing approximately 73% of Avanti’s senior secured notes due 2019 (the “Existing Notes”) to fully underwrite the $130 million of new cash funding and consent to certain amendments and waivers to the Existing Indenture (as defined herein) necessary to implement the proposed refinancing Launch of a consent solicitation and exchange offer (the “Consent Solicitation and Exchange Offer”) to effect the proposed amendments and waivers to the Existing Indenture, requiring the support of holders representing at least 90% in aggregate principal amount of the Existing Notes (the “Requisite Consents”) Proposed Amendments (as defined herein) include creation of a new $132.5 million Super Senior Debt (as defined herein) basket which could be used in the near term to substantially reduce the Company’s interest cost Update on outlook
Paul Walsh, Chairman said “Securing the underwriting of core bond investors to launch this major refinancing gives us a high degree of confidence that it will complete in January. After a turbulent year for Avanti, it is important for us to focus all of our attention on delivering outstanding services to our customers and preparing for the launch of HYLAS 4. This prized asset will more than double the revenue generating capacity of the fleet, bringing much needed extra capacity to mature markets in Western Europe and opening exciting new markets in West Africa. With the completion of coverage over EMEA it also makes Avanti the regional partner of choice of large multinational customers seeking a single service provider. We are grateful for the support of all our stakeholders and look forward to a more productive 2017.”
Completion of strategic review
The board of directors of Avanti (the “Board”) today announces the completion of the strategic review commenced on 11 July 2016.
Since that date, Avanti has, together with its advisers, considered various financial and strategic options for the Company including corporate transactions such as a merger with, or offer for, the Company by a third party, a sale of the business or new equity investment. In furtherance thereof, the Board decided to commence a formal sale process in accordance with Note 2 on Rule 2.6 of the Code and accordingly engaged financial advisers.
The industry backdrop has been very poor, with valuations across the industry falling dramatically in 2016. However, since commencing the formal sale process, the Company received indications of interest in writing from three strategic buyers and two private equity companies, including one formal indicative offer. Ultimately, the Board decided that none of the offers could be actioned because the Company believed that the offers received did not reflect the true value of Avanti.
As a consequence of this determination, Avanti has today terminated the formal sale process and thereby ceases to be in an offer period, in each case as defined in the Code.
Financial condition of the Group
The Group has made substantial investments in capital expenditure over recent years, and is currently constructing HYLAS 3 and HYLAS 4 to add to its existing fleet. The Company’s current fleet consists of two Ka-band satellites, HYLAS 1 and HYLAS 2, which have been commercially operational since April 2011 and November 2012, respectively, and ARTEMIS, a multiband satellite acquired from the European Space Agency on December 31, 2013. The Company’s HYLAS 4 satellite, which will complete its coverage of Europe, the Middle East and Africa, is currently under construction and scheduled for delivery in Q4 of the financial year ending 30 June 2017 (“FY2017”), with launch expected in Q1 or Q2 of the financial year ending 30 June 2018 (“FY2018”). The Company also has a satellite payload, HYLAS 2-B, which it has operated since 2015 under an indefeasible right of use agreement with another satellite operator, as well as a hosted payload under construction, HYLAS 3, which it intends to place on board a European Space Agency satellite expected to launch in 2017. Under the contracts associated with the construction, launch and operation of HYLAS 3 and HYLAS 4, the Group has committed to pay significant levels of capital expenditure and investment.
The Company has seen revenues grow at a lower than predicted rate, which has meant that it has experienced a reduction in available working capital, and a reduction in available funds to pay for the required capital expenditure payments under the construction and launch contracts in relation to HYLAS 4.
In response to the reduced working capital:
(a) the Company negotiated a deferral of certain capital expenditure payments relating to the construction and launch of HYLAS 4 so that $20 million of capital expenditure payments due to Orbital Sciences Corporation (“Orbital”, the manufacturer of HYLAS 4) have been deferred to 1 January 2017 and $18.7 million due to Arianespace (which will launch HYLAS 4) have been deferred to 28 December 2016 ($2.0 million) and up to 28 February 2017 ($16.7 million); and
(b) on 18 October 2016, the Company completed a consent solicitation process which allowed it to make the interest payment due to consenting holders of the Existing Notes on 1 October 2016 (the “October Coupon”) by issuing additional Existing Notes in lieu of cash, thereby preserving $28 million net cash in the short-term.
Despite the foregoing measures, absent the consummation of the Refinancing Transaction (as defined below), the Company does not expect to have sufficient funding to complete the construction and launch of HYLAS 4 and to meet certain of its future payment obligations.
The Company is therefore proposing the Refinancing Transaction to preserve its cash liquidity in the short-term and provide significant sources of new capital to fund the business through the launch of HYLAS 4 in Q1 or Q2 FY2018 and beyond.
The Refinancing Transaction will increase the amount of working capital available to the Group, which will allow it to make the required payments associated with HYLAS 4. Once HYLAS 4 becomes operational, the growth capacity in Europe and additional coverage in Africa and the Middle East are expected to result in significantly increased revenues for the Group and improvements to cash flow and available funds for working capital and future investments.
Summary of the Refinancing Transaction
Agreement of holders representing approximately 73% of Avanti’s Existing Notes to provide up to $130 million of fully underwritten new cash funding in the form of PIK Toggle Notes (as defined herein) to support capital expenditure
Opportunity available to all holders of Existing Notes on a pro rata basis to participate in and backstop the up to $130 million in new cash funding, which (a) shall entitle backstop parties to a pro rata share of 9.09% of the fully diluted share capital of the Company (which represents the only form of equity dilution in the proposed transaction) and (b) shall include the option for all participants to roll up $1,540 aggregate principal amount of Existing Notes into PIK Toggle Notes for every $1,000 of PIK Toggle Notes purchased
Agreement of holders of 73% of the Existing Notes to consent to certain amendments and waivers to the Existing Indenture (as defined herein) to permit (a) up to approximately $112 million of potential interest deferral (relating to the April 2017 and October 2017 PIK Toggle Notes coupons and the April 2017, October 2017 and April 2018 Amended Existing Notes (as defined herein) coupons), (b) the incurrence of the $132.51 million in PIK Toggle Notes, and (c) incurrence of up to $132.5m of Super Senior Debt to repay issued PIK Toggle Notes and replace and cancel any unissued PIK Toggle Note commitments
Launch of a Consent Solicitation and Exchange Offer to effect amendments and waivers to the Existing Indenture, which are necessary to effect the proposed refinancing, requiring the support of holders representing at least 90% in aggregate principal amount of the Existing Notes
If the Consent Solicitation is unsuccessful, the Company intends to launch a scheme of arrangement pursuant to Part 26 of the English Companies Act 2006 (the “Scheme”) to effect the proposed amendments and waivers to the Existing Indenture, which would require consent of a majority in number of holders representing at least 75% in aggregate principal amount of the Existing Notes present and voting on the Scheme
The Refinancing Transaction comprises the following three distinct steps which are inter-conditional: 1 $82.5 million of New Money Offer issued at issue price of $0.97 for $80 million in cash and $50 million of additional PIK Toggle Notes to be issued later in 2017 subject to certain conditions.
Step 1: Proposed Amendments, Proposed Waiver and Notes Exchange
(a) Certain provisions and covenants of the indenture governing the Company’s Existing Notes, as amended and/or supplemented from time to time between, amongst others, the Company, certain subsidiaries of the Company, as guarantors, and The Bank of New York Mellon, London Branch, as trustee and as security agent (the “Existing Indenture”) shall be amended (the “Proposed Amendments”) to:
(i) permit the incurrence of the Super Senior Debt and the PIK Toggle Notes as indebtedness which are senior in priority to the Existing Notes that will be secured on the collateral that currently secures the Existing Notes and provide that holders of the Super Senior Debt and the PIK Toggle Notes will be entitled to receive the proceeds from enforcement of such collateral in priority to holders of the Existing Notes;
(ii) permit the payment of the interest payments due on the Existing Notes, as amended (the “Amended Existing Notes”), in April 2017, October 2017 and April 2018 in the form of PIK interest in lieu of cash under certain conditions; and
(iii) amend certain other provisions of the Existing Indenture to, among other things, extend the maturity of the Existing Notes, require that certain subsidiaries guarantee and become obligors under the Existing Notes and change certain other covenants in the Existing Indenture;
(b) Certain provisions of the Existing Indenture shall be waived to effect the proposed refinancing (the “Proposed Waiver”); and
(c) The Company is offering to each holder that participates in the New Money Offer (as defined below) the opportunity to exchange (the “Notes Exchange”), for each $1,000 aggregate principal amount of PIK Toggle Notes purchased pursuant to the New Money Offer (based on a potential maximum issuance of $132.5 million in aggregate principal amount of PIK Toggle Notes which corresponds to (i) $82.5m of PIK Toggle Notes on the basis of $80m funded with original issue discount of 3% and (ii) $50m of PIK Toggle Notes to be issued to such holders on specified delayed draw dates (up to $15 million on 30 June 2017 and up to $35 million on 30 November 2017), $1,540 aggregate principal amount of Existing Notes held by such holder for an equal aggregate principal amount of additional PIK Toggle Notes,
Together, the “Refinancing Transaction”.
The Company intends to implement the Proposed Amendments, the Proposed Waiver and the Notes Exchange pursuant to:
the Consent Solicitation and Exchange Offer; or
if the Requisite Consents to the Proposed Amendment and Proposed Waiver are not obtained in the Consent Solicitation, a Scheme between Avanti and the holders of the Existing Notes, which would require consent of a majority in number of holders representing at least 75% in aggregate principal amount of the Existing Notes present and voting on the Scheme, as a fallback option to the Consent Solicitation and Exchange Offer.
Holders who consent to the Consent Solicitation prior to the 10th business day following launch of the Consent Solicitation and Exchange Offer will be eligible to receive a consent payment of $2.50 per $1,000 of Existing Notes, to be paid in cash on closing of the Refinancing Transaction.
Step 2: New Money Offer and issue of new ordinary shares
Subject to the receipt of the Requisite Consents, the Company is offering to all holders that deliver a consent in connection with the Consent Solicitation the right to purchase super senior second-priority PIK toggle notes due 2021 (the “PIK Toggle Notes”) in an aggregate principal amount of up to $132.5 million (which corresponds to (i) $82.5m of PIK Toggle Notes issued on the basis of $80m funded with original issue discount of 3% and (ii) $50m of PIK Toggle Notes to be issued on specified Delayed Draw dates (up to $15 million on 30 June 2017 and up to $35 million on 30 November 2017)), the proceeds of which will be used by the Company for working capital purposes and to pay upcoming capital expenditure and insurance obligations of the Group (the “New Money Offer”). Up to $82.5 million in aggregate principal amount of the PIK Toggle Notes will be issued on closing of the Refinancing Transaction, with up to the remaining $50.0 million to be issued to such holders on specified dates (up to $15 million on 30 June 2017 and up to $35 million on 30 November 2017), subject to reduction for the incurrence of Super Senior Debt and subject to certain conditions being satisfied on the draw down dates, including there having been no default in respect of any indebtedness of the Company and no material adverse change having occurred, as described below (such amount, the “Delayed Draw Amount”). Interest payments due on the PIK Toggle Notes in April 2017 and October 2017 may be paid in the form of PIK interest in lieu of cash under certain conditions.
Holders that elect to purchase more than their pro rata share of PIK Toggle Notes (the “New Money Backstop Creditors”) pursuant to the New Money Offer will be offered, together with the Initial Consenting Creditors (as defined herein), the right to subscribe for their pro rata share of 14,739,600 new ordinary shares in the capital of the Company, representing approximately 9.09% of the fully diluted share capital of the Company, at nominal value.
New Money Backstop Creditors and the Initial Consenting Creditors will also receive a commitment fee of 3.0% payable in cash on their pro rata share of the Delayed Draw Amount as well as a drawdown fee of 1.5% payable in cash on their pro rata share of the Delayed Draw Amount when issued.
The Initial Consenting Creditors have agreed, pursuant to the Conditional Subscription Agreement (as defined herein), to fund up to the entirety of the New Money Offer, subject to reduction for the level of participation in the New Money Offer by other participants in the New Money Offer and the incurrence of Super Senior Debt.
Step 3: Reorganization of the Board of Directors of the Company
Subject to the consummation of the Refinancing Transaction, the Board of the Company will be reorganised (the “Board Reorganisation”, together with the Proposed Amendments, Proposed Waiver, Notes Exchange and the New Money Offer, the “Refinancing Transaction”) to consist of a total of nine directors, being:
the current Chairman;
the current CEO of the Company,
the current Technical Director of the Company;
three new non-independent directors selected by the Initial Consenting Creditors;
Richard Mastoloni, a new non-executive director;
a new independent non-executive director selected by the Company from a list of three independent candidates provided by the Initial Consenting Creditors; and
an independent non-executive director selected by the Initial Consenting Creditors from a list of three independent candidates provided by the Company.
Richard Mastoloni was appointed today. Any other new appointments (or resignations of existing directors) shall take place on or prior to the settlement date of the Consent Solicitation (the “Settlement Date”), with effect from the Settlement Date.
Support for the Refinancing Transaction
The Company already has support for the Refinancing Transaction from holders of the Existing Notes representing approximately 73% of Existing Notes (the “Initial Consenting Creditors”). On 20 December 2016, Avanti entered into a lock-up agreement (the “Lock-up Agreement”) and a conditional subscription agreement (the “Conditional Subscription Agreement”) with the Initial Consenting Creditors. Pursuant to these agreements, the Initial Consenting Creditors have contractually agreed to validly deliver (and not revoke) a consent in connection with the Consent Solicitation, tender their Existing Notes in connection with the Exchange Offer, vote in favour of the Scheme (as applicable) and fund up to the entirety of the New Money Offer. The obligations in respect of the Refinancing Transaction are subject to usual conditions precedent, including there having been no default in respect of any indebtedness of the Company and no material adverse change having occurred.
Super Senior Debt
The Company will have the right to raise up to $132.5 million of super senior debt (the “Super Senior Debt”), plus any refinancing fees and applicable make whole amounts at terms acceptable to the Initial Consenting Creditors or, if raised after closing of the Refinancing Transaction, 60% of the holders of the PIK Toggle Notes.
Proceeds of Super Senior Debt raised before the closing of the Refinancing Transaction will be used to fund capital expenditure payments up to an aggregate amount of $80 million, which will result in a corresponding reduction in the amount of PIK Toggle Notes to be issued on the Settlement Date and, if any additional funding is available, to fund capital expenditure payments up to an aggregate amount of $50 million, which will result in a corresponding reduction in Delayed Draw Amount commitments.
Proceeds of Super Senior Debt raised after the Settlement Date will be used to fund capital expenditure payments up to an aggregate amount equal to the Delayed Draw Amount then outstanding which will result in a corresponding reduction in Delayed Draw Amount commitments and, if any additional funding is available, will be used to refinance the amount of PIK Toggle Notes then in issue (including any Delayed Draw Amounts issued) pro rata.
Related Party Transaction
The entering into of the Lock-up Agreement and the Conditional Subscription Agreement with MAST Capital Management, LLC and Solus Alternative Asset Management LP (together, the "Related Parties"), who are also substantial shareholders, would amount to a related party transaction pursuant to Rule 13 of the AIM Rules for Companies (the "AIM Rules"). The Directors consider, having consulted Cenkos Securities plc, that the terms of the contractual arrangements with the Related Parties are fair and reasonable in so far as the Company's shareholders are concerned.
Positive outcome for both Avanti and its stakeholders
The Board believes that the Refinancing Transaction, if implemented, will provide a solution to its liquidity needs and is in the best interest of those with an economic interest in the Group. The Board views the Refinancing Transaction as a positive outcome as it creates a potential maximum of approximately $242 million of additional liquidity and allows the Company significant working capital to grow into its capital structure.
