Is ‘creditor-on-creditor violence’ coming to the muni market? Texas bankruptcy tests the waters
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A bankruptcy financing maneuver common in the high-yield corporate bond market is making a rare appearance in the municipal bond market in the bankruptcy of a Texas-based metals recycler.
A group of bondholders have floated a debtor-in-possession financing with a “rollup loan” that elevates their pre-petition position to a super-priority status. Smaller bondholders in a suddenly subordinated position are calling the move the kind of “creditor-on-creditor violence” seen in corporate restructurings where creditors use various tools to prioritize their own claims over other creditors.
The DIP facility is a key part of the bankruptcy of Aleon Metals, LLC, which has $293.6 million of revenue bonds outstanding. The financing, as is typical in bankruptcy cases, will allow the debtor to continue operations and cover expenses of the bankruptcy and the upcoming sale.
“It’s been detrimental to the corporate market and they’re testing it in the muni market now,” a source familiar with the case said. “Retail [bondholders] could be wiped out because of this special treatment,” the source said. “That’s why this precedent is important for the market, because if they’re successful with the DIP rollup, you’re going to see it done over and over again in future deals.”
Aleon Metals, LLC and its two subsidiaries, Aleon Renewable Metals, ARM, and Gladieux Metals Recycling, GMR,
The same day it filed bankruptcy, the debtor announced it had secured $188 million in DIP financing. The same bondholder group that offered the DIP is also serving as the stalking horse bidder for the sale,
Jefferies, which is acting as Aleon’s investment banker, will “continue to market the business as part of the ongoing, competitive auction process, which remains open to higher or better offers,” the company said.
The $188 million DIP includes $62.5 million of new money and a rollup loan on a two-to-one ratio, which rolls up $125 million of bonds held by the bondholder group to a super priority lien, according to an
The court has given interim approval to the DIP financing loan. A hearing on final approval is set for Wednesday afternoon. No objections have been filed to the financing.
The bondholders offering the DIP loan and the stalking horse bid are Invesco, Pimco and Capital Research and Management, according to two sources familiar with the situation. Other bondholders include AllianceBernstein and Goldman Sachs Asset Management LP, which are not participating in the DIP financing, according to a creditor list and one of the sources.
A pair of retail buyers who hold smaller pieces of the debt said they were not invited to be included in the DIP financing. Some of the bonds were purchased for four cents on the dollar from the Easterly RocMuni High Income Municipal Bond Fund, which formerly was a majority holder before the fund’s
UMB Bank NA is bond trustee and acting as administrative agent and collateral agent for the DIP Facility. Invesco and Pimco did not respond to requests for comment. UMB declined to comment.
One of the sources familiar said other institutional holders were invited to participate in the DIP financing and declined in part because they didn’t want to “put more money at risk.” The source added that the majority bondholders have propped up the company financially since last year.
“Creditor-on-creditor aggression,” although common in corporate restructurings — where it forms what
A bankrupt debtor has limited resources, so “it’s not unusual in a bankruptcy, on the one hand, to see competition between creditors,” said an attorney familiar with DIP financing.
“On the other hand, mutual funds typically will cooperate with one another,” the lawyer said, adding that the reason for that from a business perspective is that people run up against each other in other situations, and “people want to be treated fairly if they don’t have the leverage in the other situation.”
Generally, in bankruptcy situations people tend to work with one another, “but that’s because they expect to see the other mutual funds or other bondholders in other situations where everyone wants a fair deal,” the attorney said.
“I’m suspecting that the ones that own a small amount of bonds are probably retail owners,” the lawyer said. “Mutual funds aren’t going to care as much about retail because they don’t interact with retail, they don’t have relationships. But they do have relationships with other mutual funds.”
GMR sold three series of senior revenue bonds totaling $100 million in 2019 and $38.5 million of subordinated bonds in a single 2020 series. Revenue bonds sold by ARM totaled $75 million in 2022 and $100 million in 2023.
In a court filing, Roy Gallagher, the debtors’ chief restructuring officer, outlined events leading up to bankruptcy, including a malfunction in a sulfur dioxide scrubber that led to materially reduced production, metals price volatility, and unavailable capital investment from equity holders.
Gallagher also said that he believes the bondholders would not have offered the DIP financing without the rollup terms.
“I believe the DIP lenders viewed the roll-op loans and the milestones in the DIP credit agreement as integral to the proposed DIP Facility and would not have otherwise provided the DIP facility,” he said in the filing, adding that it would “prevent substantial value destruction.” The DIP facility, he said “is the best and only financing available to the debtors” and its terms “are reasonable and necessary under the circumstances of these cases.”
The Freeport, Texas-based companies’ assets include a facility purchased in 2017 specializing in extracting valuable metals from waste generated by oil refineries.
