Vivarte Restructing Hits Some CLOs Harder Than Others

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French retailer Vivarte is one of most widely held credits among European collateralized loan obligations, but its debt restructuring will hit older deals harder than newer one.

Vivarte announced in February it would postpone payments on €2.8 billion ($3.9 billion) of debt while it negotiates a restructuring. Managers of CLOs approaching maturity, who will be unable to wait out the restructuring, will have to sell their holdings of the company’s debt and take an immediate hit, according to research published this week by Moody’s Investors Service.

But managers of CLOs farther away from maturity will have time to decide whether to go through the work-out process or sell, possibly at a higher price at a later date, generating a higher recovery value.

Vivarte was acquired by Charterhouse in 2007 buyout backed by €3.43 billion of loans.  In January, the retailer failed to persuade enough lenders to waive loan covenants capping the ratio of its debt to earnings. Lenders have appointed investment bank Houlihan Lokey and attorneys Willkie Farr & Gallagher to represent a committee of creditors to coordinate talks with the company.

One hundred thirty-eight, or 78%, of the CLOs that Moody’s rates hold Vivarte’s debt, making it the second-most widely held European issuer among CLO holdings. The total exposure of €1.03 billion to Vivarte constitutes approximately 2.3% of the total par of European CLOs, 20 making it the third-largest European issuer among CLO holdings.

European CLOs’ exposures to Vivarte range from 15% to 0.1%, with a weighted average exposure of 2.6%. Thirty-five different collateral managers hold Vivarte’s debt.

Moody’s said in its report that Vivarte’s default will trigger overcollateralization failures (OC) in 3617 transactions, resulting in the diversion of excess spread from equity to pay the senior noteholders, which is “credit positive” for senior noteholders but “credit negative” for junior noteholders.

The diversion of excess spread will continue until the CLO cures the failure. When calculating their OC, transactions will have to carry Vivarte at approximately half the par exposure because CLO documentation requires carrying defaulted obligations at the lower of market value or Moody’s assumed recovery rate.

“For those CLOs whose OC tests do not fail or that have sufficient time to maturity, the impact of Vivarte’s default will still be credit negative, but mainly to the junior noteholders,” the report stated. “For the junior classes, the OC cushion from which they currently benefit will decline (assuming an ultimate recovery rate of less than 100%), which will make them more vulnerable to future default/credit deterioration.”

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