Benjamin Kovacka

Intralot’s drop-down restructuring games: priming pari passu noteholders, circumventing non-consenters and artificially reducing asset values

Intralot is the first European group to restructure its debt using the “J. Crew”-inspired drop-down procedure, transferring its unencumbered US business away from unsecured noteholders due to be repaid in 2024, to be used to support secured debt to refinance unsecured notes maturing earlier in 2021. The trustee for the notes due in 2024 is suing and there is a separate claim for fraudulent transfer. In this article, the authors explore: how unsecured pari passu and pro rata noteholders came to prime others by becoming senior secured noteholders under the drop-down procedure; how the drop down was achieved by a US subsidiary issuing unsecured notes due 2025, swapping them for the unsecured notes due 2021 issued by a holding company, being designated an “Unrestricted Subsidiary”, with its shares and assets then being pledged as security for the notes due 2025; how Intralot exploited imprecise but standard drafting of the covenants to ensure the value of the US business was low enough to fit within investment basket capacity required to be used for the drop-down; why only 75% of the primed noteholders may have decided to stay being supported by the non-US business rather than exchange for equity in the US business; how the different bargaining power among creditor groups impacted the restructuring and resulted in unequal outcomes for creditors in the same class; how a minority of 2021 noteholders withheld consent to force repayment of 59% of their notes at par prior to the refinancing-by-drop-down; and “J. Crew” blockers as anti-drop-down provisions and their frequency in 2021.