Linklaters advises on innovative drop-down financing and subsequent settlement transaction

Linklaters has advised the shareholders and certain creditors of the LYCRA Company (LYCRA) on the comprehensive refinancing of LYCRA’s 2023 maturing debt. LYCRA is a major global manufacturer of textile, fibre and technology solutions for apparel.

Following on from Linklaters acting for the mezzanine lenders to LYCRA on the successful cross-border enforcement and restructuring implemented in June 2022 that resulted in the firm’s clients acquiring equity ownership of LYCRA (see here for details), Linklaters has advised on:

1. the par refinancing of LYCRA’s USD110m super senior revolving credit facility;

2. the par refinancing of LYCRA’s EUR250m senior secured notes due May 2023 (the "2023 Notes”) (the "2023 Notes Refinancing"); and

3. an amendment and settlement transaction with, amongst others, holders of LYCRA’s USD750m senior secured notes due 2025 (the “2023 Settlement”).

The completion of the transactions above result in a par refinancing of all of LYCRA’s near-term debt and provide the group with a stable platform moving forward.

2023 Notes Refinancing key transaction features

The 2023 Notes Refinancing represents one of the most innovative drop-down financing transactions that has been seen in the European market to date.

In summary, the transaction involved:

(i) a newly incorporated Orphan Issuer outside of the LYCRA Restricted Group issuing new 1st and 2nd lien “SPV Notes” to investors (including ‘participating’ holders of the 2023 Notes in exchange for their existing 2023 Notes);

(ii) the Orphan Issuer using the proceeds from the SPV Notes to subscribe for new back-to-back “Refinancing Notes” issued by a LYCRA company within the Restricted Group; and

(iii) the proceeds of the Refinancing Notes being up-streamed to the 2023 Notes issuer to repay the 2023 Notes at par.

The Orphan Issuer’s claim under the Refinancing Notes is secured pari passu on the same collateral as the existing senior secured debt of LYCRA. By extension, the SPV Notes also benefit from an (indirect) claim on the same pari passu pool of collateral within the Restricted Group.

In readiness for a potential ‘drop-down’ transaction, LYCRA then intended to transfer certain trademarks to two new restricted subsidiaries. LYCRA could use permitted investment capacity to designate both the new companies as Unrestricted Subsidiaries, thereby permitting the Security Agent to release the security in favour of the existing pari passu senior secured debt over the trademarks.

As a result, security could have been granted over the relevant trademarks solely for the benefit of the Orphan Issuer / the Refinancing Notes (whilst the Orphan Issuer and, indirectly, the holders of the SPV Notes, also maintained a separate claim against the remaining pool of assets securing the pari passu senior secured debt at the Restricted Group level (thereby creating a ‘double dip’)).

2023 Settlement transaction key features

It was subsequently agreed that the drop-down transaction described above would not be implemented as part of the 2023 Settlement, which involved:

(i) an amendment to the intercreditor agreement waterfall to provide for USD120m of claims of the Refinancing Notes to rank ahead of LYCRA’s pari passu senior secured debt;

(ii) certain amendments to the terms of the Refinancing Notes and the 2025 Notes; and

(iii) various releases and waivers as between the relevant parties.

The 2023 Settlement represented a negotiated agreement between LYCRA’s key creditors, LYCRA and its shareholders and avoids any litigation or other action in relation to the intended drop-down financing transactions.

The Linklaters team was led by partners James Warboys (London, Restructuring and Insolvency) and Liam Robinson (London, Restructuring and Insolvency) supported by Christianne Williams (Partner, London High Yield), Andrew Jennens (Partner, London Leverage Finance), James Simpson (Counsel, London High Yield), Brad Pawlak (Managing Associate, London Leverage Finance) and Sam Kennerley (Managing Associate, London Restructuring and Insolvency).

Rory Conway (Partner, London Litigation, Arbitration & Investigations) and Andrew Lynch (Partner, London Corporate) also provided specialist support as part of the transactions. The team was also supported by a cross-border team of colleagues across various jurisdictions and practices.