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Aleris International has hired Weil Gotshal and Alvarez & Marsal as it prepares to file for Chapter 11 amid a liquidity crunch, three lenders and a source close to the situation told Debtwire. Loan holders were informed of an imminent restructuring yesterday, as the news service previously reported.
Aleris is currently exploring the possibility of a debtor-in-possession (DIP) financing in the range of USD 400m, said two of the lenders. The company approached existing lenders for the bulk of the new money but it remains to be seen whether they will pony up the extra cash, they said. Pricing for the priming DIP has been suggested at Libor+ 1,000bps, they added.
The pending insolvency triggered today a heavy selloff of the company’s loans by CLOs and raised the prospect that Aleris will be removed from the LCDX index.
The Texas Pacific Group-owned aluminum roller has been battling declining demand for the past year due to exposure to the slumping auto and housing sectors. Aleris is the third largest supplier of aerospace sheet and plate, and operates over 40 production facilities in North America, Europe, South America and Asia.
TPG declined to comment. Calls to Aleris, Weil and Alvarez not returned.
Aleris’ USD 825m L+ 200bps term loan dove roughly 15 points in the span of five hours today as CLOs fled the credit based on concerns that a bankruptcy would trigger the credit agreement’s collateral allocation mechanism (CAM).
If Deutsche enacts the CAM as written, it would convert the USD-denominated loan and Aleris’ EUR 425m term loan into EUR-denominated pro-rata interests in both facilities, said two of the lenders. US-based CLOs cannot hold EUR-denominated loans.
The US TLB was quoted at 21.5-23.5 this afternoon, down from a high bid of 40 yesterday, one of the sources specified. Aleris’ USD 400m 10% senior subordinated notes due 2016 traded at 6 today, down from 16 yesterday. The company’s USD 600m 9% senior PIK toggle notes due 2014 traded at 4 today, down from 10 on 2 February, according to TRACE.
Aleris’ CAM exchange would be similar in principle to the exchange executed by Lyondell Chemical after its filing last month. The CAM exchange is triggered by a Chapter 11 filing and mandates that lenders assume pro-rata shares across all term loan tranches in the US and Europe, in order to allocate global assets equally among tranches.
However, Lyondell’s loan agent, Citibank, re-interpreted the CAM last week to allow loan holders to trade any class of loans they held on a non-pro rata basis. The bank made the change in order to allow LCDS holders to deliver the actual loans underlying their swap contracts.
Aleris is included in each of the versions of the LCDX index and an LCDS settlement auction will likely be held on the name, similar to those that have been held on the previous defaulted index constituents.
Aleris reported USD 377m of liquidity at 30 September, including USD 84m of cash and USD 293m of revolver availability. But the cash balance probably dwindled significantly over recent months as the company was not expected to generate positive EBITDA in 4Q08, said a sellside analyst and a buysider.
Moreover, the company’s USD 844m ABL revolver borrowing is due for redetermination at a lower value in relation to lower aluminum prices cutting into the value of its inventory. Aleris likely spent USD 58m in interest expenses and USD 25m in capex in 4Q08, the analyst and buysider added.
(Additional reporting by Nicoletta Kotsianas in New York)
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