Holders of TalkTalk’s due 2025 bonds have organised and heard pitches from financial and legal advisors this week amid the UK telecoms provider’s refinancing efforts, according to three sources familiar with the matter.
The B-/B rated GBP 685m 3.875% senior secured 2025s are indicated at 71-mid today (12 October) with a 32.2% yield-to-worst on Markit.
A group of lenders in the company’s GBP 330m RCF had earlier chosen PwC as their advisor to coordinate the financial information that lenders would be receiving ahead of a refinancing, as reported.
A GBP 20m piece of the RCF, which ranks pari passu with the senior secured bonds, cleared an auction in early September in the high-70% to par, as reported.
TalkTalk has secured a covenant relaxation for the RCF with its banks. The RCF debt had a 3.75x net leverage test at FY22/23 fiscal year-end 28 February 2023 that stepped down to 3.5x in FY23/24, but the test for the fiscal year end-February 2024 has now been set at 4.95x to give more headroom in case of any downside scenarios. It reported 3.66x net leverage at FY22/23 for covenant purposes.
The net leverage covenant test level then reverts down to 3.5x after the relaxation period ends in February 2024. There is also a minimum liquidity covenant built in during the relaxation period.
RCF lenders include Bank of Ireland, Barclays, Clydesdale Bank, DNB, HSBC, ING, Mitsubishi UFJ Financial Group, and RBS (NatWest), according to Debtwire Par.
Road to refi
TalkTalk announced on 29 September that it had sold its B2B arm, TalkTalk Business Direct, to TFP Telecoms Limited (TFP), a special purpose vehicle controlled by the main shareholders of TalkTalk Telecom Group Limited (TTG), for GBP 95m. As part of the sale, the B2B business had also signed an exclusive long-term wholesale services agreement with TalkTalk worth approximately GBP 25m over the next three years.
In early September, the company managed to obtain an approximately three-year GBP 75m non-recourse financing facility from KKR, which replaced a receivables facility of the same amount that was coming due the same month.
TalkTalk elaborated its expected operational recovery and refinancing strategy at investor meetings organised through Citi on 18 July. But some investors were apprehensive about the refinancing plan given its increasing HoldCo PIK size, downward pre-IFRS 16 earnings trajectory and uncertainty on realising any speculated sale value on its B2B Direct business, as reported.
The company is expected to have higher year-on-year EBITDA in FY23/24 on both a pre-IFRS 16 and post-IFRS 16 basis, while its average revenue per user in 1Q23/24 on its Wholesale platform grew around 14%-15%. The Wholesale platform (75% of remaining group EBITDA after the B2B Direct business sale) is infrastructure-like. High yield debt on this business is expected to be smaller than it is today, while the company considers direct lending as one of its options, as reported.
The outstanding amount on the HoldCo PIK had risen to around GBP 380m after an around GBP 90m debt increase via fund Ares which lent the amount to the HoldCo via a Virtual1 asset that is outside the restricted group, as reported. Adding GBP 380m to net debt means that adjusted covenant net leverage climbs above 5x and investor estimated pre-IFRS 16 adjusted net leverage climbs above 10x. The HoldCo PIK had previously been disclosed as GBP 291m in size as of 28 February 2022, according to public filings for company entity Tosca IOM Limited.
TalkTalk was taken private back in March 2021 when private equity funds Toscafund Asset Management and Penta Capital took control of the business, with ratings agency Fitch noting the business was taken private for an implied GBP 1.1bn enterprise value. The two private equity houses funded the transaction with a GBP 275m HoldCo PIK note, net of GBP 140m of additional equity, according to a TalkTalk June 2021 lender presentation. TalkTalk is ultimately owned by a number of private equity investors, none of which has a majority shareholding, according to its latest annual report.
The PIK is unsecured debt in the shareholder entity, and it was done to fund the previous take-private. Maturing in 2026, it sits structurally subordinated to the bond issuer group debt, as reported.
TalkTalk declined to comment.