Trinseo's Restructuring: Doubling Down on Double-Dips

When it comes to what I’ve called the “new restructuring pipeline” – which, to be clear, is not so much new or novel as it is a name I’ve dreamt up for discussion purposes – I’ve suggested that the number of LMEs that occur is a forward-indicator of the number of future filings that’ll occur. Which, of course, is true enough (see: Wheel Pros).

But the number of LMEs that occur – especially if they’re narrower in scope – can also be a forward-indicator of the number of additional LMEs within those same set of names that’ll occur (if at first you don’t succeed, try, try again, etc. – at least if the post-LME docs don't completely constrain your freedom of movement).

So, for example, in the original Double-Dip Guide we talked at length about Trinseo and, as it happens, late last year they announced a new transaction – signed on to at announcement by at least a simple majority of their holders under each applicable indenture and credit agreement – after hopes for a turnaround in their cash burn didn’t materialize and doesn’t appear to be about to materialize to a sufficient degree anytime soon. (This time around, Centerview advised Trinseo and PWP advised the TSA lenders.)

The transaction itself was a bit of a hodgepodge but it partly involved (surprise, surprise) the designation of two of their businesses (Aristech Surfaces and Altuglas) as unrestricted subsidiaries and the creation of two new tranches of (secured) intercompany loans. (Aristech Surfaces was acquired by Trinseo for $445mm in 2021 and has an EBITDA of around $50mm, Altuglas was acquired by Trinseo in 2020 as part of the $1.4b acquisition of Arkema’s polymethyl methacrylate business.)

While the TSA breaks down the transaction into seven components, it’s probably better understood for explanation purposes as being comprised of three core components...

Note: Since most of this was written in the days after the TSA dropped and before the ultimate transaction closed, you'll notice that the present tense is used for a bit before I then switch tenses when discussing some ramifications. But since I talk a little bit about why holders shouldn't hesitate to participate in the transaction (spoiler alert: almost all did participate) I figured it's better not to change around the tenses and leave this as it is.

First, there’ll be an incremental term loan of $115mm funded by participants (to use Trinseo’s laborious naming convention, the Super HoldCo New Money Participating Lenders) that’ll be tacked onto the pre-existing ~$1.07b TL that we talked a lot about vis-à-vis Trinseo’s 2023 LME (the “2028 Refinance Term Loans” that were broken into $128.8mm of Tranche A TL, $948.3mm of Tranche B TL, and had Trinseo Luxco Finance SPV S.à.r.l. as lead borrower and Trinseo NA Finance SPV, LLC. as co-borrower – this new $115mm is referred to as Tranche C in the amended credit agreement).

Then the first tranche of the aforementioned two new secured intercompany loans, that we’ll call the Tranche A TL, will flow from Trinseo Luxco Finance SPV S.à.r.l. (lender) to Trinseo Holding S.à.r.l. and Trinseo Materials Finance, Inc. (co-borrowers) and be equal to $115mm. The proceeds from the Tranche A TL will then be used, once received by the borrowers, to redeem the $115mm of 2025 SNs outstanding at par in cash (for reference, the issuers of the 2025 SNs were Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc.).

In simpler terms, Trinseo will tack on $115mm to the 2028 Refinance Term Loans (that arose from the 2023 LME and benefit from the structural advantages we talked about at the time) to take out their $115mm of 2025 SNs. So, we see once again that it often pays to be the inside maturity when in rickety capital structures (there’s a reason the 2025s were trading in the low-90s prior to the TSA!).

Note: To make this all easier to follow (famous last words) it’s probably not a bad idea to reference the below that I created when we first talked about Trinseo’s original LME (and to read that overview) since this new hodgepodge LME involves the same set of entities as their last hodgepodge LME...

Now, it might seem odd (if you’re paying attention to all the entities being bandied about) that the co-borrowers of the Tranche A TL are Trinseo Holding S.à.r.l. and Trinseo Materials Finance, Inc., as opposed to Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. since the latter set were the co-issuers of the 2025s. However, as illustrated above, Trinseo Holding S.à.r.l. is the parent entity and as part of the overall transaction it was announced that Trinseo Materials Operating S.C.A. will merge with and into Trinseo Holdings S.à.r.l.

So, for practical purposes, the flow here is what one would expect and no different, in function, than with the $948mm worth of secured intercompany loans – which recall were divided between the $680mm Refinancing Term Loans and the $268mm Incremental Term Loans – we talked about in relation to Trinseo’s 2023 LME which were from Trinseo Luxco Finance SPV S.à.r.l to Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. since, of course, now Trinseo Materials Operating S.C.A. has been subsumed by Trinseo Holding S.à.r.l.

The impact is all the same: an intercompany loan from Trinseo Luxco Finance SPV S.à.r.l that’ll reside pari to the secured debt that resides at the Trinseo Holding S.à.r.l. / Trinseo Materials Finance, Inc. level (e.g., the $724mm 2028 TLB issued well before all the LME shenanigans began and the $948mm worth of intercompany loans that arose from the 2023 LME) with the exception of the new $300mm revolver, to be discussed as the third component of this transaction, which will be senior.

Note: The two businesses, Aristech Surfaces and Altuglas, that have been designated as unsubs will be guarantors solely under the 2028 Refinance Credit Agreement (a.k.a. become guarantors of the 2028 Refinance Term Loans) to provide some extra credit support there (read: avoid the $115mm incremental term loan diluting the credit support of the 2028 Refinance Term Loans).

Second, the 2029 SNs – that, like the 2025 SNs, were issued by Trinseo Materials Operating S.C.A. and Trinseo Materials Finance, Inc. – will be offered an exchange, at a ~15% discount, into New 2L Notes (if we want to use Trinseo’s laborious naming convention again, they’re the New 2L Super HoldCo Notes) which will be issued by Trinseo Luxco Finance SPV S.à.r.l and Trinseo NA Finance SPV, LLC. (These New 2L Notes will be 5.125% cash plus 2.50% cash or PIK, at Trinseo’s discretion for three years, and then 7.625% cash thereafter.)

Not to beat a dead horse but remember that Trinseo Luxco Finance SPV S.à.r.l and Trinseo NA Finance SPV, LLC. were the same entities that were the lead borrower and co-borrower, respectively, of the 2028 Refinance Term Loans (a.k.a. the ~$1.07b TL that Oaktree, Apollo, et al. fronted). Further, recall that Trinseo NA Finance SPV LLC was the unsub that Trinseo’s Americas Styrenics LLC business was dropped to (well, it’s 50% stake purportedly worth $500mm…).

So, this SN exchange will allow for the capture of a non-trivial amount of discount. However, the exchange rate on offer here is still well above the pre-transaction trading price of the 2029 SNs, which was within the 50s, and the New 2L Notes will now have a collateral package comprised of a second-lien on all the same collateral as the 2028 Refinance Term Loans (which is $115mm larger than before, as discussed above, but now benefits from Aristech and Altuglas being guarantors too).

The second of the secured intercompany loan tranches – that we’ll call the Tranche B TL – will, as with the Tranche A TL, flow from Trinseo Luxco Finance SPV S.à.r.l. (lender) to Trinseo Holdings S.à.r.l. and Trinseo Materials Finance, Inc. (co-borrowers) and will be equal to the face value of the New 2L Notes that’ll be issued in exchange for the 2029 SNs (e.g., at least $280mm based on the participation rate announced in the TSA but probably much higher in the end).

So, as with the Tranche A TL, this Tranche B TL will reside pari to the secured debt that resides at the Trinseo Holding S.à.r.l. / Trinseo Materials Finance, Inc. level (e.g., the $724mm 2028 TLB and the $948mm worth of intercompany loans that arose from Trinseo’s 2023 LME) with the exception of the new $300mm revolver to be discussed below as the third component of the transaction.

And, of course, the 2029 SN holdouts (if there are any) will have their docs stripped on the way out by participating holders (remember that when the TSA was announced a supermajority of the 2029s had already signed on, so the requite level of consent had already been hit to strip the indenture).

Thus, we should expect pretty much unanimous participation in the exchange in this situation (based on the 2029s positioning in the capital structure and their far-dated maturity it doesn’t pay to roll the dice and be a holdout here à la the holdouts with near dated maturities in recent LMEs).

So, in effect, participating 2029s will be moving from one silo of the capital structure where they were unsecured and would have had even more debt layered over top of them through the two new intercompany loans created vis-à-vis this transaction and would have been left with stripped docs to another silo where they’re part of the in-crowd (that still benefits from secured claims at their former silo via the intercompany loans) comprised of those that were involved in Trinseo’s last LME and those that were involved in the first component of this LME that resulted in the now enlarged 2028 Refinance Term Loans.

Sure, these participating 2029s will have a second-lien on the 2028 Refinance Term Loans collateral and, I suppose, that’s not ideal (there’s still a lot of debt in front of them, even if they’re in a better neighborhood than before!) but it’s better than where they’d otherwise be sans participation.

Thus, this should be another reminder that it often pays to be the inside maturity in a capital structure that’s untenable in a certain sense but where there are some options. Because the reason the 2025 SNs were trading in the 90s pre-transaction while the 2029 SNs were trading in the 50s is that everyone knew that Trinseo wouldn’t be able to do a regular-way refi of the 2025s but that it could probably figure out some solution to take them out.

And, like, the nature of the 2023 LME meant that one didn’t need to be too imaginative to see at least one pathway forward: remember that the 2023 transaction took out $385mm of the $500mm tranche of 2025 SNs at par – leaving us with this stub of $115mm we’re now dealing with – through the proceeds from the $268mm Incremental (Intercompany) Term Loan that was paired with the proceeds from the $129mm Tranche A (Intercompany) TL (the latter of which, after some twists and turns through the structure, became an equity contribution at Trinseo Materials Operating S.C.A.).

Now, as a little aside, remember that in stressed situations in order to achieve some objective – whether it’s fresh liquidity or the pushing out of thornier maturities – one will often need to massage or perhaps mangle the pre-existing corporate structure to open up pockets where people want to either place new-money or exchange their holdings into.

And, of course, that’s what Trinseo’s original 2023 LME involved: with their back against the wall, the pre-existing corporate structure was massaged (well, more mangled) to open up a pocket that was enticing to either place new-money into or exchange debt into represented by Trinseo Luxco Finance SPV S.à.r.l. and Trinseo NA Finance SPV LLC since this pocket enables debt that resides there to have significant structural advantages relative to Trinseo’s pre-existing debt (e.g., the 2028 Refinance TL created in the 2023 LME benefits from first dibs on the Americas Styrenics business worth around $500mm; $352mm worth of guarantees from an assortment of non-guarantor restricted subs; and, of course, the $948mm worth of intercompany loans that reside pari to Trinseo’s pre-existing secured debt).

But there are always draw backs: when one massages or mangles the corporate structure of a stressed company to open up pockets where people want to lend new-money or exchange pre-existing debt into, the natural consequence is that there’s going to be some value that otherwise would’ve benefited someone else that’s been shifted away from them.

Which will, in turn, make it even more difficult to deal with thornier parts of the capital structure that weren’t dealt with in the initial transaction unless there’s a significant turnaround in the company’s fundamentals (e.g., the drop-down of Americas Styrenics hurt, in a derivative sense, the 2025 and 2029 SNs since that’s value that would’ve been to their benefit assuming the secured debt above them was covered).

So, in the case of Trinseo, before their 2023 LME it was obvious that the unsecured 2025s and 2029s were going to be tough to handle via a regular-way refi sans a dramatic turnaround in Trinseo’s fundamentals. But after the 2023 LME – which stripped value that would’ve otherwise benefited them via the drop-down and still layered secured debt above them via the intercompany loans – it became a foregone conclusion that a more “creative” transaction would be needed to address them (read: no regular-way refi, again sans a dramatic turnaround in their fundamentals, would occur).

Therefore, in this transaction what we see is Trinseo doubling down on their double-dip structure via placing even more value to the benefit of transaction participants (through the designation of Aristech Surfaces and Altuglas as unsubs), and ensuring that an even larger part of the first-lien claim pool at the Trinseo Holdings S.à.r.l. level is dominated by intercompany loan claims that redound to the ultimate benefit of LME participants (read: ensuring that an even larger percentage of whatever recovery there’ll be there flows to the ultimate benefit of participants via the intercompany loans).

In the end, as it relates to the first component of this transaction, some benevolent credit funds had the willingness to lend $115mm of new-money – despite the continued cash burn of Trinseo – to take out the stub of 2025 SNs left because of where this new-money would reside (e.g., the structural advantages that exist there).

Likewise, as it relates to these New 2L Notes, it’s the same idea: sure, they’re behind the 2028 Refinance TL and their only recovery in a future filing will come from what remains after the now-enlarged 2028 Refinance TL has received payment in full (inclusive of the recovery that flows from all the intercompany loans, which is all first to the benefit of the 2028 Refinance TL). However, because of the structural advantages that exist by residing in this silo, they’re in a (much) better position to receive some recovery relative to where they were before (which, of course, is partially the reason we should expect near unanimous consent in the 2029s exchange).

Note: This was all written well before the exchange deadline. However, on Jan 15 it was announced that we hit as near to near unanimous consent as you can get on the 2029s exchange: 99.88%.

Third, the transaction contemplates that the pre-existing $375mm revolver due in 2026 will be terminated and be replaced with a new $300mm revolver due 2029 (can tack on incremental revolving facilities not to exceed at any time $50mm and there’s a super priority net leverage covenant of 1.5x that’s tested if more than 30% of the commitment amount is drawn). This new revolver will be senior to all obligations that were issued out of the Trinseo Holdings S.à.r.l. / Trinseo Materials Finance, Inc. level inclusive of all the intercompany loans created in the 2023 LME and this LME.

So, with the completion of the transaction, Trinseo will have enhanced liquidity (around ~$500mm, inclusive of the new revolver), a touch lower overall leverage from the discount capture vis-à-vis the exchange (still around ~11x), and will have pushed out its maturity wall through to 2028.

Therefore, with maturities pushed out and liquidity that should be more than sufficient to meet its cash burn until those maturities come due, there’s more than enough time to allow for an operational turnaround here (assuming an operational turnaround is possible to begin with, of course...).

Note: In the end, Trinseo’s second LME – that can almost be thought of as a delayed follow-on to its 2023 LME – is an illustration of what we talked about earlier: that in a lot of more recent LMEs when the hoped for turnaround doesn’t materialize the incentives of the former LME participants are more aligned with the company’s to work together to chip away at the capital structure and extend out optionality a touch further if possible. Since the company, of course, doesn’t want to file but LME participants also would rather see a turnaround and, if successful, their debt refi’ed when it comes due. Because especially with companies that are cash incinerators right now everyone knows post-reorg the debtor will have to be significantly delevered which means that consideration for those even at the top of the capital structure will be dominated by post-reorg equity. However, LME participants might not want to have the keys thrown to them if it can be avoided – at least not right now.

Now, one reason that most recent LMEs that have occurred – especially those that have occurred in the back-half of 2024 – are a bit more liable to file in the future than to do a second LME à la Trinseo is because of how docs are often amended as part of the original LME.

Because, as we’ve talked about ad nauseum before, a valuable form of non-monetary consideration for participants in any transaction is amending the docs to preclude future transactions that could siphon value away from current participants.

Which, like, makes sense since if you’re participating in an LME then you already know the company is willing to do more aggressive transactions (they’re doing one with you!). So, it’s only natural to want to ensure that in the future what you’ve done to others can’t be done to you.

Therefore, if one is on the lookout for the most airtight docs around, it’s always a safe bet to open up the new credit agreement or indenture that’s been created or amended as part of an LME and see what language lawyers have dreamt up to try to preclude future aggressive transactions (call it Robertshaw protection).

So, for example, if we pop open Trinseo’s new $300mm revolver we’ll find it littered with blockers (these snippets are from the term sheet, not the doc itself)...

Double-Dip (At Home) Blocker: Which states that debt owed to an entity outside the borrower and its guarantors (a.k.a. the loan parties), or a guarantee of debt that’s originated by an entity outside of the loan parties, must be subordinated to the debt that resides there (e.g., not pari to pre-existing debt).

Envision Blocker: Which states that you can only use the General Investments Basket to facilitate a drop-down as opposed to being able to tap the wider set of baskets that are typically relied on (e.g., like we discussed in relation to the drop-down component of Trinseo’s original LME!).

Chewy Blocker: Which states that the company is limited in their ability to release subsidiary guarantors from their guarantees solely by dint of them becoming non-wholly owned subs (to avoid scenarios where a company manufactures a release and thus allows a subsidiary guarantor, that obviously benefits those in the restricted group through the guarantee it provides, to become a non-guarantor restricted sub).

J. Crew Blocker: As I discussed in the 2023-24 Bonus Guide, the “strong-form” of a J. Crew blocker involves material property (as opposed to a narrower subset like material intellectual property). In Trinseo’s case, as we should expect based on all the other blockers included here to make the doc more or less as tight as it can be, we have the “strong-form” variation.

Serta / Omni Blocker: Which states, in brief, that there’s the need for consent from all holders (directly affected) to amend the above blockers, the pro rata sharing provisions, the waterfall provisions, etc.

The above configuration is worth spending a few seconds on because it doesn’t just deal with aspects downstream of the pro rata sharing provision (e.g., what the original so-called Serta blockers were more focused on) but also deals with amendments to any of the aforementioned blockers.

Which, of course, is notable since these other blockers are often constructed such that they can be amended (or removed) with a majority vote because what the majority often wants in their new docs is to ensure that they are in the driver’s seat on future aggressive transactions and that others can’t do one without them – not that the aggressive transactions themselves are impossible to effectuate without unanimous consent (because one can perhaps envision a scenario in which they’d like to lead an aggressive transaction in the future, etc.).

This is, once again, a scenario where often more unsophisticated lenders (see: STG) take false comfort: if a blocker can be circumvented (read: jettisoned) by the majority to allow for a more aggressive transaction in the future, then one better feel certain that they’ll be part of that majority that participates in this future transaction (or else the blocker won’t have blocked much from their perspective).

With that said, in Trinseo’s case, based on its tight post-LME docs (inclusive of the 2Ls referenced below) the door to future aggressive transactions is more or less closed. So, we can say with some level of confidence that if Trinseo isn’t able to turn things around over the next few years then they’ll be destined to file after they’ve had their chance to have a few turns on the LME merry-go-round.

Note: Included is also an Anti-Liability Management Provision which, as the name would suggest, is a kind of broad catchall that basically says, “Look, in case there are unintentional loopholes elsewhere that clever lawyers find, there can’t be additional indebtedness (secured or otherwise), investments, etc. in connection with a ‘liability management financing transaction’ that’s outside of the scope of the narrow, small baskets that we’ve set out here and their defined use cases. Don’t try to get cute with us.”

Note: Even though Trinseo does still have some incremental debt capacity – and the capacity for more secured debt if a heightened level of consent is reached – unless there’s a large turnaround in Trinseo’s fundamentals no one will jump at the possibility of providing new-money again sans an aggressive transaction structure that siphons off some value from someone to the benefit of participants (especially after all that has come before). So, as mentioned, Trinseo either needs to turn things around over these next few years to such an extent that they can do a regular-way refi of all their new indebtedness or their next stop will be the Southern District of Texas (or whatever the venue du jour is at the time).

Of course, the new 2L Notes that’ll be created as part of the exchange component of Trinseo’s transaction are also restrictive on the LME-front (again, these snippets are from the term sheet not the doc itself). So, to really underline just how anti-LME post-LME docs often are, let’s take a look at what’s meant by the term “Triggering Event” that’ll be included in the “Events of Default” section of the new 2Ls.

When we do we see, front and center, a number of defined terms that look familiar...

So, if Trinseo even proposes the thought of completing a J. Crew Transaction or a Serta Transaction or some kind of other Liability Management Transaction, that’s an event of default...

As a final note, when some began to call LMEs the new “Texas Two-Step” an obvious implication was that lenders coerced companies into transaction structures where participants would be at least somewhat agnostic vis-à-vis the future of the company (in fact, perhaps participants would want the company to file if there wasn’t an immediate turnaround – better to do so quickly than to burn cash or have the company’s EV degrade during a faulty operational turnaround that dragged on and on).

And, of course, there are situations (e.g., Robertshaw) where there’s no doubt that’s kind of the case. However, as we move forward it’ll become more obvious to people that often the inverse of all of this is true: that after an LME a company’s capital structure becomes so concentrated with LME participants who want the company to turn things around – since they didn’t shift enough value from others at time zero – that as the company continues to burn cash the company has the leverage to go back to lenders for some additional, to use a euphemism, accommodation (especially if the company is a cash incinerator and no one wants the keys right now since it might still be FCF negative even with a much delevered post-reorg capital structure – kind of an “If you owe the bank $100, that’s your problem; if you owe the bank $100mm, that’s the bank’s problem” situation).

So, while one can feel like a master of the universe for siphoning a bit of value off of one’s former compatriots as part of a transaction – and that will, on paper, show a nice little IRR in the immediate aftermath – this can amount to a pyrrhic victory in short succession if the company continues to burn cash and has its value degrade further (again, at least vis-à-vis the en vogue version of LMEs with their broad-based participation since participants can no longer siphon off near as much value to themselves and still must reside alongside lots of other holders in the rejiggered capital structure).

In other words, the aim (read: aspiration) of a participant in an LME should be to become more or less agnostic to the company's future prospects (since one has ensured they're well covered if it files) but such an aim is not realized in these softer, en vogue LMEs we've seen of late which does mean, net-net, that companies retain some kind of leverage when they need a little more accommodation (since for LME participants the LME, in effect, has provided some downside protection if filing is to occur relative to their former position, but the largest, or perhaps only, source of significant upside is if the company turns things around and the LME debt trades up, the rich coupons keep flowing, etc. so the incentive is to facilitate that if there's a somewhat viable option to do so).