Relevant Documents: Unsecured 2022 Indenture Credit Agreement Funds including GSO, CQS and Hayfin holding 44% of Concordia’s debt under its credit agreement and 2022 senior secured notes indenture have voiced their concerns with the company’s management and asked that Concordia recognize the need for a restructuring. In letters exchanged since May 8 between the debtholders and the pharmaceutical group, investors have lamented the company’s lack of dialogue with them in light of deteriorating earnings and what they claim to a be slow business review.
In the letters, White & Case, representing the funds, expressed concerns about persistent value erosion in the context of an unsustainable capital structure. The law firm drew attention to the company’s current and future financial health amid multiple regulatory issues and competitive challenges. In addition to allegations of events of default and possible securities violations in Canada, the letters expressed frustration with the alleged unwillingness of Concordia and its advisors, PJT Partners and Skadden Arps, to explore a restructuring. Creditors are concerned about the removal of CFO Ed Borkowski, who they describe as a vocal advocate of a restructuring. Additionally, they question the appointment of new board members with no restructuring experience.
White & Case expressed these concerns, among others, in an initial 10-page letter dated May 8, to which Concordia responded with an email. In it, Concordia CEO Allan Oberman told the group of investors that the company continues to review all its options and alternatives with respect to the business and capital structure. He noted that he disagrees with the funds’ conclusions.
A June 2 follow-up letter, from White & Case on behalf of the the funds, described Concordia’s response as dismissive and insufficient in addressing the “legitimate worries” of secured lenders. In this letter, the funds urged Concordia to start an active dialogue with its key stakeholders and recognize the need for a balance sheet restructuring. They expressed concern that Concordia’s subsidiaries may conclude that filing for bankruptcy protection is unavoidable in the interests of preserving their company’s position. The group of creditors represented by White & Case is alarmed that Concordia has so far failed to take measures to avoid “a value-destructive ‘free-fall’ restructuring.” White & Case requested that Concordia respond by June 8.
The letters indicate that between May 8 and June 2, creditors’ holdings have grown to 44% of the outstanding amounts under the credit agreement and indenture, from owning 28% of the credit and guarantee agreement and 9% of the credit agreement and indenture. According to the May 8 letter, the group is “extremely concerned” that an event of default may occur in due course, or may actually have occurred, under Section 8.1(h) of the
credit agreement. This section provides that an automatic event of default is triggered if the borrower or any material subsidiary shall “become unable, admit in writing its inability or fail generally to pay its debts as they fall due.” In its public filings, Concordia has indicated the possibility that it may become unable to pay future debts, investors say in the letter.
The group claimed that the company is in likely violation of Canadian securities laws by failing to address in public filings its ability to meet longer-term debt obligations. Applicable guidance from the Canadian Securities Administrators, or CSA, states that management’s assessment of its liquidity should focus on the company’s short- and long-term ability to fund development activities or to meet planned growth, per the letter. “The lack of disclosure with respect to the Company’s ability to meet its debt obligations in any realistic scenario, let alone fund growth or development activities consequently fails to discharge the relevant reporting obligations,” the letter asserted. Additionally, guidance from the CSA recommends that management’s discussion and analysis, or MD&A, “disclose any defaults or risk of defaults on debt covenants and how the issuer intends to cure the default or otherwise address the risk,” the letter stated. As described earlier, the creditor group believes that an event of default may occur imminently, or may have already occurred.
Concordia’s negative earnings outlook coupled with a significant step-up in annual amortization payments under the credit agreement after December 2018, “raise severe doubts” regarding the company’s ability to receive an auditor’s unqualified opinion for the period ending December 2017, the May 8 letter stated. Pursuant to Section 5.4 of the credit agreement, the company is required to publish annual consolidated financial statements with an auditor’s unqualified opinion regarding Concordia’s status as a going concern, the letter added. “Accordingly, the Group considers it to be inevitable that an Event of Default will eventually result from the Company’s inability to obtain an unqualified audit opinion,” according to the letter. In the June 2 letter, the group further noted that it is considering appointing an independent audit firm to evaluate the issue in greater detail.
Investors reserved the right to forward this letter to the Company’s Auditors and the Ontario Securities Commission, the group’s counsel stated in the June 2 letter.
The May 8 letter described why the creditors disagree with management’s view of the company’s liquidity position. Specifically, management assumes that it will have access to $60 million under its undrawn revolving credit facility. Given the group’s concern that an event of default may have occurred under Section 8.1(h) of the credit agreement, the group doubts whether this additional liquidity will be available to the company.
Additionally, given ongoing investigations into Concordia’s potentially anti-competitive pricing practices by the U.K. Competition and Markets Authority, the group doubts the company’s ability to make the representation that it is not in violation of any law, rule or regulation, as stipulated by Section 4.9(b) of the credit agreement. This would in turn limit the company’s ability to access the revolver, according to the letter.
Concordia’s capital structure as of March 31 is as follows: